SECURITIES AND EXCHANGE COMMISSION
_____________________
_____________________
(Mark One)
☒ | | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30,
20192022
☐ | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
___________ to
___________
Commission File
Number: 001-39035
(Exact Name of Registrant as Specified in Its Charter)
| | | | | |
| Delaware | | 45-5614458 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification No.)
|
| |
| 6230 Stoneridge Mall Road | |
| Pleasanton, California | 94588 |
| (Address of principle executive offices) | (Zip Code) |
6230 Stoneridge Mall Road
Pleasanton, California 94588
(Address of principal executive offices and zip code)
(Registrant’s telephone number, including area code)
_____________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading
Symbol
| | Name of each exchange
on which registered
|
| Class A common stock, par value $0.00001 per share | | TXG | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No ☒☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | ☐ | | Accelerated filer | | ☐ |
| | | | |
| Non-accelerated filer | ☐ | ☒ | | Smaller reporting company | | ☐ |
| | | | |
| | | | Emerging growth company | | ☒☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31,
2019,2022, the registrant had
20,900,52495,596,266 shares of Class A common stock, $0.00001 par value per share, outstanding and
75,269,43018,867,255 shares of Class B common stock, $0.00001 par value per share, outstanding.
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form
10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Quarterly Report,
on Form10-Q,including statements concerning our plans, objectives, goals, beliefs, business strategies,
future events, business conditions, results of operations, financial position,
sufficiency of our capital resources and business outlook,
future events, business conditions, costs and expenses that we expect to incur or to save in connection with our workforce reduction, the anticipated timing for completion of our workforce restructuring activities, uncertainties related to the global COVID-19 pandemic and the impact of our and our customers' and suppliers' responses to it, business trends and other information, may be forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,”
“project”“project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue”
or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct and actual results may vary materially from what is expressed in or indicated by the forward-looking statement. Such statements reflect the current views of our management with respect to our business, results of operations and future financial performance.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report
on Form10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled “Risk Factors”
and elsewhere in this Quarterly Report
and Part I, Item 1A of our Annual Report on Form
10-Q. 10-K for the year ended December 31, 2021 (“Annual Report”). Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly
Report on Form10-Q.Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “Risk Factors”
we previously disclosed in our
prospectus filed with the SecuritiesAnnual Report and
Exchange Commission (“SEC”) on September 12, 2019, and in this Quarterly Report,
on Form10-Q, as such risk factors may be updated from time to time in our periodic filings with the
SEC. Such prospectusU.S. Securities and
ourExchange Commission ("SEC"). Our periodic filings are accessible on the SEC’s website at www.sec.gov.
The forward-looking statements made in this Quarterly Report
on Form10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report
on Form10-Qto reflect events or circumstances after the date of this Quarterly Report
on Form10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
Further, as the COVID-19 pandemic is continuously evolving, our forward-looking statements may not accurately or fully reflect the potential impact that the COVID-19 pandemic may have on our business, financial condition, results of operations and cash flows.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report,
on Form10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
Unless otherwise stated or the context otherwise indicates, references to “we,” “us,” “our,” “the
Company”Company,” “10x” and similar references refer to 10x Genomics, Inc.
and its subsidiaries.
Channels for Disclosure of Information
Investors and others should note that we may announce material information to the public through filings with the SEC, our website (https://www.10xGenomics.com), press releases, public conference calls, public webcasts and our social media accounts, (https://twitter.com/10xGenomics, https://www.facebook.com/10xGenomics/10xGenomics and
https://www.linkedin.com/company/10xgenomics/)10xgenomics). We use these channels to communicate with our customers and the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through such channels as such information could be deemed to be material information. The information on such channels, including on our website and our social media accounts, is not incorporated by reference in this Quarterly Report on Form10-Qand shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. Please note that this list of disclosure channels may be updated from time to time.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
(In
thousands, except share and per share data) | | | | | | | | |
| | | September 30,
2019 | | | December 31,
2018 | |
| | | (Unaudited) | | | (Note 1) | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 427,436 | | | $ | 65,080 | |
Accounts receivable, net | | | 26,150 | | | | 28,088 | |
Inventory | | | 13,305 | | | | 8,570 | |
Prepaid expenses and other current assets | | | 7,253 | | | | 4,498 | |
| | | | | | | | |
Total current assets | | | 474,144 | | | | 106,236 | |
Property and equipment, net | | | 46,840 | | | | 11,127 | |
Restricted cash | | | 50,053 | | | | 5,008 | |
Other assets | | | 1,778 | | | | 1,939 | |
| | | | | | | | |
Total assets | | $ | 572,815 | | | $ | 124,310 | |
| | | | | | | | |
Liabilities, convertible preferred stock and stockholders’ equity (deficit) | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 11,959 | | | $ | 8,792 | |
Accrued compensation and related benefits | | | 7,850 | | | | 7,047 | |
Accrued expenses and other current liabilities | | | 14,267 | | | | 8,172 | |
Term loans, current portion | | | 7,383 | | | | 4,187 | |
Accrued legal expenses | | | 3,695 | | | | 1,769 | |
Deferred revenue, current | | | 3,082 | | | | 2,395 | |
| | | | | | | | |
Total current liabilities | | | 48,236 | | | | 32,362 | |
Term loans, noncurrent portion | | | 22,307 | | | | 25,489 | |
Accrued contingent liabilities | | | 62,501 | | | | 38,000 | |
Deferred revenue, noncurrent | | | 1,202 | | | | 1,102 | |
Deferred rent, noncurrent | | | 16,170 | | | | 3,329 | |
Other noncurrent liabilities | | | 951 | | | | 771 | |
| | | | | | | | |
Total liabilities | | | 151,367 | | | | 101,053 | |
| | | | | | | | |
Commitments and contingencies (Note 6) | | | | | | | | |
Convertible preferred stock, $0.00001 par value, no shares authorized and no shares issued and outstanding as of September 30, 2019; 67,904,871 shares authorized and 67,704,278 shares issued and outstanding as of December 31, 2018; aggregate liquidation preference of $242,588 as of December 31, 2018 | | | — | | | | 243,244 | |
Stockholders’ equity (deficit): | | | | | | | | |
Preferred stock, $0.00001 par value; 100,000,000 shares authorized, no shares issued and outstanding as of September 30, 2019 and December 31, 2018 | | | — | | | | — | |
Common stock, $0.00001 par value; 1,100,000,000 shares authorized as of September 30, 2019, 96,118,804 shares issued and outstanding as of September 30, 2019; 190,955,000 shares authorized as of December 31, 2018, 14,549,801 shares issued and outstanding as of December 31, 2018 | | | 2 | | | | 1 | |
Additionalpaid-in capital | | | 676,839 | | | | 11,165 | |
Accumulated deficit | | | (255,233 | ) | | | (231,116 | ) |
Accumulated other comprehensive loss | | | (160 | ) | | | (37 | ) |
| | | | | | | | |
Total stockholders’ equity (deficit) | | | 421,448 | | | | (219,987 | ) |
| | | | | | | | |
Total liabilities, convertible preferred stock and stockholders’ equity (deficit) | | $ | 572,815 | | | $ | 124,310 | |
| | | | | | | | |
thousands)
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| (Unaudited) | | (Note 1) |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 233,951 | | | $ | 587,447 | |
| Marketable securities | 218,435 | | | — | |
| Restricted cash | 508 | | | 1,028 | |
| Accounts receivable, net | 83,549 | | | 85,254 | |
| Inventory | 78,629 | | | 59,966 | |
| Prepaid expenses and other current assets | 14,350 | | | 13,896 | |
| Total current assets | 629,422 | | | 747,591 | |
| Property and equipment, net | 257,694 | | | 169,492 | |
| Restricted cash | 7,091 | | | 7,598 | |
| Operating lease right-of-use assets | 71,095 | | | 60,918 | |
| Goodwill | 4,511 | | | 4,511 | |
| Intangible assets, net | 23,493 | | | 25,397 | |
| Other noncurrent assets | 2,901 | | | 3,319 | |
| Total assets | $ | 996,207 | | | $ | 1,018,826 | |
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 21,594 | | | $ | 17,351 | |
| Accrued compensation and related benefits | 28,214 | | | 31,626 | |
| Accrued expenses and other current liabilities | 61,989 | | | 50,909 | |
| | | |
| Deferred revenue | 6,665 | | | 5,340 | |
| Operating lease liabilities | 8,393 | | | 5,131 | |
| | | |
| Total current liabilities | 126,855 | | | 110,357 | |
| | | |
| | | |
| Accrued license fee, noncurrent | — | | | 5,814 | |
| | | |
| Operating lease liabilities, noncurrent | 87,833 | | | 76,847 | |
| Other noncurrent liabilities | 5,727 | | | 8,240 | |
| Total liabilities | 220,415 | | | 201,258 | |
| Commitments and contingencies (Note 5) |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock | — | | | — | |
| Common stock | 2 | | | 2 | |
| Additional paid-in capital | 1,793,388 | | | 1,680,865 | |
| Accumulated deficit | (1,012,106) | | | (863,321) | |
| Accumulated other comprehensive income (loss) | (5,492) | | | 22 | |
| Total stockholders’ equity | 775,792 | | | 817,568 | |
| Total liabilities and stockholders’ equity | $ | 996,207 | | | $ | 1,018,826 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
and Comprehensive Loss
(In thousands, except share and per share data)
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Revenue | | $ | 61,207 | | | $ | 36,607 | | | $ | 170,604 | | | $ | 95,759 | |
Cost of revenue | | | 15,480 | | | | 5,241 | | | | 44,451 | | | | 13,761 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 45,727 | | | | 31,366 | | | | 126,153 | | | | 81,998 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Research and development | | | 22,209 | | | | 11,085 | | | | 55,208 | | | | 34,457 | |
In-process research and development | | | — | | | | 16,104 | | | | — | | | | 22,310 | |
Selling, general and administrative | | | 32,614 | | | | 19,110 | | | | 92,078 | | | | 61,030 | |
Accrued contingent liabilities | | | — | | | | — | | | | 1,360 | | | | — | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 54,823 | | | | 46,299 | | | | 148,646 | | | | 117,797 | |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (9,096 | ) | | | (14,933 | ) | | | (22,493 | ) | | | (35,799 | ) |
Other income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | 481 | | | | 294 | | | | 986 | | | | 755 | |
Interest expense | | | (708 | ) | | | (659 | ) | | | (2,087 | ) | | | (1,721 | ) |
Other expenses, net | | | (272 | ) | | | (31 | ) | | | (413 | ) | | | (151 | ) |
| | | | | | | | | | | | | | | | |
Total other expense | | | (499 | ) | | | (396 | ) | | | (1,514 | ) | | | (1,117 | ) |
| | | | | | | | | | | | | | | | |
Loss before provision for income taxes | | | (9,595 | ) | | | (15,329 | ) | | | (24,007 | ) | | | (36,916 | ) |
Provision for income taxes | | | 8 | | | | 16 | | | | 110 | | | | 45 | |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (9,603 | ) | | $ | (15,345 | ) | | $ | (24,117 | ) | | $ | (36,961 | ) |
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | (126 | ) | | | 1 | | | | (123 | ) | | | 17 | |
| | | | | | | | | | | | | | | | |
Comprehensive loss | | $ | (9,729 | ) | | $ | (15,344 | ) | | $ | (24,240 | ) | | $ | (36,944 | ) |
| | | | | | | | | | | | | | | | |
Net loss per share attributable to common stockholders, basic and diluted | | $ | (0.33 | ) | | $ | (1.13 | ) | | $ | (1.21 | ) | | $ | (2.80 | ) |
| | | | | | | | | | | | | | | | |
Weighted-average shares of common stock used in computing net loss per share attributable to common stockholders, basic and diluted | | | 29,184,218 | | | | 13,587,288 | | | | 19,904,184 | | | | 13,188,322 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | $ | 131,072 | | | $ | 125,297 | | | $ | 360,177 | | | $ | 346,960 | |
| Cost of revenue | 30,377 | | | 24,518 | | | 83,559 | | | 46,493 | |
| Gross profit | 100,695 | | | 100,779 | | | 276,618 | | | 300,467 | |
| Operating expenses: | | | | | | | |
| Research and development | 67,290 | | | 54,582 | | | 202,053 | | | 149,867 | |
| | | | | | | |
| Selling, general and administrative | 73,401 | | | 62,076 | | | 219,413 | | | 187,683 | |
| Accrued contingent liabilities | — | | | — | | | — | | | (660) | |
| Total operating expenses | 140,691 | | | 116,658 | | | 421,466 | | | 336,890 | |
| Loss from operations | (39,996) | | | (15,879) | | | (144,848) | | | (36,423) | |
| Other income (expense): | | | | | | | |
| Interest income | 2,025 | | | 49 | | | 3,832 | | | 157 | |
| Interest expense | (114) | | | (219) | | | (351) | | | (649) | |
| Other expense, net | (1,950) | | | (599) | | | (4,193) | | | (807) | |
| | | | | | | |
| Total other expense | (39) | | | (769) | | | (712) | | | (1,299) | |
| Loss before provision for income taxes | (40,035) | | | (16,648) | | | (145,560) | | | (37,722) | |
| Provision for income taxes | 1,879 | | | 523 | | | 3,225 | | | 2,052 | |
| Net loss | $ | (41,914) | | | $ | (17,171) | | | $ | (148,785) | | | $ | (39,774) | |
| | | | | | | |
| Net loss per share, basic and diluted | $ | (0.37) | | | $ | (0.15) | | | $ | (1.31) | | | $ | (0.36) | |
| Weighted-average shares of common stock used in computing net loss per share, basic and diluted | 114,112,382 | | | 110,874,249 | | | 113,555,750 | | | 109,826,104 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of
Convertible Preferred Stock and Stockholders’ Equity (Deficit)Comprehensive Loss
(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Convertible
Preferred Stock | | | Common Stock | | | Additional
Paid-in
Capital | | | Accumulated
Deficit | | | Accumulated
Other
Comprehen-
sive
Income
(Loss) | | | Total
Stockholders’
Equity
(Deficit) | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
Balance as of December 31, 2018 | | | 67,704,278 | | | $ | 243,244 | | | | 14,549,801 | | | $ | 1 | | | $ | 11,165 | | | $ | (231,116 | ) | | $ | (37 | ) | | $ | (219,987 | ) |
Issuance of Class A common stock upon exercise of stock options | | | — | | | | — | | | | 898,858 | | | | — | | | | 923 | | | | — | | | | — | | | | 923 | |
Vesting of shares subject to repurchase, including early exercised options | | | — | | | | — | | | | — | | | | — | | | | 72 | | | | — | | | | — | | | | 72 | |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 1,359 | | | | — | | | | — | | | | 1,359 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,636 | ) | | | — | | | | (3,636 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (24 | ) | | | (24 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2019 | | | 67,704,278 | | | | 243,244 | | | | 15,448,659 | | | | 1 | | | | 13,519 | | | | (234,752 | ) | | | (61 | ) | | | (221,293 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Class A common stock upon exercise of stock options | | | — | | | | — | | | | 696,723 | | | | — | | | | 1,082 | | | | — | | | | — | | | | 1,082 | |
Vesting of shares subject to repurchase, including early exercised options | | | — | | | | — | | | | — | | | | — | | | | 89 | | | | — | | | | — | | | | 89 | |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 3,025 | | | | — | | | | — | | | | 3,025 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (10,878 | ) | | | — | | | | (10,878 | ) |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 27 | | | | 27 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2019 | | | 67,704,278 | | | | 243,244 | | | | 16,145,382 | | | | 1 | | | | 17,715 | | | | (245,630 | ) | | | (34 | ) | | | (227,948 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Class A common stock upon exercise of stock options | | | — | | | | — | | | | 508,120 | | | | — | | | | 1,013 | | | | — | | | | — | | | | 1,013 | |
Conversion of convertible preferred stock into Class B common stock | | | (67,704,278 | ) | | | (243,244 | ) | | | 67,704,278 | | | | 1 | | | | 243,243 | | | | — | | | | — | | | | 243,244 | |
Issuance of Class A common stock upon initial public offering, net of issuance costs | | | — | | | | — | | | | 11,500,000 | | | | — | | | | 410,824 | | | | — | | | | — | | | | 410,824 | |
Cashless exercise of Class A common stock warrants | | | — | | | | — | | | | 261,024 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Vesting of shares subject to repurchase, including early exercised options | | | — | | | | — | | | | — | | | | — | | | | 170 | | | | — | | | | — | | | | 170 | |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 3,874 | | | | — | | | | — | | | | 3,874 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (9,603 | ) | | | — | | | | (9,603 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (126 | ) | | | (126 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of September 30, 2019 | | | — | | | $ | — | | | | 96,118,804 | | | $ | 2 | | | $ | 676,839 | | | $ | (255,233 | ) | | $ | (160 | ) | | $ | 421,448 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
10x Genomics, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Convertible
Preferred Stock | | | Common Stock | | | Additional
Paid-in
Capital | | | Accumulated
Deficit | | | Accumulated
Other
Comprehen-
sive
Income
(Loss) | | | Total
Stockholders’
Deficit | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
Balance as of December 31, 2017 | | | 59,730,213 | | | $ | 158,414 | | | | 12,883,930 | | | $ | 1 | | | $ | 6,136 | | | $ | (118,631 | ) | | $ | (15 | ) | | $ | (112,509 | ) |
Issuance of Class A common stock upon exercise of stock options | | | — | | | | — | | | | 463,400 | | | | — | | | | 313 | | | | — | | | | — | | | | 313 | |
Issuance of warrants to purchase common stock | | | — | | | | — | | | | — | | | | — | | | | 150 | | | | — | | | | — | | | | 150 | |
Vesting of shares subject to repurchase, including early exercised options | | | — | | | | — | | | | — | | | | — | | | | 9 | | | | — | | | | — | | | | 9 | |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 488 | | | | — | | | | — | | | | 488 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (15,693 | ) | | | — | | | | (15,693 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (11 | ) | | | (11 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2018 | | | 59,730,213 | | | | 158,414 | | | | 13,347,330 | | | | 1 | | | | 7,096 | | | | (134,324 | ) | | | (26 | ) | | | (127,253 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Series D convertible preferred stock, net of issuance cost | | | 5,224,658 | | | | 49,878 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Issuance of Class A common stock upon exercise of stock options | | | — | | | | — | | | | 184,775 | | | | — | | | | 148 | | | | — | | | | — | | | | 148 | |
Vesting of shares subject to repurchase, including early exercised options | | | — | | | | — | | | | — | | | | — | | | | 9 | | | | — | | | | — | | | | 9 | |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 518 | | | | — | | | | — | | | | 518 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5,923 | ) | | | — | | | | (5,923 | ) |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 27 | | | | 27 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2018 | | | 64,954,871 | | | | 208,292 | | | | 13,532,105 | | | | 1 | | | | 7,771 | | | | (140,247 | ) | | | 1 | | | | (132,474 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Class A common stock upon exercise of stock options | | | — | | | | — | | | | 410,231 | | | | — | | | | 291 | | | | — | | | | — | | | | 291 | |
Vesting of shares subject to repurchase, including early exercised options | | | — | | | | — | | | | — | | | | — | | | | 166 | | | | — | | | | — | | | | 166 | |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 589 | | | | — | | | | — | | | | 589 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (15,345 | ) | | | — | | | | (15,345 | ) |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of September 30, 2018 | | | 64,954,871 | | | $ | 208,292 | | | | 13,942,336 | | | $ | 1 | | | $ | 8,817 | | | $ | (155,592 | ) | | $ | 2 | | | $ | (146,772 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
10x Genomics, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| | | | | | | | |
| | | Nine Months Ended
September 30, | |
| | | 2019 | | | 2018 | |
Operating activities: | | | | | | | | |
Net loss | | $ | (24,117 | ) | | $ | (36,961 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | |
Depreciation and amortization | | | 4,221 | | | | 3,015 | |
Stock-based compensation | | | 8,258 | | | | 1,595 | |
Loss on disposal of property and equipment | | | 614 | | | | 195 | |
Accretion of discount on term loan | | | 72 | | | | 326 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | 1,938 | | | | (5,756 | ) |
Inventory | | | (4,735 | ) | | | (2,011 | ) |
Prepaid expenses and other current assets | | | (2,756 | ) | | | (1,030 | ) |
Other assets | | | 49 | | | | (835 | ) |
Accounts payable | | | 2,686 | | | | (1,825 | ) |
Accrued compensation and other related benefits | | | 838 | | | | (199 | ) |
Deferred revenue | | | 787 | | | | 1,300 | |
Accrued contingent liabilities | | | 24,501 | | | | — | |
Accrued expenses and other current liabilities | | | 2,550 | | | | 16,211 | |
Deferred rent, noncurrent | | | 12,841 | | | | 470 | |
Other noncurrent liabilities | | | 180 | | | | 95 | |
| | | | | | | | |
Net cash provided by (used in) operating activities | | | 27,927 | | | | (25,410 | ) |
| | | | | | | | |
Investing activities: | | | | | | | | |
Purchases of property and equipment | | | (36,186 | ) | | | (3,880 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (36,186 | ) | | | (3,880 | ) |
| | | | | | | | |
Financing activities: | | | | | | | | |
Proceeds from term loans | | | — | | | | 19,512 | |
Payments on term loans | | | — | | | | (704 | ) |
Proceeds from borrowings under revolver | | | 11,000 | | | | — | |
Payments on borrowings under revolver | | | (11,000 | ) | | | — | |
Payments on capital lease obligations | | | — | | | | (69 | ) |
Proceeds from issuance of common stock upon initial public offering, net of issuance costs | | | 412,679 | | | | — | |
Proceeds from issuance of preferred stock, net of issuance costs | | | — | | | | 49,878 | |
Proceeds from issuance of common stock upon exercise of stock options | | | 3,018 | | | | 872 | |
| | | | | | | | |
Net cash provided by financing activities | | | 415,697 | | | | 69,489 | |
| | | | | | | | |
Effect of exchange rates on changes in cash, cash equivalents, and restricted cash | | | (37 | ) | | | 9 | |
| | | | | | | | |
Net increase in cash, cash equivalents, and restricted cash | | | 407,401 | | | | 40,208 | |
Cash, cash equivalents, and restricted cash at beginning of period | | | 70,088 | | | | 47,857 | |
| | | | | | | | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 477,489 | | | $ | 88,065 | |
| | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | |
Cash paid for interest | | $ | 1,722 | | | $ | 1,455 | |
| | | | | | | | |
Cash paid for taxes | | $ | 22 | | | $ | — | |
| | | | | | | | |
Noncash investing and financing activities | | | | | | | | |
Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities | | $ | 6,511 | | | $ | 594 | |
| | | | | | | | |
Conversion of convertible preferred stock into common stock upon initial public offering | | $ | 243,244 | | | $ | — | |
| | | | | | | | |
Deferred offering costs in accounts payable and accrued expenses and other current liabilities | | $ | 1,855 | | | $ | — | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net loss | $ | (41,914) | | | $ | (17,171) | | | $ | (148,785) | | | $ | (39,774) | |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Unrealized losses on available-for-sale marketable securities | (1,459) | | | — | | | (5,188) | | | — | |
| Foreign currency translation adjustment | (68) | | | 136 | | | (326) | | | 244 | |
| Other comprehensive income (loss), net of tax | (1,527) | | | 136 | | | (5,514) | | | 244 | |
| Comprehensive loss | $ | (43,441) | | | $ | (17,035) | | | $ | (154,299) | | | $ | (39,530) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in
Capital | | Accumulated
Deficit | | Accumulated
Other Comprehensive
Income (Loss) | | Total
Stockholders’
Equity |
| | Shares | | Amount | | | | |
| Balance as of December 31, 2021 | | 112,514,977 | | | $ | 2 | | | $ | 1,680,865 | | | $ | (863,321) | | | $ | 22 | | | $ | 817,568 | |
| Issuance of Class A common stock related to equity awards | | 761,373 | | | — | | | 7,826 | | | — | | | — | | | 7,826 | |
| Vesting of shares subject to repurchase, including early exercised options | | — | | | — | | | 32 | | | — | | | — | | | 32 | |
| Stock-based compensation | | — | | | — | | | 26,137 | | | — | | | — | | | 26,137 | |
| Net loss | | — | | | — | | | — | | | (42,413) | | | — | | | (42,413) | |
| Other comprehensive loss | | — | | | — | | | — | | | — | | | (2,465) | | | (2,465) | |
| Balance as of March 31, 2022 | | 113,276,350 | | | 2 | | | 1,714,860 | | | (905,734) | | | (2,443) | | | 806,685 | |
| Issuance of Class A common stock related to equity awards | | 610,447 | | | — | | | 6,360 | | | — | | | — | | | 6,360 | |
| Vesting of shares subject to repurchase, including early exercised options | | — | | | — | | | 32 | | | — | | | — | | | 32 | |
| Stock-based compensation | | — | | | — | | | 36,419 | | | — | | | — | | | 36,419 | |
| Net loss | | — | | | — | | | — | | | (64,458) | | | — | | | (64,458) | |
| Other comprehensive loss | | — | | | — | | | — | | | | | (1,522) | | | (1,522) | |
| Balance as of June 30, 2022 | | 113,886,797 | | | 2 | | | 1,757,671 | | | (970,192) | | | (3,965) | | | 783,516 | |
| Issuance of Class A common stock related to equity awards | | 541,705 | | | — | | | 2,039 | | | — | | | — | | | 2,039 | |
| Vesting of shares subject to repurchase, including early exercised options | | — | | | — | | | 32 | | | — | | | — | | | 32 | |
| Stock-based compensation | | — | | | — | | | 33,646 | | | — | | | — | | | 33,646 | |
| Net loss | | — | | | — | | | — | | | (41,914) | | | — | | | (41,914) | |
| Other comprehensive loss | | — | | | — | | | — | | | — | | | (1,527) | | | (1,527) | |
| Balance as of September 30, 2022 | | 114,428,502 | | | $ | 2 | | | $ | 1,793,388 | | | $ | (1,012,106) | | | $ | (5,492) | | | $ | 775,792 | |
10x Genomics, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in
Capital | | Accumulated
Deficit | | Accumulated
Other Comprehensive
Income (Loss) | | Total
Stockholders’
Equity |
| | Shares | | Amount | | | | |
| Balance as of December 31, 2020 | | 108,485,909 | | | $ | 2 | | | $ | 1,544,218 | | | $ | (805,098) | | | $ | (50) | | | $ | 739,072 | |
| Issuance of Class A common stock related to equity awards | | 1,102,618 | | | — | | | 8,546 | | | — | | | — | | | 8,546 | |
| Vesting of shares subject to repurchase, including early exercised options | | — | | | — | | | 42 | | | — | | | — | | | 42 | |
| Stock-based compensation | | — | | | — | | | 16,253 | | | — | | | — | | | 16,253 | |
| Net loss | | — | | | — | | | — | | | (11,551) | | | — | | | (11,551) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 98 | | | 98 | |
| Balance as of March 31, 2021 | | 109,588,527 | | | 2 | | | 1,569,059 | | | (816,649) | | | 48 | | | 752,460 | |
| Issuance of Class A common stock related to equity awards | | 1,151,392 | | | — | | | 16,194 | | | — | | | — | | | 16,194 | |
| Vesting of shares subject to repurchase, including early exercised options | | — | | | — | | | 42 | | | — | | | — | | | 42 | |
| Stock-based compensation | | — | | | — | | | 26,932 | | | — | | | — | | | 26,932 | |
| Net loss | | — | | | — | | | — | | | (11,052) | | | — | | | (11,052) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 10 | | | 10 | |
| Balance as of June 30, 2021 | | 110,739,919 | | | 2 | | | 1,612,227 | | | (827,701) | | | 58 | | | 784,586 | |
| Issuance of Class A common stock related to equity awards | | 797,529 | | | — | | | 6,682 | | | — | | | — | | | 6,682 | |
| Vesting of shares subject to repurchase, including early exercised options | | — | | | — | | | 38 | | | — | | | — | | | 38 | |
| Stock-based compensation | | — | | | — | | | 25,950 | | | — | | | — | | | 25,950 | |
| Net loss | | — | | | — | | | — | | | (17,171) | | | — | | | (17,171) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 136 | | | 136 | |
| Balance as of September 30, 2021 | | 111,537,448 | | | $ | 2 | | | $ | 1,644,897 | | | $ | (844,872) | | | $ | 194 | | | $ | 800,221 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10x Genomics, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Operating activities: | | | |
| Net loss | $ | (148,785) | | | $ | (39,774) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| | | |
| Depreciation and amortization | 18,847 | | | 15,337 | |
| Stock-based compensation expense | 95,874 | | | 69,058 | |
| Loss on disposal of property and equipment | 455 | | | 66 | |
| | | |
| Amortization of premium and accretion of discount on marketable securities, net | 665 | | | — | |
| | | |
| Amortization of right-of-use assets | 5,687 | | | 5,593 | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | 1,673 | | | (27,216) | |
| Inventory | (19,761) | | | (21,349) | |
| Prepaid expenses and other current assets | (2,457) | | | (1,220) | |
| Other noncurrent assets | 411 | | | 348 | |
| Accounts payable | 6,082 | | | 12,191 | |
| Accrued compensation and other related benefits | (3,163) | | | 11,868 | |
| Deferred revenue | 1,845 | | | 1,221 | |
| Accrued contingent liabilities | — | | | (44,173) | |
| Accrued expenses and other current liabilities | 2,867 | | | (2,545) | |
| Operating lease liability | (4,566) | | | (2,498) | |
| Other noncurrent liabilities | (3,003) | | | (4,085) | |
| Net cash used in operating activities | (47,329) | | | (27,178) | |
| Investing activities: | | | |
| | | |
| Acquisition of business, net of cash acquired | (1,500) | | | (5,451) | |
| Purchases of property and equipment | (91,927) | | | (73,660) | |
| Purchase of marketable securities | (282,871) | | | — | |
| Proceeds from sales of marketable securities | 41,401 | | | — | |
| Proceeds from maturities of marketable securities | 17,182 | | | — | |
| Net cash used in investing activities | (317,715) | | | (79,111) | |
| Financing activities: | | | |
| Payments on financing arrangement | (5,409) | | | (5,028) | |
| | | |
| | | |
| | | |
| | | |
| Issuance of common stock from exercise of stock options and employee stock purchase plan purchases | 16,225 | | | 31,422 | |
| Net cash provided by financing activities | 10,816 | | | 26,394 | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (295) | | | 316 | |
| Net decrease in cash, cash equivalents, and restricted cash | (354,523) | | | (79,579) | |
| Cash, cash equivalents, and restricted cash at beginning of period | 596,073 | | | 688,644 | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 241,550 | | | $ | 609,065 | |
| | | |
| Supplemental disclosures of cash flow information: | | | |
| Cash paid for interest | $ | 841 | | | $ | 1,222 | |
| Cash paid for taxes | $ | 3,649 | | | $ | 8,318 | |
| Noncash investing and financing activities: |
| Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities | $ | 29,290 | | | $ | 12,710 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 16,562 | | | $ | 19,566 | |
| Contingent consideration payable from business acquisition | $ | 1,500 | | | $ | 1,536 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
o
1. Description of Business and Basis of Presentation
Organization and Description of Business
10x Genomics, Inc. (the “Company”)
was incorporated inis a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the
statecomplexity of
Delaware on July 2, 2012.biology. The Company’s integrated solutions include the Company’s Chromium
Controller, Chromium Connect and Chromium X Series instruments, which
are referredthe Company refers to as
“instruments”, its enzymes, reagents,“Chromium instruments,” the Company's Visium CytAssist instrument and the Company’s proprietary microfluidic chips,
slides, reagents and other
consumable products,consumables for the Company's Chromium and Visium solutions, which
are referredthe Company refers to as
“consumables”, and“consumables.” The Company bundles its software
for analyzing biological systems. These solutionswith these products to guide customers through the workflow, from sample preparation
to next-generation sequencing to subsequentthrough analysis and visualization.
EachThe Company was incorporated in the state of
the Company’s solutions is designed to interrogate a major class of biological information that is impactful to researchers. The CompanyDelaware in July 2012 and began commercial and manufacturing operations and selling its instruments and consumables in 2015. The
Company’s headquartersCompany is
locatedheadquartered in Pleasanton, California and has wholly-owned subsidiaries in
Sweden, Netherlands, Singapore, GermanyAsia, Europe and
China.Initial Public Offering
The Company’s registration statement on FormS-1 related to its initial public offering (“IPO”) was declared effective on September 11, 2019 by the Securities and Exchange Commission (“SEC”), and the Company’s Class A common stock began trading on the Nasdaq Global Select Market on September 12, 2019. On September 16, 2019, the Company completed its IPO, in which the Company sold 11,500,000 shares of Class A common stock (which included 1,500,000 shares that were offered and sold pursuant to the full exercise of the IPO underwriters’ option to purchase additional shares) at a price to the public of $39.00 per share. Including the option exercise, the Company received aggregate net proceeds of $410.8 million after deducting offering costs, underwriting discounts and commissions of $37.7 million.
Immediately prior to the completion of the IPO, 67,704,278 shares of convertible preferred stock then outstanding converted into an equivalent number of shares of Class B common stock, 8,050,000 shares of Historical Class A common stock converted into an equivalent number of shares of Class B common stock, and 8,095,382 shares of Historical Class B common stock converted into an equivalent number of shares of Class A common stock. The Company has reflected the renaming of Historical Class A common stock and Historical Class B common stock to Class B common stock and Class A common stock, respectively, throughout the document and all instances of Class A common stock and Class B common stock reflect this change. Immediately prior to the completion of the IPO, the Company filed its Amended and Restated Certificate of Incorporation, which authorizes a total of 1,000,000,000 shares of Class A common stock, 100,000,000 shares of Class B common stock and 100,000,000 shares of preferred stock. During the third quarter of 2019, 484,484 shares of Class B common stock were converted to Class A common stock. As of September 30, 2019, Class A common stock and Class B common stock issued and outstanding was 20,849,374 and 75,269,430, respectively. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time into one share of Class A common stock.
North America.
The accompanying condensed consolidated financial statements,
which include the Company’s accounts and the accounts of its wholly-owned subsidiaries, are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The condensed consolidated balance sheets at December 31,
20182021 have been derived from the audited consolidated financial statements of the Company at that date. Certain information and footnote disclosures typically included in the Company’s audited consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive loss and cash flows for the periods presented, but are not necessarily indicative of the results of operations to be anticipated for any future annual or interim period. All intercompany
balancestransactions and
transactionsbalances have been
eliminated in consolidation.eliminated. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The inputs into our judgments and estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates.
The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31,
20182021 included in the
final prospectus for the IPOCompany's Annual Report on Form 10-K filed with the SEC on
September 12, 2019.Liquidity
WhileFebruary 18, 2022 (our "Annual Report").
2. Summary of Significant Accounting Policies
There were no material changes in the Company has generated positive cash flows from operations of $27.9 million forCompany's significant accounting policies during the three and nine months ended September 30, 2019, the Company has incurred significant losses and has historically had negative cash flows from operations. As of September 30, 2019, the Company had cash and cash equivalents of $427.4 million and an accumulated deficit of $255.2 million. Management
10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
expects to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term while the Company makes investments to support its anticipated growth. The Company believes that its cash and cash equivalents balance2022, except as of September 30, 2019, which includes the proceeds from the IPO, and borrowing capacity under existing credit agreements provide sufficient capital resources to continue its operations for at least 12 months from the issuance date of the accompanying condensed consolidated financial statements.
2.set forth below. See Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The preparation of to the consolidated financial statements included in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities atCompany's Annual Report, for information regarding the date of the financial statements, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expense. These judgments, estimates and assumptions are used for, but not limited to, revenue recognition, inventory valuation and write-downs, loss contingencies,Company's significant accounting for assets acquisitions and the fair value of common stock and stock option awards. policies.
Marketable Securities
The Company
bases its estimates on various factors and information, which may include, but are not limited to, history and prior experience, the Company’s forecasts and future plans, current economic conditions and information from third-party professionals that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and recorded amounts of expenses that are not readily apparent from other sources. Actual results may differ from those estimates, and the differences may be material.Segment Information
The Company operatesdesignates investments in debt securities as a single operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for the purposes of allocating resources, making operating decisions and evaluating financial performance.
Cash Equivalents and Restricted Cash
The Company considers all highly liquid investmentsavailable-for-sale. Available-for-sale debt securities with an original maturitymaturities of three months or less from the date of purchase to beare classified within cash and cash equivalents. Available-for-sale debt securities with original maturities longer than three months are available to fund current operations and are classified as marketable securities, within current assets on the balance sheet. Available-for-sale debt securities are reported at fair value with the related unrealized gains and losses included in "Accumulated other comprehensive income (loss)," a component of stockholders’ equity, net of tax. Realized gains (losses) on the sale of marketable securities are determined using the specific-identification method and recorded in "Other expense, net" in the Consolidated Statements of Operations.
The available-for-sale debt securities are subject to a periodic impairment review. For investments in an unrealized loss position, the Company determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions. The Company recognizes an allowance for credit losses, up to the amount of the unrealized loss when appropriate, and writes down the amortized cost basis
10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
of the investment if it is more likely than not that the Company will be required or will intend to sell the investment before recovery of its amortized cost basis. Allowances for credit losses and write-downs are recognized in “Other expense, net,” and unrealized losses not related to credit losses are recognized in “Accumulated other comprehensive income (loss).” There are no allowances for credit losses for the periods presented.As of September 30, 2022, the gross unrealized losses on available-for-sale securities are related to market interest rate changes and not attributable to credit.
Fair Value of Financial Instruments
Cash
and cash equivalents
consist primarilyare comprised of
amounts invested in money market funds and
cash which are
stated at fair value.The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the condensed consolidated balance sheets that sum to the total of the same amounts shownclassified as Level 1 in the condensed consolidated statements of cash flows (in thousands):
| | | | | | | | |
| | | September 30,
2019 | | | December 31,
2018 | |
Cash and cash equivalents | | $ | 427,436 | | | $ | 65,080 | |
Restricted cash | | | 50,053 | | | | 5,008 | |
| | | | | | | | |
Total cash, cash equivalents and restricted cash | | $ | 477,489 | | | $ | 70,088 | |
| | | | | | | | |
Fair Value of Financial Instruments
The Company determines the fair value hierarchy. Assets recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset in the principal or liability based on the assumptions thatmost advantageous market participants would use in pricingfor the asset or liability in an orderly transaction between market participants aton the measurement date. The identification of market participant assumptions providesauthoritative guidance on fair value measurements establishes a basis for determining what inputs are to be used for pricing each asset or liability.
Athree-tier fair value hierarchy has been established which gives precedence tofor disclosure of fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows:
Level
1: Quoted1 - Inputs are unadjusted, quoted prices in active markets for identical
instrumentsassets or liabilities at the measurement date;
Level
2: Other significant2 - Inputs are observable,
inputs (includingunadjusted quoted prices in active markets for similar
instruments)Level 3: Significant unobservableassets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs (including assumptions in determining the fair value of certain investments)
Money market fundsthat are highly liquid investments and are actively traded. The pricing information for the Company’s money market funds are readily available andobservable or can be independently validated ascorroborated by observable market data for substantially the full term of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. There were no transfers between Levels 1, 2related assets or 3 for any of the periods presented. As of September 30, 2019liabilities; and December 31, 2018, the Company held $406.9 million and $44.5 million in money market funds, respectively, with no unrealized gains or losses.
10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has issued common stock warrants for which fair value is determined using Level 3 inputs. See Note 5 for more on- Unobservable inputs that are significant to the common stock warrants.
Accounts Receivable, Net
Accounts receivable consistmeasurement of amounts due from customers for the sales of products and services. The Company reviews its accounts receivable and provides allowances of specific amounts if collectability is no longer reasonably assured based on historical experience and specific customer collection issues. The allowance for doubtful accounts was $0.1 million and $0.3 million as of September 30, 2019 and December 31, 2018, respectively.
Business Concentrations
The Company’s instruments are mostly assembled and tested by a single contract manufacturer in the United States. The Company’s agreement with the contract manufacturer expires in 2020 and may be terminated by either party for any reason by providing the other party with at least 30 days written notice. The Company’s agreement with the contract manufacturer contains purchase commitments. In addition, the Company is reliant on several suppliers for key components for its reagent kits. A significant disruption in the operations of the contract manufacturer or suppliers may impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on its business, financial condition and results of operations.
Concentrations
Financial instruments that potentially subject the Company to credit risk consist of cash equivalents and accounts receivable. The Company’s cash and cash equivalents are primarily held with a large financial institution in the United States and deposits exceed the Federal Deposit Insurance Corporation’s insurance limit. The Company’s debt is with this same financial institution. The Company performs periodic evaluations of the risks associated with its investments and the relative credit standing of this financial institution.
The Company performs ongoing credit evaluations of its customers’ financial condition. The Company does not require collateral from its customers but may require upfront payments from certain customers. The Company has not experienced significant credit losses to date. For the three and nine months ended September 30, 2018 and 2019, no single customer represented more than 10% of revenue. As of September 30, 2019 and December 31, 2018, no single customer represented more than 10% of the Company’s outstanding accounts receivable.
Substantially all the Company’s long-lived assets are located in the United States.
Inventory
Inventory is recorded at the lower of cost, determined ona first-in, first-out basis, or net realizable value. The Company uses judgment to analyze and determine if the composition of its inventory is obsolete, slow-moving or unsalable and frequently reviews such determinations. The Company writes down specifically identified unusable, obsolete, slow-moving or known unsalable inventory in the period that it is first recognized by using a number of factors including product expiration dates, open and unfulfilled orders and sales forecasts. Any write-down of its inventory to net realizable value establishes a new cost basis and will be maintained even if certain circumstances suggest that the inventory is recoverable in subsequent periods. Costs associated with the write-down of inventory are recorded to cost of revenue on the Company’s consolidated statements of operations.
Property and Equipment, Net
Property and equipment, net is stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets. Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased assets ator liabilities that are supported by little or no market data.
The Company’s financial instruments consist of Level 1 and Level 2 assets. Where quoted prices are available in an active market, securities are classified as Level 1. Money market funds are classified as Level 1. Level 2 assets consist primarily of corporate bonds, asset backed securities, commercial paper, U.S. Government Treasury and agency securities, and debt securities in government-sponsored entities based upon quoted market prices for similar movements in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the inceptionmarket or can be corroborated by observable market data for substantially the full term of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the leased assets or the period of the related lease. Amortization of assets under capital leases is included in depreciation expense.
10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Impairment of Long-Lived Assets
The Company evaluates long-lived assets, such as property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment exist and the undiscountedassets. Where applicable these models project future cash flows thatand discount the assets are expectedfuture amounts to generate are less than the carryinga present value of the assets, the Company reduces the carrying amount of the assetsusing market-based observable inputs obtained from various third party-data providers, including but not limited to, their estimated fair values based on a discounted cash flow approach or, when availablebenchmark yields, interest rate curves, reported trades, broker/dealer quotes and appropriate, to comparable market values. There were no impairment losses recorded for the three and nine month periods ended September 30, 2019 and 2018.
Product Warranties
The Company generallyprovides a one-year warranty on its instruments. The Company reviews its exposure to estimated warranty obligations associated with instrument sales and establishes an accrual based on historical product failure rates and actual warranty costs incurred. This expense is recorded as a component of cost of revenue in the consolidated statements of operations and comprehensive loss.
Deferred Revenue
Deferred revenue consists of payments received in advance of revenue recognition primarily related to instrument service agreements, also referred to as extended warranties. Revenue under these agreements is recognized over the related service period. Deferred revenue that will be recognized during the 12 months following the balance sheet date is recorded as current portion of deferred revenue and the remaining portion is recorded as long term.
Accrued Contingent Liabilities
Accrued contingent liabilities represents the Company’s estimates of possible losses on pending litigations, including related accrued royalties that are both probable and reasonably estimable. See Note 6.
reference data.
Revenue Recognition
Commencing on January 1, 2019, the Company recognized revenues in accordance withAccounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers.
The Company generates revenue from sales of products and
services. The Company’sservices, and its products consist of instruments and consumables.
The Company also sells instrument service agreements which relate to extended warranties.The Company recognizes revenue when control of the products and services is transferred to its customers in an amount that reflects the consideration it expects to receive from its customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. The Company considers a performance obligation satisfied once it has transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service.
Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. In instances where right of payment or transfer of title is contingent upon the customer’s acceptance of the product, revenue is deferred until all acceptance criteria have been met. Instrument service agreements, which relate to extended warranties, are typically entered into forone-year terms, following the expiration of the standardone-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers in advance of product shipment or providing services is recorded as a contract liability. The Company’s contracts with its customers generally do not include rights of return or a significant financing component.
The Company regularly enters into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. The Company determines standalone selling price using average selling prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by management, adjusted for applicable discounts.
Net loss per share is computed using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of losses are
Notes to Unaudited Condensed Consolidated Financial Statements
Contract Costs
Sales commissions earned
identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis.
Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase.
For the calculation of diluted net loss per share, basic net loss per share is adjusted by the effect of dilutive securities including awards under the Company’s sales forceequity compensation plans. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. For periods in which the Company reports net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive shares of common stock are considered incrementalnot assumed to have been issued if their effect is anti-dilutive.
Stock-Based Compensation
The Company’s stock-based compensation expense relates to stock options, restricted stock units (“RSUs”), market-based performance stock awards ("PSAs") including performance stock options and
recoverable costsperformance RSUs granted pursuant to equity incentive plans and stock purchase rights under an Employee Stock Purchase Plan (“ESPP”). Stock-based compensation expense for its stock-based awards is based on their grant date fair value. The Company determines the fair value of
obtaining a contract with a customer. Sale commissions related toRSUs based on the
saleclosing price of
extended warranties are deferred and amortized on a straight-line basis over the service term,its stock, which is
typically greater than 1 year from the contract date. Amortization of deferred commissions is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations and comprehensive loss.Cost of Revenue
Costs of revenue primarily consist of manufacturing costs incurred in the production process, including personnel and related costs, component materials, labor and overhead, packaging and delivery costs and allocated costs including facilities and information technology. In addition, costs of product revenue includes royalty costs for licensed technologies included in the Company’s products, warranty costs and provisions for slow-moving and obsolete inventory. In addition, cost of revenue includes estimated accrued royalties related to theBio-Rad litigation. See Note 6.
Shipping and Handling Costs
Shipping and handling charged to customers are recorded as revenue. Shipping and handling costs are included in the Company’s cost of revenue.
Research and Development
Research and development costs are expensed in the period incurred. Research and development expense consists of personnel and related costs, independent contractor costs, laboratory supplies, equipment maintenance, prototype and materials expenses, amortization of developed technology and intangibles and allocated costs including facilities and information technology.
See Note 3 for discussionof in-process research and development includedlisted on the consolidated statementsNasdaq Stock Market LLC, at the date of operations.
Stock-Based Compensation
the grant. The Company estimates the fair value of share-based paymentstock option awards granted to employeesunder an equity incentive plan and directorsstock purchase rights under an ESPP on the grant date using the Black-Scholes option-pricing model. The fair valuevalues of share-based paymentstock-based awards isexcluding PSAs are recognized as compensation expense on a straight-line basis over the requisite service period in which the awards are expected to vest and forfeitures are recognized as they occur. Share-based payment awards that include a service condition and a performance condition are considered expected to vest when the performance condition is probable of being met.
The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield and the expected stock price volatility over the expected term.
For all stock options granted, theThe Company calculated the expected term using the simplified method,
for “plain vanilla”which is the mid-point between the vesting and contractual term. Due to the short trading period of the Company's stock,
option awards. The Company has limited publicly available stock information and therefore, the Company has
usedestimated volatility by reference to the historical
volatility of the stock pricevolatilities of similar publicly traded peer companies. The risk-free interest rate is based on the yield available on U.S.
Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.
Stock-based compensation expense for nonemployee stock options is measured based on fair market value using
For PSAs, the
Black-Scholes option pricing model and is recorded as the options vest. Prior to January 1, 2019, nonemployee stock options subject to vesting were revalued periodically overCompany derives the requisite service period
which was generally the same as thefor each separately vesting
termportion of the
award. From January 1, 2019,award using a Monte Carlo simulation model and the related compensation expense is recognized over the derived service period using the accelerated attribution method commencing on the grant
date fair market valuedate. The derived service period is the median duration of
nonemployeethe successful stock
options is recognizedprice paths to meet the respective escalating stock price thresholds as simulated in the
consolidated statementsMonte Carlo valuation model which uses assumptions such as volatility, risk-free interest rate, cost of
operations on a straight-line basis overequity and dividend estimated for the
requisiteperformance period of the PSAs. If the related market condition is achieved earlier than its estimated derived service period,
the stock-based compensation expense will be accelerated, and
forfeitures are recognized as they occur.Foreign Currency
For foreign subsidiaries wherea cumulative catch-up expense will be recorded during the functional currencyperiod in which the market condition is met.
3. Restructuring
On August 3, 2022, the
local currency, assetsCompany implemented a reduction in force plan in order to decrease costs and
liabilities are translatedmaintain a streamlined organization to
support the
U.S. dollarusing month-end exchange rates, and revenue and expenses using average exchange rates. The adjustments resulting from these foreign currency translations arebusiness. Restructuring charges of $4.2 million associated with this plan, comprised primarily of severance-related costs, were recorded in
accumulated other comprehensive loss.For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are remeasured using exchange rates in effect at the balance sheet datesand non-monetary assets and liabilities are remeasured at historical exchange rates. Revenue and expenses are remeasured at the average exchange rates for the period. Gains or losses from foreign currency remeasurement are included in other income (expense), net in the consolidated statements of operations and comprehensive loss. The Company recognized foreign currency transaction losses of $0.1 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and foreign currency transaction losses2022.
Notes to Unaudited Condensed Consolidated Financial Statements
Income Taxes
The Company uses the asset and liability methodfollowing table is a summary of accounting for income taxes, in which deferred tax assets and liabilities are recognized for the future tax consequences attributablerestructuring costs related to the differences between the financial statement carrying amountsrestructuring as of existing assetsSeptember 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Severance and Benefits Costs | | Stock-Based Compensation Expense | | Total |
| Restructuring charge | | $ | 3,600 | | | $ | 616 | | | $ | 4,216 | |
| Cash payments made | | (2,838) | | | — | | | (2,838) | |
| Non-cash charge | | — | | | (616) | | | (616) | |
| Balance at September 30, 2022 | | $ | 762 | | | $ | — | | | $ | 762 | |
Restructuring costs of $0.3 million, $1.4 million and
liabilities$2.5 million were recorded in cost of revenue, research and
their respective tax bases. Deferred tax assetsdevelopment expense, and
liabilities are measured using the enacted tax rates expected to apply to taxable incomeselling, general and administrative expense, respectively, in the
years in which those temporary differencesCompany's condensed consolidated statements of operations during the three months ended September 30, 2022. No additional restructuring charges are expected to be
reversed. The effect on deferred tax assetsincurred and
liabilities of a change in tax rates is recognized as income in the
period that includesrestructuring activities are expected to be substantially completed by the
enactment date. A valuation allowance is established if it is more likely than not that all or a portionend of the
deferred tax asset will not be realized.The Company’s tax positions are subject to income tax audits. The Company recognizes the tax benefitfourth quarter of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not (greater than 50% likely) to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its tax provision.
The Company calculates the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed income tax returns are recorded when identified. The amount of income tax paid is subject to examination by U.S. federal and state tax authorities. The estimate2022.
4. Other Financial Statement Information
Available-for-sale Securities
Available-for-sale securitiesat September 30, 2022 consisted of the potential outcomefollowing (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Fair Value Measurement |
| Cash equivalents: | | | | | | | | | |
| Money market funds | $ | 198,852 | | | $ | — | | | $ | — | | | $ | 198,852 | | | Level 1 |
| Marketable securities: | | | | | | | | | |
| Corporate debt securities | 158,491 | | | — | | | (3,634) | | | 154,857 | | | Level 2 |
| Government debt securities | 54,142 | | | — | | | (1,417) | | | 52,725 | | | Level 2 |
| Asset-backed securities | 10,990 | | | — | | | (137) | | | 10,853 | | | Level 2 |
| Total available-for-sale securities | $ | 422,475 | | | $ | — | | | $ | (5,188) | | | $ | 417,287 | | | |
As of any uncertain tax issue is subject to management’s assessmentDecember 31, 2021, the Company held $548.0 million in money market funds with no unrealized gains or losses.
The contractual maturities of marketable securities as of September 30, 2022 were as follows (in thousands):
| | | | | | | | | | | |
| Amortized Cost | | Fair Value |
| Due in one year or less | $ | 130,206 | | | $ | 127,560 | |
| Due after one year to five years | 93,417 | | | 90,875 | |
| Total marketable securities | $ | 223,623 | | | $ | 218,435 | |
Inventory
Inventory was comprised of the relevant risks, facts and circumstances existing at that time. To the extent the assessmentfollowing (in thousands):
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| Purchased materials | $ | 33,418 | | | $ | 31,954 | |
| Work in progress | 26,157 | | | 14,052 | |
| Finished goods | 19,054 | | | 13,960 | |
| Inventory | $ | 78,629 | | | $ | 59,966 | |
Table of such tax position changes, the change in estimate is recorded in the period in which the determination is made.Net Loss Per Share
Net loss per share of common stock is computed usingthe two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of losses are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share attributed to common stockholders will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis.
The Company’s participating securities included the Company’s convertible preferred stock, as the holders are entitled to receive noncumulative dividends on a pari passu basis in the event that a dividend is paid on common stock. The Company also considers any shares issued on the early exercise of stock options subject to repurchase to be participating securities because holders of such shareshave non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of convertible preferred stock, as well as the holders of early exercised shares subject to repurchase, do not have a contractual obligation to share in losses.
Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase.
For the calculation of diluted net loss per share, basic net loss per share attributable to common stockholders is adjusted by the effect of dilutive securities, including convertible preferred stock, awards under the Company’s equity compensation plan and common stock warrants. Diluted net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding. For periods in which the Company reports net losses, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders because potentially dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive.
Acquisitions of Assets
The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs which would meet the requirements of a business.
Contents Notes to Unaudited Condensed Consolidated Financial Statements
The Company accounts for an asset acquisition under Accounting Standards Codification (“ASC”), Business Combinations Topic 805, Subtopic 50, which requires the acquiring entity in an asset acquisition to recognize net assets based on the cost to the acquiring entity on a relative fair value basis, which includes transaction costs in addition to consideration given. Goodwill is not recognized in an asset acquisition; any excess consideration transferred over the fair value of the net assets acquired is allocated tothe non-monetary identifiable assets based on relative fair values.In-process research and development expense is expensed as incurred provided there is no alternative future use.
Contingent consideration payments in asset acquisitions are recognized when the contingency is resolved and the consideration is paid or becomes payable (unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the basis in the asset acquired). Upon recognition of the contingent consideration payment, the amount is included in the cost of the acquired asset or group of assets.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASUNo. 2014-09,Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This standard is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The Company adopted this standard as of January 1, 2019 using the modified retrospective approach, which did not have a material impact on the condensed consolidated financial statements.
In June 2018, the FASB issued ASU2018-07,Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This standard expands the scope of Topic 718,Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This standard is effective for annual periods beginning after December 15, 2019. The Company early adopted this standard on January 1, 2019 which did not have a material impact on the condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASUNo. 2016-02,Leases (Topic 842), which supersedes the guidance in former ASC 840, Leases. This standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. The classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record aright-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. This standard is effective for the Company for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating adoption methods and whether this standard will have a material impact on the condensed consolidated financial statements.
In October 2016, the FASB issued ASUNo. 2016-16,Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard will require entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs instead of when the asset is sold. This standard is effective for annual periods beginning after December 31, 2018. The Company is currently assessing the impact of this standard to the condensed consolidated financial statements but does not anticipate that it will have a material impact on the adoption due to the valuation allowance.
In August 2018, the FASB issued ASU2018-15,Intangibles – Goodwill and Other – Internal Use Software (Subtopic350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtaininternal-use software under ASC350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. This standard is effective for annual periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted, including adoption in any interim period. This standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adopting this standard on the condensed consolidated financial statements.
10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
3. Acquisition
In March 2018, the Company acquired all of the outstanding shares of Epinomics, Inc. for $22.2 million inclusive of acquisition costs of $0.3 million. Of this amount, $6.2 million was due upon close of the acquisition and $16.0 million was due upon the amendment and assignment of a license agreement with the Board of Trustees of the Leland Stanford Junior University which occurred in August 2018. The technology licenses acquired in this transaction will enable the Company to develop products for epigenetics research. The transaction was accounted for as an asset acquisition. As the technology licenses acquired did not have alternative future use, the Company recognized charges of $16.0 million and $22.2 million during the three and nine months ended September 30, 2018, respectively, related to this transaction which are included as a component ofin-process research and development on the condensed consolidated statements of operations and comprehensive loss.
4. Other Financial Statement Information
Inventory
Inventory was comprised of the following as of the dates indicated (in thousands):
| | | | | | | | |
| | | September 30,
2019 | | | December 31,
2018 | |
Purchased materials | | $ | 4,365 | | | $ | 3,052 | |
Work in progress | | | 4,525 | | | | 2,553 | |
Finished goods | | | 4,415 | | | | 2,965 | |
| | | | | | | | |
Inventory | | $ | 13,305 | | | $ | 8,570 | |
| | | | | | | | |
Accrued Compensation and Related Benefits
Accrued compensation and related benefits were comprised of the following as of the dates indicated (in thousands):
| | | | | | | | |
| | | September 30,
2019 | | | December 31,
2018 | |
Accrued bonus | | $ | 4,517 | | | $ | 3,545 | |
Accrued commissions | | | 1,757 | | | | 2,299 | |
Other | | | 1,576 | | | | 1,203 | |
| | | | | | | | |
Accrued compensation and related benefits | | $ | 7,850 | | | $ | 7,047 | |
| | | | | | | | |
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| Accrued payroll and related costs | $ | 3,797 | | | $ | 3,978 | |
| Employee stock purchase program liability | 1,812 | | | 1,693 | |
| Accrued bonus | 14,278 | | | 16,558 | |
| Accrued commissions | 3,055 | | | 3,417 | |
| Accrued acquisition-related compensation | 3,766 | | | 4,430 | |
| Accrued vacation | 1,089 | | | 1,172 | |
| Other | 417 | | | 378 | |
| Accrued compensation and related benefits | $ | 28,214 | | | $ | 31,626 | |
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities were comprised of the following as of the dates indicated (in thousands):
| | | | | | | | |
| | | September 30,
2019 | | | December 31,
2018 | |
Accrued royalties for licensed technologies | | $ | 1,814 | | | $ | 1,571 | |
Accrued property and equipment | | | 5,367 | | | | 990 | |
Accrued consulting | | | 763 | | | | 741 | |
Product warranties | | | 409 | | | | 804 | |
Customer deposits | | | 792 | | | | 381 | |
Taxes payable | | | 740 | | | | 738 | |
Other | | | 4,382 | | | | 2,947 | |
| | | | | | | | |
Accrued expenses and other current liabilities | | $ | 14,267 | | | $ | 8,172 | |
| | | | | | | | |
10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| Accrued legal and related costs | $ | 3,277 | | | $ | 2,425 | |
| Accrued license fee | 6,119 | | | 6,214 | |
| | | |
| Accrued royalties for licensed technologies | 4,245 | | | 4,415 | |
| Accrued property and equipment | 29,290 | | | 15,361 | |
| Accrued professional services | 4,447 | | | 8,593 | |
| Product warranties | 1,968 | | | 994 | |
| Customer deposits | 1,161 | | | 954 | |
| Taxes payable | 3,118 | | | 4,622 | |
| Accrued lab supplies | 1,266 | | | 2,056 | |
| Other | 7,098 | | | 5,275 | |
| Accrued expenses and other current liabilities | $ | 61,989 | | | $ | 50,909 | |
Changes in the reserve for product warranties were as follows for the periods indicated (in thousands):
| | | | | | | | |
| | | September 30,
2019 | | | December 31,
2018 | |
Beginning of period | | $ | 804 | | | $ | 174 | |
Additions charged to cost of revenue | | | 408 | | | | 1,685 | |
Repairs and replacements | | | (803 | ) | | | (1,055 | ) |
| | | | | | | | |
End of period | | $ | 409 | | | $ | 804 | |
| | | | | | | | |
| | | | | | | | | | | |
| Nine Months Ended
September 30, |
| 2022 | | 2021 |
| Beginning of period | $ | 994 | | | $ | 399 | |
| Amounts charged to cost of revenue | 3,590 | | | 2,113 | |
| Repairs and replacements | (2,616) | | | (1,688) | |
| End of period | $ | 1,968 | | | $ | 824 | |
Revenue and Deferred Revenue
As of September 30, 2019,2022, the aggregate amount of the transaction price allocated to remaining performance obligations related to separately sold extended warranty service agreements, or allocated amounts for extended warranty service agreements bundled with sales of instruments, was $4.3$9.4 million, of which approximately 72%$6.6 million is expected to be recognized to revenue in the next 12 months, with the
10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
remainder thereafter. TheseThe contract liabilities of $4.3$9.4 million and $7.7 million as of September 30, 2022 and December 31, 2021, respectively, consisted of deferred revenue related to extended warranty service agreements, and as of September 30, 2019,agreements.
The following revenue recognized for the
short-term portion was $3.1 million. Revenue recorded during the three months and nine months ended September 30, 2019 included $0.6 million and $1.9 million, respectively, of previously deferred revenue that wasperiods were included in contract liabilities as of
the adoption date of January 1, 2019. Contract assets as of the adoption date of January 1, 2019December 31, 2021 and
September 30, 2019 were not material.December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Deferred revenue recognized | $ | 1,043 | | | $ | 884 | | | $ | 3,940 | | | $ | 3,412 | |
The following table represents revenue by source for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Instruments | | $ | 10,377 | | | $ | 9,193 | | | $ | 25,527 | | | $ | 25,057 | |
Consumables | | | 49,745 | | | | 26,810 | | | | 142,134 | | | | 69,292 | |
Services | | | 1,085 | | | | 604 | | | | 2,943 | | | | 1,410 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 61,207 | | | $ | 36,607 | | | $ | 170,604 | | | $ | 95,759 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Instruments | $ | 20,899 | | | $ | 17,121 | | | $ | 50,064 | | | $ | 45,123 | |
| Consumables | 108,107 | | | 106,117 | | | 303,991 | | | 296,342 | |
| Services | 2,066 | | | 2,059 | | | 6,122 | | | 5,495 | |
| Total revenue | $ | 131,072 | | | $ | 125,297 | | | $ | 360,177 | | | $ | 346,960 | |
The following table presents revenue by geography based on the location of the customer for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
North America | | $ | 35,838 | | | $ | 21,391 | | | $ | 97,293 | | | $ | 56,932 | |
Europe, Middle East and Africa | | | 12,136 | | | | 8,228 | | | | 36,634 | | | | 21,953 | |
China | | | 7,046 | | | | 4,248 | | | | 22,453 | | | | 9,710 | |
Asia Pacific | | | 6,187 | | | | 2,740 | | | | 14,224 | | | | 7,164 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 61,207 | | | $ | 36,607 | | | $ | 170,604 | | | $ | 95,759 | |
| | | | | | | | | | | | | | | | |
Revenue for
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| United States | $ | 75,345 | | | $ | 68,440 | | | $ | 202,159 | | | $ | 182,747 | |
| Europe, Middle East and Africa | 27,927 | | | 25,819 | | | 74,067 | | | 73,761 | |
| China | 15,773 | | | 19,063 | | | 45,620 | | | 55,577 | |
| Asia-Pacific (excluding China) | 9,791 | | | 10,187 | | | 32,334 | | | 29,822 | |
| North America (excluding United States) | 2,236 | | | 1,788 | | | 5,997 | | | 5,053 | |
| Total revenue | $ | 131,072 | | | $ | 125,297 | | | $ | 360,177 | | | $ | 346,960 | |
5. Commitments and Contingencies
Lease Agreements
The Company leases office, laboratory, manufacturing and distribution space in various locations worldwide. On November 6, 2020, the United States,Company entered into a Master Lease Agreement ("MLA") to lease additional office building space near the Company's Pleasanton, California headquarters. The MLA consists of various lease components, a few of which is includedcommenced in North America in the table above, was 57% and 56% of consolidated revenue for the three months ended September 30, 2019 and 2018, respectively, and 55% and 56% of consolidated revenue for the nine months ended September 30, 20192022. The sole outstanding component is expected to commence in 2023 and 2018, respectively.is expected to terminate on June 30, 2033. Total undiscounted payments for the lease component commencing in fiscal year 2023 will be $14.0 million with an expected lease term of 10.5 years.
Notes to Unaudited Condensed Consolidated Financial Statements
5. Debt
In September 2016, the Company entered into a loan and security agreement which includes a term loan and revolving line of credit facility, and initially borrowed $10.6 million as a term loan, known as Tranche A. In February 2018, the loan and security agreement was amended and restated. Under the terms of the amended and restated loan and security agreement, amounts available under Tranche A were increased to $30.0 million (the “Amended Tranche A”). As of the date of modification, the balance outstanding under Tranche A was $10.5 million. After giving consideration
Future net lease payments related to the
end of term payment, the Company borrowed an additional $19.5 million under the Amended Tranche A. Under the amended agreement, the Company had the option to borrow an additional $20.0 millionCompany’s operating lease liabilities as
a term loan, known as the Amended Tranche B, beginning October 1, 2018 through June 30, 2019, or the date of an event of default if earlier, and the revolving line of credit facility was increased from $5.0 million to up to $25.0 million.Monthly payments of interest were due under the Amended Tranche A term loan through June 30, 2019, with monthly installments of principal and interest due for 42 months thereafter. If the Amended Tranche B was borrowed, monthly installments of principal and interest were to be reduced to 36 months. In June 2019, the Company’s loan and security agreement was amended to extend the Company’s option to borrow the Amended Tranche B through December 31, 2019. Additionally, the interest-only period was extended to December 31, 2019, with monthly installments of principal and interest due for 36 months thereafter. The term loan accrues interest at the greater of the floating per annum rate equal to the greater of The Wall Street Journal prime rate plus 2.0% or 6.25%. Additionally, an end of term payment is due to the lender in the amount of $1.8 million upon maturity, prepayment or acceleration of the term loan, as amended. The end of term payment is being accreted as additional interest expense over the term of the debt using the effective interest method. In connection with the amendment, the Company paid aone-time fee of $50,000 to the lender.
The term loan can be repaid prior to the maturity date, however, a prepayment fee of 3.0% of the outstanding principal balance will be due in addition to all outstanding principal and interest, if the prepayment is made before the first anniversary date of the loan closing date. This prepayment fee decreases to 2.0% if the prepayment is made on or after the first anniversary of the loan closing date but before the second anniversary of the loan closing date and the fee decreases to 1.0% of the outstanding principal amount if paid after the second anniversary and prior to the maturity date.
The loan and security agreement provides the Company with a revolving line of credit of up to $25.0 million through December 2022. The amount available on the revolving line of credit is based on 80% of eligible receivables and is subject to a borrowing base calculation. Principal amounts outstanding under the revolving line of credit accrue interest at the greater of a floating per annum rate equal to the greater of The Wall Street Journal prime rate plus 0.25% or 4.5% and are repayable monthly. Upon termination of the agreement for any reason prior to the revolving credit facility’s maturity date, a termination fee of $250,000 will be due in addition to all outstanding principal and interest. Additionally, the revolving line of credit has a nonrefundable annual commitment fee of $62,500 payable on each anniversary date. In August 2019, the Company borrowed $11.0 million under the revolving line of credit. As of September 30, 2019, the entire $11.0 million was repaid.
In connection with the amendment of the loan and security agreement, the Company issued the lender a warrant2022 is as follows (in thousands):
| | | | | |
| Operating Leases |
| 2022 (excluding the nine months ended September 30, 2022) | $ | 2,424 | |
| 2023 | 14,774 | |
| 2024 | 14,891 | |
| 2025 | 13,774 | |
| 2026 | 14,481 | |
| Thereafter | 61,452 | |
| Total lease payments | $ | 121,796 | |
| Less: imputed interest | (25,570) | |
| Present value of operating lease liabilities | $ | 96,226 | |
| Operating lease liabilities, current | $ | 8,393 | |
| Operating lease liabilities, noncurrent | 87,833 | |
| Total operating lease liabilities | $ | 96,226 | |
The following table summarizes additional information related to
purchase 125,000 Class A common shares with an exercise price per share of $1.62. The warrants had an estimated fair value of $150,000 which has been recordedoperating leases as
a debt discount. The Company had previously issued warrants to purchase an aggregate of 141,099 additional Class A common shares in connection with the loan. Thus, following the amendment of the loan and security agreement, the Company had issued warrants to purchase an aggregate of 266,099 Class A common shares. In September 2019, all then-outstanding warrants were net exercised which resulted in the issuance of an aggregate of 261,024 shares of common stock. If the Company borrows under the Amended Tranche B term loan, the Company is obligated to issue the lender a warrant to purchase an additional 133,000 Class A common shares with an exercise price per share of $1.62.Amounts borrowed under the loan and security agreement are collateralized by all of the Company’s assets, except for intellectual property, but including the proceeds from the sale of any of the Company’s intellectual property. In addition, the Company has provided a negative pledge regarding its intellectual property and cannot encumber it without the lender’s consent. The loan and security agreement contains various covenants for reporting, protecting and obtaining adequate insurance coverage for assets collateralized and for coverage of business operations, and complying with requirements, including the payment of all necessary taxes and fees for all federal, state and local government entities. Immediately upon the occurrence and during the continuance of an event of default, including the noncompliance with the above covenants, the lender may increase the interest rate per annum by 5.0% above the rate that is otherwise applicable; stop future loan advances; require the Company to deposit 105% of any undrawn letters of credit, or 110% if the letter of credit is denominated in a foreign currency; and take control over all assets collateralizing the loan and take necessary means to protect the collateral. The loan and security agreement contains a material adverse change clause, including terms for subjective acceleration. As of September 30, 2019 and as of the date these financial statements were available to be issued, the Company was in compliance with all loan covenants.
2022: 10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
6. Commitments and Contingencies
| | | | | | | | | | | |
| September 30,
2022 | | December 31, 2021 |
| Weighted-average remaining lease term | 8.4 years | | 8.7 years |
| Weighted-average discount rate | 5.5 | % | | 5.4 | % |
| | | |
The Company is currently a defendantregularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and the Company may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the lawsuits and proceedings described below. Other than with respect tofuture.
Nanostring
On May 6, 2021, the
2015 Delaware Action, losses are not probable or estimable for the described below.The 2015 Delaware Action
In February 2015, Raindance Technologies, Inc. (“Raindance”) and the University of ChicagoCompany filed suit against the CompanyNanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that substantially all ofNanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219 (the "GeoMx Action"). On May 19, 2021, the Company’s products that use the Company’s GEM microfluidic chips infringe certain patents. In May 2017,Bio-Rad Laboratories, Inc.(“Bio-Rad”) was substituted as the plaintiff following its acquisition of Raindance. In November 2018, a jury foundCompany filed an amended complaint additionally alleging that the accusedGeoMx products willfully infringed one or moreinfringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, the Company filed an amended complaint in the GeoMx Action additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing the Company's claim of the asserted patents and awardedBio-Rad approximately $24 million in damages through June 30, 2018. The Company appealed the jury verdict. Post-trial,Bio-Rad moved for a permanent injunction, treble damages for willful infringement attorneys’ fees, supplemental damages as well aspre- and post-judgment interest.
In responseof U.S. Patent No. 10,662,467. Nanostring filed its answer to the jury award,GeoMx Action on May 18, 2022. Discovery is in progress. A Markman hearing is scheduled for November 2022 and trial is scheduled for August 2023.
On February 28, 2022, the Company established an accrual of $30.6 million as of December 31, 2018, which was recorded as an operating expense on the consolidated statement of operations for the year ended December 31, 2018. Additionally, beginning in the fourth quarter of 2018, the Company also began recording an accrual for estimated royalties toBio-Rad as a cost of revenue on the consolidated statements of operations based on an estimated royalty rate of 15% of sales of the Company’s Chromium instruments operating its GEM microfluidic chips and associated consumables. As a result, the Company recorded $7.4 million of royalties for the fourth quarter of 2018. As of December 31, 2018, the Company recorded a total accrual of $38 million related to this matter which represented the jury award plus the Company’s estimate of additional damages for the period from June 30, 2018 to the trial date in November 2018 and the royalties accrued in the fourth quarter of 2018.In July 2019, the Court awarded supplemental damages for the period from June 30, 2018 through the end of the trial in November 2018 and established the interest rates forpre- and post-judgment interest, which when combined with the original award, resulted in a $35 million preliminary judgment in favor ofBio-Rad for damages through November 2018 and interest. During the three and nine months ended September 30, 2019 the Company recorded royalties of $7.2 million and $23.1 million, respectively, as a cost of revenue and an additional $1.4 million during the nine months ended September 30, 2019 as an operating expense for estimatedpre-and post- judgment interest. The Company’s accrual of $62.5 million as of September 30, 2019 is comprised of the preliminary judgment, along with the Company’s estimate of additional royalties and interest for the period from November 2018 through September 30, 2019. To date the Company has not made any payments related to the judgment or royalties. In July 2019, the Court deniedBio-Rad’s other post-trial requests such as attorneys’ fees and enhanced damages for willful infringement.
In July 2019, the Court also grantedBio-Rad a permanent injunction against the Company’s GEM microfluidic chips and associated consumables that were found to infringe theBio-Rad patents, which historically have constituted substantially all of the Company’s product sales. Under the injunction, the Company is permitted to continue to sell its GEM microfluidic chips and associated consumables for use with its historical installed base of instruments provided that the Company pay a royalty of 15% into escrow on the Company’s net revenue related to such sales commencing after the injunction effective date. The amounts will be held in escrow until the conclusion of the Company’s appeal. These decisions were entered as a final judgment against the Company in August 2019, and the injunction became effective on August 28, 2019. The Company appealed the injunction to the Federal Circuit. The Federal Circuit granted an interim order staying the injunction pending resolution of the Company’s motion with respect to the Company’s Single Cell CNV and Linked-Read solutions subject to the 15% royalty payment described above. On September 24, 2019, the Federal Circuit extended the stay with respect to the Single Cell CNV and Linked-Read solutions for the pendency of the appeal, but otherwise denied the Company’s request to stay the injunction. The Company also appealed the judgment to the Federal Circuit.
In August 2019, the Court ordered that the Company may post a bond in the amount of $52 million in lieu of payment of the final judgment. On September 13, 2019, the Company posted a $52 million bond (the “Bond”) in lieu of payment of the judgment pending the Company’s ongoing appeal. In connection with the Bond, the Company deposited $45 million as collateral in a segregated cash account, where it will be held until the conclusion of the appeal.
The ITC 1068 Action
On July 31, 2017,Bio-Rad and Lawrence Livermore National Security, LLC filed a complaint against the Company in the U.S. International Trade Commission (“ITC”) pursuant to Section 337 of the Tariff Act of 1930, alleging that substantially all of the Company’s products infringe certain asserted patents (the “ITC 1068 Action”). In September 2018, the judge found that the Company’s GEM microfluidic chips infringe certain of the asserted patents, but also that the Company’s gel bead manufacturing
10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
microfluidic chip and Next GEM microfluidic chip do not infringe any claim asserted against them. The judge recommended entry of an exclusion order preventing the Company from importing its GEM microfluidic chips and a cease and desist order that would prevent the Company from selling such imported chips. A Final Determination is expected to be issued in December 2019, which is subject to a60-day presidential review period before taking effect. The Company believes this proceeding is without merit and intends to vigorously defend itself.
The Northern District of California Action
On July 31, 2017,Bio-Rad and Lawrence Livermore National Security, LLC also filedsecond suit against the CompanyNanostring in the U.S. District Court for the Northern District of California,Delaware alleging that substantially all of itsNanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737 (the "CosMx Action"). On May 12, 2022, the Company filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe certain patents in additionU.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. Nanostring filed its answer to the patents assertedCosMx Action on May 26, 2022.Discovery is in progress. A Markman hearing is scheduled for May 2023 and trial is scheduled for June 2024.
On August 16, 2022, Nanostring filed a counterclaim in the
ITC 1068 Action.CosMx Action alleging that the Company's Visium products infringe U.S. Patent No. 11,377,689. The
complaint seeks injunctive relief, unspecified monetary damages, costsCompany filed its answer to Nanostring's counterclaim in the CosMx Action on August 30, 2022. Discovery and
attorneys’ fees. This litigation has been stayed pending resolution oftrial are consolidated with the
ITC 1068Company's claims against Nanostring in the CosMx Action. The Company believes
that this lawsuitNanostring's counterclaim in the CosMx Action is
without meritmeritless and intends to vigorously defend itself.
The Germany Action
On July 31, 2017,Bio-Rad filed suit against the Company in Germany in the Munich Region Court alleging that the Company infringed a European patent.Bio-Rad dismissed this action in August 2018.
On February 13, 2018,Bio-Rad filed suit against the Company in Germany in the Munich Region Court alleging that its Chromium instruments, GEM microfluidic chips and certain accessories infringe a German utility model.Bio-Rad seeks unspecified damages and an injunction prohibiting sales
10x Genomics, Inc.
Notes to
recall these products sold in Germany subsequent to February 11, 2018. An initial hearing was held on November 27, 2018, and a subsequent hearing was held on May 15, 2019. The court is expected to issue a ruling on the merits on November 20, 2019. The Company believes that this lawsuit is without merit and intends to vigorously defend itself.The 2018 Delaware Action
Unaudited Condensed Consolidated Financial Statements
On October
25, 2018,Bio-Rad20, 2022, Nanostring filed
a separate suit against the Company in the U.S. District Court for the District of Delaware alleging that the
Company infringed certain patents. Discovery is in progress. On October 25, 2019, the Company filed petitions in theCompany's Visium products also infringe U.S. Patent
No. 11,473,142, a continuation of U.S. Patent No. 11,377,689 (the "Nanostring Action"). The Company has not yet responded. Discovery has not yet commenced and
Trademark Office requestinginter partes review of the asserted patents.Bio-Rad seeks injunctive relief, unspecified monetary damages, costs and attorneys’ fees.no case schedule has been set. The Company believes
that this lawsuitNanostring's claim in the Nanostring Action is
without meritmeritless and intends to vigorously defend itself.
The 2019 Delaware
On March 9, 2022, the Company filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1 (the "Germany CosMx Action"). Nanostring filed its statement of defense to the Germany CosMx Action
on August 26, 2022. A hearing on infringement is scheduled for March 2023 and a decision is expected around May 2023. On September 11, 2019,Bio-RadJuly 29, 2022, Nanostring filed a nullity action with the German Federal Patent Court challenging the validity of EP Patent No. 2794928B1. A preliminary decision in the nullity action is expected by February 2023.
Vizgen
In May 2022, the Company filed suit against the CompanyVizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. On July 25, 2022, Vizgen filed a motion to dismiss the Company’s Next GEM products infringe certainCompany's claims offor willful and indirect infringement, which the Court denied on September 19, 2022. Discovery is in progress. A Markman hearing is scheduled for July 2023 and trial is scheduled for July 2024.
On August 30, 2022, Vizgen filed its answer and counterclaims alleging that the Company's forthcoming Xenium product infringes U.S. Patent No.
8,871,444. On November 5, 2019,Bio-Rad amended the complaint to additionally allege11,098,303. Vizgen also filed counterclaims alleging that the
Company’s Next GEM products infringe certain claims of U.S. Patent Nos. 9,919,277Company tortiously interfered with Vizgen's contractual and
10,190,115.business relationship with Harvard and that the Company engaged in unfair practices under Massachusetts state law. The Company has not yet responded. The Company believes
that the asserted patentsthese claims are
invalid and not infringedmeritless and intends to
vigorously defend
itself vigorously.The Becton, Dickinson Action
itself.
Parse
On
November 15, 2018, Becton, Dickinson andAugust 24, 2022, the Company
(“BD”) and Cellular Research, Inc. filed suit against
the CompanyParse Biosciences, Inc. ("Parse") in the U.S. District Court for the District of Delaware alleging that
the Company infringed certain patents. In September 2019, the CompanyParse’s Evercode Whole Transcriptomics and ATAC-seq products infringe U.S. Patent Nos. 10,155,981, 10,697,013, 10,240,197, 10,150,995, 10,619,207, and 10,738,357. On October 17, 2022, Parse filed
counterclaimsa motion to dismiss alleging that
BD and Cellular Research, Inc. (together, the
“BD Entities”) infringed a number of the Company’s patents. This case was dismissed with prejudice on October 21, 2019 following the entrance by the parties into a settlement andasserted claims are directed to patent
cross license agreement.ineligible subject matter. The Company
considers this matter closed. See Note 10.7. Equity Incentive Plans
2012 Stock Plan
In October 2012, the Company adopted the 10x Genomics, Inc. 2012 Stock Plan (the “2012 Stock Plan”) whichhas not yet filed its response. Discovery has not yet commenced and no case schedule has been amended in subsequent years for increases in authorized shares, among other changes. The 2012set.
6. Capital Stock Plan allowed for the issuance of incentive stock options (“ISOs”),non-statutory stock options (“NSOs”) or restricted shares.
As of September 30, 2019,2022, the number of shares of Class A common stock issuable uponand Class B common stock issued and outstanding were 95,561,247 and 18,867,255, respectively.
The following table represents the exercise of stock options granted under the 2012 Stock Plan is 15,612,937. The 2012 Stock Plan did not allow for the issuancenumber of shares of Class B common stock.stock converted to shares of Class A common stock upon the election of the holders of such shares during the periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Class B common stocks converted to Class A common stock | — | | | — | | | 779,210 | | | 2,400,000 | |
Notes to Unaudited Condensed Consolidated Financial Statements
Upon the adoption of the 2019 Omnibus
7. Equity Incentive
Plan in September 2019, any awards outstanding under the 2012 Stock Plan will continue to be governed by their existing terms but no further awards may be granted under the 2012 Stock Plan.2019 Omnibus Incentive Plan
In July 2019, in connection with the IPO, the Company’s board of directors adopted the 10x Genomics, Inc. 2019 Omnibus Incentive Plan (the “Omnibus Incentive Plan”), which was subsequently approved by the Company’s stockholders. The Omnibus Incentive Plan went into effect on September 11, 2019. The Omnibus Incentive Plan allows for the issuance of ISOs, NSOs or restricted shares. ISOs may be granted only to the Company’s employees (including officers and directors who are also considered employees). NSOs and restricted shares may be granted to the Company’s employees and service providers. As of September 30, 2019, the number of shares of Class A common stock issuable upon the exercise of stock options granted under the Omnibus Incentive Plan is 339,240. The Omnibus Incentive Plan provides that the total number of shares of the Company’s Class A common stock that may be issued under the Omnibus Incentive Plan is 11,000,000 (such share limit as increased from time to time, the “Absolute Share Limit”). However, the Absolute Share Limit shall be increased on the first day of each calendar year commencing on January 1, 2021 and ending on January 1, 2029 in an amount equal to the lesser of (i) 5% of the total number of shares of common stock outstanding on the last day of the immediately preceding fiscal year and (ii) such number of shares of the Company’s Class A common stock as determined by the Company’s board of directors. However, if on January 1 of a calendar year, the Company’s board of directors has not either confirmed the 5% increase described in clause (i) or approved a lesser number of shares of the Company’s Class A common stock for such calendar year, then the Company’s board of directors will be deemed to have waived the automatic increase, and no such increase will occur for such calendar year. Of the Absolute Share Limit, no more than 11,000,000 shares of Class A common stock may be issued in the aggregate pursuant to the exercise of incentive stock options granted under the Omnibus Incentive Plan.
Options under the Omnibus Incentive Plan have a contractual term of 10 years. The exercise price of an ISO and NSO shall not be less than 100% of the fair market value of the shares on the date of grant.
2019 Employee Stock Purchase Plan
In July 2019, the Company’s board of directors adopted the 10x Genomics, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”), which was subsequently approved by the Company’s stockholders. The ESPP went into effect on September 11, 2019. Subject to any limitations contained therein, the ESPP allows eligible employees to contribute, through payroll deductions, up to 15% of their eligible compensation to purchase the Company’s Class A common stock at a discounted price per share. The ESPP generally provides for consecutive, overlapping6-month offering periods. The initial offering periods runs from September 11, 2019 through May 14, 2020. Unless otherwise determined by the administrator of the ESPP, a participant may not sell, transfer or otherwise dispose of any shares of our Class A common stock purchased under the ESPP for 12 months following the applicable exercise date.
A total of 2,000,000 shares of Class A common stock were reserved for issuance under the ESPP. As of September 30, 2019, no shares of Class A common stock have been purchased under the ESPP. The ESPP provides that the maximum number of shares of the Company’s Class A common stock made available for sale thereunder will be 2,000,000, which number will be automatically increased on the first day of each calendar year commencing on January 1, 2021 and ending on January 1, 2029 in an amount equal to the lesser of (i) 1% of the total number of shares of common stock outstanding on the last day of the immediately preceding fiscal year and (ii) such number of shares of the Company’s Class A common stock as determined by the Company’s board of directors. However, if on January 1 of a calendar year the Company’s board of directors has not either confirmed the 1% described in clause (i) or approved a lesser number of shares of the Company’s Class A common stock for such calendar year, the Company’s board of directors will be deemed to have waived the automatic increase and no such increase will occur for such calendar year. The maximum number of shares available under the ESPP (and any share limitations thereunder, as applicable) will automatically be adjusted upon certain changes to the Company’s capital structure.
Plans 10x Genomics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Stock-based Compensation
The Company recorded stock-based compensation expense in the condensed consolidated statement of operations for the periods presented as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | Nine months ended
September 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Cost of revenue | | $ | 81 | | | $ | 27 | | | $ | 171 | | | $ | 63 | |
Research and development | | | 1,650 | | | | 230 | | | | 3,448 | | | | 670 | |
Selling, general and administrative | | | 2,143 | | | | 332 | | | | 4,639 | | | | 862 | |
| | | | | | | | | | | | | | | | |
Total stock-based compensation expense | | $ | 3,874 | | | $ | 589 | | | $ | 8,258 | | | $ | 1,595 | |
| | | | | | | | | | | | | | | | |
8. Income Tax
The Company’s provision
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Cost of revenue | $ | 1,281 | | | $ | 878 | | | $ | 3,748 | | | $ | 2,183 | |
| Research and development | 14,476 | | | 11,226 | | | 41,346 | | | 30,162 | |
| Selling, general and administrative | 17,757 | | | 13,846 | | | 50,780 | | | 36,713 | |
| Total stock-based compensation expense | $ | 33,514 | | | $ | 25,950 | | | $ | 95,874 | | | $ | 69,058 | |
Restricted Stock Units
Restricted stock unit activity for income taxes was $8,000 and $110,000 for the three and nine months ended September 30, 2019, respectively, with an effective tax rate of 0.1% and 0.5%, respectively, and $16,000 and $45,0002022 is as follows:
| | | | | | | | | | | |
| Restricted Stock
Units | | Weighted-Average
Grant Date Fair Value
(per share) |
| Outstanding as of December 31, 2021 | 1,298,244 | | | $ | 141.48 | |
| Granted | 5,462,866 | | | 45.21 | |
| Vested | (495,552) | | | 114.08 | |
| Cancelled | (454,836) | | | 105.49 | |
| Outstanding as of September 30, 2022 | 5,810,722 | | | $ | 56.13 | |
Stock Options
Stock option activity for the three and nine months ended September 30, 2018, respectively, with an effective tax rate of 0.1% and 0.1%, respectively. Deferred tax assets generated from the Company’s domestic net operating losses have been fully reserved,2022 is as follows:
| | | | | | | | | | | |
| Stock Options | | Weighted-Average
Exercise Price |
| Outstanding as of December 31, 2021 | 8,212,754 | | | $ | 29.28 | |
| Granted | 1,803,411 | | | 54.01 | |
| Exercised | (1,326,102) | | | 9.43 | |
| Cancelled | (339,147) | | | 56.90 | |
| Outstanding as of September 30, 2022 | 8,350,916 | | | $ | 36.66 | |
Market-based Performance Stock Awards (PSAs)
In September 2022, the Company believes it is not more likely than not thatgranted 709,025 PSAs including performance stock options and RSUs under the benefit will2019 Plan to certain members of management, which are subject to the achievement of certain escalating stock price thresholds established by the Company's Board of Directors.
The PSAs each vest in equal installments upon the achievement of escalating stock price thresholds of $60, $80 and $105, respectively, calculated based on 20 consecutive days of trading at each respective threshold. The escalating stock price thresholds can be
realized.9. Net Loss Per Share
met any time prior to the fourth anniversary of the date of grant. The following table sets forthvesting of the computationPSAs can also be triggered upon certain change in control events and achievement of basic and diluted net loss per share forcertain change in control price thresholds, or in the periods indicated (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | Nine months ended
September 30, | |
| | | 2019 | | | 2018 | �� | | 2019 | | | 2018 | |
Net loss attributable to common stockholders | | $ | (9,603 | ) | | $ | (15,345 | ) | | $ | (24,117 | ) | | $ | (36,961 | ) |
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted | | | 29,184,218 | | | | 13,587,288 | | | | 19,904,184 | | | | 13,188,322 | |
| | | | | | | | | | | | | | | | |
Net loss per share attributable to common stockholders, basic and diluted | | $ | (0.33 | ) | | $ | (1.13 | ) | | $ | (1.21 | ) | | $ | (2.80 | ) |
| | | | | | | | | | | | | | | | |
Notes to Unaudited Condensed Consolidated Financial Statements
As of September 30, 2022, none of the escalating stock price thresholds had been met resulting in no shares vesting or becoming exercisable. Stock-based compensation expense recognized for these market-based awards was approximately $0.2 million for the three months ended September 30, 2022. The weighted-average grant date fair value of the PSAs was $22.55.
2019 Employee Stock Purchase Plan
A total of 3,284,859 shares of Class A common stock were reserved for issuance under the 2019 Employee Stock Purchase Plan ("ESPP"). The price at which Class A common stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower.
During the nine months ended September 30, 2022 and 2021, 91,871 and 30,980 shares of Class A common stock, respectively, were issued under the ESPP. No shares of Class A common stock were issued under the ESPP during the three months ended September 30, 2022 or 2021. As of September 30, 2022, there were 2,965,685 shares available for issuance in connection under the ESPP.
8. Net Loss Per Share
The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect:
| | | | | | | | |
| | | September 30, | |
| | | 2019 | | | 2018 | |
Convertible preferred stock (on anif-converted basis) | | | — | | | | 64,954,871 | |
Stock-options to purchase common stock | | | 15,952,177 | | | | 12,226,166 | |
Shares subject to repurchase | | | 164,375 | | | | 163,750 | |
Common stock warrants | | | — | | | | 266,099 | |
Shares committed under ESPP | | | 2,438 | | | | — | |
| | | | | | | | |
Total | | | 16,118,990 | | | | 77,610,886 | |
| | | | | | | | |
10. Subsequent Events
The 2015 Delaware Action
On October 10, 2019, the Court denied the Company’s motion to decrease the bond amount
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Stock options to purchase common stock | 8,350,916 | | | 9,206,850 | | | 8,350,916 | | | 9,206,850 | |
| Restricted stock units | 5,810,722 | | | 1,314,157 | | | 5,810,722 | | | 1,314,157 | |
| Shares committed under ESPP | 74,835 | | | 29,178 | | | 74,835 | | | 29,178 | |
| Shares subject to repurchase | — | | | 25,000 | | | — | | | 25,000 | |
| Contingent restricted shares | — | | | 236,484 | | | — | | | 236,484 | |
| Total | 14,236,473 | | | 10,811,669 | | | 14,236,473 | | | 10,811,669 | |
Item 2. Management’s Discussion and
stayed any execution or enforcementAnalysis of
the judgment until the completionFinancial Condition and Results of
appeal, and for thirty days thereafter.The 2019 Becton, Dickinson Settlement and Patent Cross License Agreement
In October 2019, the Company entered into a settlement and patent cross license agreement (the “BD Agreement”) with the BD Entities. The BD Agreement resolved all outstanding patent litigation between the parties (the “BD Litigation”), which was dismissed with prejudice on October 21, 2019. Under the terms of the BD Agreement, the BD Entities granted the Company and its affiliates, and the Company granted BD and its affiliates, a worldwide,royalty-free, non-exclusive, fully paid-up license to certain patents and patent applications relating to molecular barcoding and single cell analysis, including to all the patents asserted in the BD Litigation. Under the terms of the BD Agreement, the Company is obligated to make payments totaling $25.0 million to BD comprised of four annual payments of $6.25 million beginning in January 2020. As part of the BD Agreement, each party, on behalf of itself and its affiliates, has also entered into a covenant not to sue in certain fields related to each company’s products. The companies have also agreed on behalf of themselves and their affiliates to refrain from challenging the patents and patent applications licensed under the BD Agreement.
Operations. Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form10-Qand our audited consolidated financial statements and notes thereto and management’s discussionthe section titled “Management’s Discussion and analysisAnalysis of financial conditionFinancial Condition and resultsResults of operationsOperations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 included in the final prospectus for our initial public offering dated as of September 11, 2019, and2021 filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as amended,SEC on September 12, 2019 (FileNo. 333-233361) (the “Prospectus”February 18, 2022 (our "Annual Report"). As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” underin this Quarterly Report and Part II,I, Item 1A below. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions.
our Annual Report.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report
on Form10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
We operate on a fiscal year that ends on December 31.
We are a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. Our expanding suite of offerings leverages our cross-functional expertise across biology, chemistry, software and hardware to provide a comprehensive, dynamic and high-resolution view of complex biological systems. We have launched multiple products that enable researchers to understand and interrogate biological analytes in their full biological context. Our commercial product portfolio leverages our Chromium
instruments,Controller, Chromium Connect and Chromium X Series, which we refer to as
“instruments”,“Chromium instruments,” our Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of analytes from standard glass slides to Visium slides, and our proprietary microfluidic chips, slides, reagents and other consumables for
both our
VisiumChromium and
ChromiumVisium solutions, which we refer to as
“consumables”.“consumables.” We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and visualization.
Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolutions and on massive scales, such as at the single cell level for millions of cells.
Our ChromiumCustomers purchase instruments and
Chromium consumables are designed to work together exclusively. After buying a Chromium instrument, customers purchase consumables from us for use in their experiments.
Accordingly, as the installed base of our instruments grows, we expect recurring revenue from consumable sales to become an increasingly important driver of our operating results. As such, our revenue growth is expected to outpace growth in our instrument placements as our business develops. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our
Chromium instruments.
For the three and nine months ended September 30, 2019, sales of our Chromium instruments accounted for 17% and 15% of our revenue, respectively, sales of our consumables accounted for 81% and 83% of our revenue, respectively, and sales of services accounted for 2% and 2% of our revenue, respectively.We currently serve thousands of researchers in more than 40 countries. Our customers include a range of academic, government, biopharmaceutical, biotechnology and other leading institutions around the globe. In the three and nine months ended September 30, 2019, approximately 68% and 70%, respectively, of our direct sales revenue came from sales to academic institutions.
As of September 30, 2019, we employed a commercial team of over 200 employees. We follow a direct sales model in North America and certain regions of Europe, representing the majority of our revenue. We sell our products through third-party distributors in Asia, certain regions of Europe, South America, the Middle East and Africa. We currently sell our products for research use only. For the three and nine months ended September 30, 2019, sales within North America accounted for approximately 59% and 57% of our revenue, respectively.
We focus a substantial portion of our resources on developing new products and solutions. Our research and development efforts are centered around improving the performance of our existing assays and software, developing new Chromium solutions such as multi-omics solutions, developing our Visium platform, improving and developing new capabilities for our Chromium platform, developing combined software and workflows across multiple solutions and investigating new technologies. We intend to continue to make significant investments in this area for the foreseeable future. In addition, during the nine months ended September 30, 2018, we made acquisitions for an aggregate purchase price of $22.2 million. There were no similar acquisitions in the nine months ended September 30, 2019.
Our instrument manufacturing is contracted out to third-party contract manufacturers and we manufacture the majority of our consumable productsin-house, with a small amount of our components outsourced to key suppliers. We have designed our operating model to be capital efficient and to scale efficiently as our product volumes grow.
Historically, we have financed our operations primarily from the sale of our instruments and consumable products, the issuance and sale of our convertible preferred stock and common stock and the issuances of debt. On September 16, 2019, we completed an initial public offering (“IPO”), in which we sold 11,500,000 shares of Class A common stock (which included 1,500,000 shares that were offered and sold pursuant to the full exercise of the IPO underwriters’ option to purchase additional shares) at a price to the public of $39.00 per share. We received aggregate net proceeds of $410.8 million after deducting, offering costs, underwriting discounts and commissions of $37.7 million.
Since our inception in 2012, we have incurred net losses in each year. Our net losses were $9.6$41.9 million and $15.3$148.8 million for the three months ended September 30, 2019 and 2018, respectively, and $24.1 million and $37.0 million for the nine months ended September 30, 20192022 and 2018,$17.2 million and $39.8 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2019,2022, we had an accumulated deficit of $255.2 million$1.0 billion, and, cash, and cash equivalents and marketable securities totaling $427.4$452.4 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we:
•attract, hire and retain qualified personnel;
•scale our technology platforms and introduce new products and services;
•protect and defend our intellectual property;
•acquire businesses or technologies; and
•invest in processes, tools and infrastructure to support the growth of our business.
Recent acquisitions
In March 2018, we completed the acquisition of Epinomics Inc., a privately-held company based in California, for an all cash purchase price of $22.2 million. Epinomics Inc.’s patent portfolio includes foundational intellectual property and a worldwide exclusive license relating toATAC-seq, which supplements our existing patent portfolio and enables us to provideATAC-seq solutions for single cell and other epigenetic applications. All of our obligations under the Epinomics acquisition agreement have been fully performed.
In November 2018, we completed the acquisition of Spatial Transcriptomics Holding AB (“Spatial Transcriptomics”), a privately-held company based in Stockholm, Sweden, for an all cash purchase price of $38.6 million. With the acquisition of Spatial Transcriptomics, we obtained intellectual property relating to the spatial interrogation of biological analytes, which we believe will open up the possibilities for discoveries in oncology, neuroscience and immunology, as well as
Operational Effectiveness in the
broader area of biology. Pursuant to the Spatial Transcriptomics acquisition agreement, we are obligated to make contingent payments to the sellers through December 31, 2022. Aside from this obligation, all of our obligations under the Spatial Transcriptomics acquisition agreement have been fully performed.In November 2018, we completed the acquisition of a worldwide exclusive license to foundational intellectual property relating to spatial analysis technologies from Prognosys Biosciences, Inc. (“Prognosys”), for a combination of cash and common stock. All of our obligations under the Prognosys license agreement have been fully performed.
Key business metrics
COVID-19 Environment
We
regularly review a number of operating and financial metrics, including the instrument installed base and consumable pull-through, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that these metrics are representative of our current business; however, we anticipate these may change or may be substituted for additional or different metrics as our business grows and as we introduce new products.We believe the instrument installed base is one of the indicators of our ability to drive customer adoption of our products. We define the instrument installed base as the cumulative number of Chromium instruments sold since inception. Our instrument installed base grew from 491 as of December 31, 2017 to 1,021 as of December 31, 2018. Our goal is to continue to growclosely monitor developments surrounding the instrument installed base and we expect to evaluate and report changes to our instrument installed base on an annual basis.
We do not believeCOVID-19 pandemic including, among other developments, the numberpotential impacts of instruments installed in an individual quarter is an effective indicator of the current state of our business trends. Our quarterly instrument unit volumes can fluctuate due to a number of factors, including the procurement and budgeting cycles of manyvariants. Many of our customers especially government and academic institutions where unused funds may be forfeited or future budgets reduced if purchases are not made by their fiscal year end. Similarly, our biopharmaceutical customers typically have calendar year fiscal years which may result in a disproportionate amount of their purchasing activity occurring during our fourth quarter. For example, instrument unit sales decreased by 18% from the second half of 2018 to the first half of 2019. We believe this
decrease was largely caused by the procurement and budgeting cycles of our government and academic institution customers where unused funds are typically spent prior to fiscal year end. We also believe the timing of unit sales has been impacted and will continue to be impacted by the timing of product introductions and transitions which can either accelerate or delay demand of existing and new products depending on the needs of individual researchers to conclude existing studies or to use new and improved product capabilities. Further, the growth of our market in certain geographic regions and our continued efforts to service these regions impact unit volumes quarter to quarter. Finally, while our Chromium Controller instrument is user installable and does not requirein-person training to use, we expect the timing of installation will be impacted when we begin selling our Chromium Connect instrument since these instruments will require installation andin-person training. We therefore believe that an annual representation of our instrument installed base is most appropriate for assessing trends in our business.
Our consumables portfolio includes proprietary microfluidic chips, slides, reagents and other consumables for both our Visium and Chromium solutions. Our Chromium instruments and Chromium consumables are designed to work together exclusively. This Chromium closed-system model generates recurring revenue from each instrument we sell. Our growth in the instrument installed base has been the largest contributor to our growth in consumable sales. In addition, we believe that annual consumable pull-through per instrument is an indicator of our ability to generate future consumable revenue and the rate of customer adoption of our new applications. We define consumable pull-through per instrument as the total consumables revenue in the given period divided by the average instrument installed base during that period. Our annual consumable pull-through per instrument grew slightly from $140,000 for the year ended December 31, 2017 to $148,000 for the year ended December 31, 2018. We expect our annual consumable pull-through per instrument to be relatively stable as the instrument installed base increases and we expect to evaluate and report changes to our annual consumable pull-through per instrument on an annual basis.
Our current customer base includes customers who purchase consumables for use on a shared or centralized instrument. We refer to customers who purchase consumables but do not own an instrument as “halo users”. For the nine months ended September 30, 2019, halo users represented approximately half of our revenue from sales of consumables. Halo users, as well as the future introduction of consumables that may not use instruments, such as our recently announced Visium solution, or Chromium instruments that are expected to use a greater amount of consumables, such as our Chromium Connect instrument, could reduce the utility of this metric and make it difficult to compare consumable pull-through per instrument metrics over time.
Key factors affecting our performance
We believe that our financial performance has been and in the foreseeable future will continue to be primarily driven by the following factors. While each of these factors presents significant opportunities for our business, they also pose importantnavigate COVID-19 related challenges that we must successfully address in orderbelieve have affected our customers’ productivity. Such challenges include COVID-19 related protocols and restrictions, difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to sustain our growthprocuring materials, equipment and improve our results of operations. Our ability to successfully address the factors below is subject to various risks and uncertainties, including those described under the heading “Risk factors” under Item 1A below.
Instrument sales
Our financial performance has largely been driven by, and in the future will continue to be impacted by, the rate of sales of our Chromium instruments. Management focuses on instrument sales as an indicator of current business success and a leading indicator of likely future sales of consumables. We expect our instrument sales to continue to grow as we increase penetration in our existing markets and expand into, or offer new features and solutions that appeal to new markets.
We plan to grow our instrument sales in the coming years through multiple strategies including expanding our sales efforts globally and continuing to enhance the underlying technology and applicationscomponents required for life sciences research. We regularly solicit feedback from our customers and focus our research and development efforts on enhancing the Chromium Controller instrument and enabling its ability to use additional applications that address their needs, whichexperiments. For example, we believe COVID-19 related lockdowns in turn helps to drive additional sales of our instruments and consumables. We are developing our Chromium Connect instrument, which is an automated version of our current Chromium Controller instrument, with a targeted release in 2020. We believe the automated features of the Chromium Connect will increase our addressable market by increasing utilization by biopharmaceutical customers.
Our sales process varies considerably depending upon the type of customer to whom we are selling. Our sales process with small laboratories and individual researchers is often short, and in some cases, we receive purchase orders from these customers in under a month. Our sales process with other institutions can be longer with most customers submitting purchase orders within six months. Given the variability of our sales cycle, weChina have in the past experienced, and likely will in the future experience, fluctuations in our instrument sales on aperiod-to-period basis.
Recurring consumable revenue
As our instrument installed base expands, consumables revenue on an absolute basis is expected to increase and over time should be an increasingly important contributor to our revenue. We expect our annual consumable pull-through per instrument to be relatively stable as the instrument installed base increases. Our expansion into new markets with less experienced users could adversely impact average pull-through, but we expect the introduction of our Visium products as well as the release of new products and applications for our Chromium instruments to increase consumable pull-through per instrument and offset these declines. We will initially report our Visium product revenue as part of consumable revenue and include it in the average annual pull-through per instrument calculation. Even though Visium is not processed through a Chromium instrument, we will sell the product primarily to Chromium instrument users and view it as pull-through from a business perspective.
Revenue mix and gross margin
Our revenue is derived from sales of our instruments, consumables and services. There have been fluctuations in the mix between instruments and consumables and amongst our consumables. Our consumable revenue as a percentage of total revenue has continued to grow. Each ofnegatively impact our consumables solutions is designed to allow researchers to study a different aspect of biology, such as DNA, RNA, protein or epigenetics, at a resolution and scale that may be impractical or impossible using existing tools. As each of our solutions has been introduced, they have been initially purchased by a small number of early adopters. As these early adopters successfully perform experiments and publish scientific articles using our solutions, the utility of these solutions is more broadly understood and the solutions are then subsequently adopted by the larger research community. The revenue contribution from these and other consumable products has varied and is expected to vary on a quarterly basis due to several factors, including the publication of scientific papers demonstrating the value of the consumables, the availability of grants to fund research, budgetary timing and our introduction of new product features and new consumables offerings. However, sales of each of our consumable solutions have increased in absolute dollars in each of the periods presented.
For each of the nine months ended September 30, 2018 and 2019, our Single Cell Gene Expression consumables, which were introduced in 2016, accounted for the majority of our consumables revenue. For each of the nine months ended September 30, 2018 and 2019, the remaining consumables revenue was substantially comprised of sales of our Single Cell Immune Profiling consumables, which were introduced in 2017. Revenue from both our Single Cell Gene Expression consumables and our Single Cell Immune Profiling consumables increased in absolute dollars period over period. Revenue contribution from our Single Cell Gene Expression consumables decreased as a percentage of overall consumables revenue while revenue contribution from our Single Cell Immune Profiling consumables increased due to its introduction in the second quarter of 2017.
For each of the three months ended September 30, 2018 and 2019, our Single Cell Gene Expression consumables also accounted for the majority of our consumables revenue. For the three months ended September 30, 2018, the remaining consumables revenue was substantially comprised of revenue from our Single Cell Immune Profiling consumables. For the three months ended September 30, 2019, the remaining consumables revenue was substantially comprised of our Single Cell Immune Profiling and our Single Cell ATAC consumables. The mix in variance between these periods was attributable to the introduction of our Single Cell ATAC consumables in the fourth quarter of 2018 which was met with significant initial demand. Revenue contributions from each of our Single Cell Gene Expression, Single Cell Immune Profiling and Single Cell ATAC consumables increased in absolute dollars period over period. Revenue contribution from our Single Cell Gene Expression consumables decreased while revenue contribution from our Single Cell Immune Profiling and to a greater extent our Single Cell ATAC consumables increased as a percentage of overall consumable sales during the three months ended September 30, 2019. The factors driving this period to period variance were differences in the respective rates of growth in adoption and sales of these products and in the case of our Single Cell ATAC consumables, the significant initial demand for this product.
Over time, as our instrument installed base grows and our Visium products are introduced, we expect consumables revenue to constitute a larger percentage of revenue. In addition, our margins are higher for those instruments and consumables that we sell directly to customers as compared to those that we sell through distributors. While we expect the mix of direct sales as compared to sales through distributors to remain relatively constant in the near term, we are currently evaluating increasing our direct sales capabilities in certain geographies.
From the fourth quarter of 2016 to the first quarter of 2019, we offered two versions of the Chromium Controller, one at a $125,000 list price with firmware that enabled the use of all our Chromium consumables and another at a $75,000 list price with firmware that enabled the use of only our Single Cell Chromium consumables. Beginning in the first quarter of 2019, we standardized our instrument offering on the fully-enabled Chromium Controller with a list price of $75,000 and as a result our Chromium Controller average selling price decreased in the first nine months of 2019 from those realized in 2017 and 2018. The list prices of our consumables vary by solution. Future instrument and consumable selling prices and gross margins may fluctuate due to a variety of factors, including the introduction by others of competing products and solutions or the attempted integration by third-parties of
capabilities similar to ours into their existing products, such as sequencers. We aim to mitigate downward pressure on our average selling prices by increasing the value proposition offered by our instruments and consumables, primarily by, for example, expanding the applications for our instruments and increasing the quantity and quality of data that can be obtained using our consumables.
In the near term, we expect our expansion of manufacturing, warehousing and product distribution facilities, and the litigation described below under “Part II, Item 1 –Legal Proceedings”, to have the greatest impact on our margins. In addition to the impact of competing products entering the market, the future margin profiles of our instruments and consumables will depend upon the outcome of such litigation, any royalties we are required to pay and the royalty rates and products to which such royalties apply.
Continued investment in growth
Our significant revenue growth has been driven by rapid innovation towards novel solutions that command price premiums and quick adoption of our solutions by our customer base. In 2018 alone, we introduced six new products or updates to existing products. We intend to continue to make focused investments to increase revenue and scale operations to support the growth of our business and therefore expect expenses in this area to increase. We have invested, and will continue to invest, significantly in our manufacturing capabilities and commercial infrastructure. The transition to our new Pleasanton global headquarters and research and development center in 2019 will help us achieve these goals in the near term by providing additional manufacturing, research and development and general office space. We plan to further invest in research and development as we hire employees with the necessary scientific and technical backgrounds to enhance our existing products and help us bring new products to market, and we expect to incur additional research and development expenses and higher stock-based compensation expenses as a result. We also plan to invest in sales and marketing activities, and we expect to incur additional general and administrative expenses and to have higher stock-based compensation expenses as we support our growth and status as a publicly traded company. As cost of revenue, operating expenses and capital expenditures fluctuate over time, we may experience short-term, negative impacts to our results of operations and cash flows, but we are undertaking such investments in the belief that they will contribute to long-term growth.
Acquisitions of key technologies
We have made, and intend to continue to make, investments that meet management’s criteria to expand or add key technologies that we believe will facilitate the commercialization of new products in the future. Such investments could take the form of an asset acquisition, the acquisition of a business or the exclusive ornon-exclusive license of patented technology. Any such acquisitions we make may affect our future financial results. For example, our 2018 acquisitions of Spatial Transcriptomics and Epinomics Inc. were largely comprised of purchases of intellectual property which were expensed asin-process research and developmentrevenues in the quarter during which such acquisitions occurred. Whileended September 30,
2022. We, our suppliers and our other partners also have encountered COVID-19 related challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not
previously entered intoexperienced any material
joint-development, partnership or joint-venture agreements, we may in the future decide to do so and any such arrangements may limit our rights and the commercial opportunities of any jointly-developed technology.Components of Results of Operations
Revenue
We generate virtually all of our revenue through the sale of our instruments and consumables to customers. We also generate a small portion of our revenue from instrument service agreements which relate to extended warranties. Our revenue is subject to fluctuation based on the foreign currency in which our products are sold, principally for sales denominated in the euro.
Revenue from consumables is largely driven by the size of our instrument installed base and the volume of consumables sold per instrument. Our instruments and consumables are generally sold without the right of return. Revenue is recognized as instruments and consumables are shipped. Revenue is recognized net of any sales incentive, distributor rebates and commissions and any taxes collected from customers. Some of our recently announced products, such as our Chromium Connect instrument, may result in our recognizing revenue with respect to such products upon installation rather than upon shipment. Instrument service agreements are typically entered into for aone-year term, with the coverage period beginning after the expiration of the standardone-year warranty period. Revenue from the sale of instrument service agreements are recognized ratably over the coverage period. Since its introduction in May 2019, the revenue attributable to our Next GEM microfluidics chips and associated consumables has continued to increase. We expect the transition to Next GEM to have a minimal impact on our revenue since we intend to sell those products at prices similar to the GEM products they are replacing.
Cost of revenue, gross profit and gross margin
Cost of revenue. Cost of revenue primarily consists of manufacturing costs incurred in the production process including personnel and related costs, costs of component materials, labor and overhead, packaging and delivery costs and allocated costs including facilities and information technology. We plan to hire additional employees as well as expand our manufacturing, warehousing and product
distribution facilities, including increasing manufacturing automation to support our growth. In addition, cost of revenue includes royalty costs for licensed technologies included in our products, warranty costs, provisions for slow-moving and obsolete inventory and personnel and related costs and component costs incurred in connection with our obligations under our instrument service agreements. Beginning with the three months ended December 31, 2018, we began recording royalty accruals relating to sales of our GEM microfluidic chips and associated consumables, which are the subject of theBio-Rad litigation, as cost of revenue. We expect cost of revenue to increase in absolute dollars in future periods.
Gross profit/gross margin. Gross profit is calculated as revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross profit in future periods will depend on a variety of factors, including: market conditions that may impact our pricing; sales mix changes among consumables, instruments and services; product mix changes between established products and new products; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; and product warranty obligations. We currently anticipate that we will experience an increase in absolute dollars of both revenue and cost of revenue as we grow our business. Additionally, we expect gross margins to gradually increase through the end of 2020 as the result of a reduced royalty accrual related to theBio-Rad litigation. We expect these increases in gross margin from the reducedBio-Rad royalty will be partially offset by expenses related to our planned increases in manufacturing and distribution capacity in our Pleasanton, California headquarters as well as in certain locations outside the United States.
As noted above, since its introduction in May 2019, we experienced improved gross profit for the nine months ended September 30, 2019, as we sold more Next GEM microfluidic chips and associated consumables which are not subject to the royalty for theBio-Rad litigation. However, consumables subject to the 15% royalty accrual related to theBio-Rad litigation still comprised a large percentage of our consumable sales for the three and nine months ended September 30, 2019. As we continue to transition customers to our Next GEM microfluidic chips and associated consumables we expect our gross margins to increase since these microfluidic chips and associated consumables are not subject to the 15% royalty accrual related to theBio-Rad litigation discussed below under “Part II, Item 1 –Legal Proceedings. As a result, we expect a gradual increase to gross margins until the substantial majority of our consumables revenue has transitioned to Next GEM solutions. Further developments in our litigationwith Bio-Rad could have a material impact on our gross margins, both in the near term and beyond.
Beginning on August 28, 2019, our cost of revenue no longer includes a 15% royalty accrual related to theBio-Rad litigation on our instruments, since all Chromium instruments that have been sold since that date operate exclusively with our Next GEM solutions. We expect that this will continue to lead to an increase in gross margins related to those instrument sales in the near term. Because the Next GEM product selling prices and product manufacturing costs are similar to the GEM products they are replacing, we do not anticipate that Next GEM selling prices and product manufacturing costs will have a significant effect on our gross margins.
Operating expenses
Research and development. Research and development expense primarily consists of personnel and related costs, independent contractor costs, laboratory supplies, equipment maintenance prototype and materials expenses, amortization of developed technology and intangibles and allocated costs including facilities and information technology.
We plan to continue to invest in our research and development efforts, including hiring additional employees, to enhance existing products and develop new products. We also expect allocated facilities and information technology costs to increase in future periodsimpacts as a result of higher costs associated withsuch challenges.
There is considerable uncertainty about the transition to our global headquarters and research and development center in Pleasanton, California. As a resultduration of these and other initiatives, we expect research and development expense will increase in absolute dollars in future periods and vary from period to period as a percentagethe ongoing impacts of revenue.In-process research and development.In-process research and development consists of costs incurred to acquire intellectual property for research and development.COVID-19. We expect these costsCOVID-19 to continue to impact our operating results, however, the extent of the financial impact and duration cannot be recognized only in periods during which we complete an acquisitionreasonably estimated at this time. For further discussion of assets comprised in whole or part of intellectual property for research and development. While we periodically evaluate acquisitions of this nature from time to time, we have no definitive agreements currently in place to acquire additional intellectual property for research and development.
Selling, general and administrative. Selling, general and administrative expense primarily consists of costs relatedthe risks relating to the sellingimpacts of the COVID-19 pandemic, see the section titled “Risk Factors,” generally, and marketing“
Risk Factors—The impacts and potential impacts of the COVID-19 pandemic continue to create significant uncertainty for our business, financial condition and results of operations,” specifically, under Part I, Item 1A of our products, including sales incentives and advertising expenses and costs associated with our finance, accounting, legal (excluding accrued contingent liabilities), human resources and administrative personnel. Related costs associated with these functions, such as attorney and accounting fees, recruiting services, administrative services, insurance, public relations and communication activities, marketing programs and trade show appearances, travel, customer service costs and allocated costs including facilities and information technology, are also included in selling, general and administrative expenses. We expect to incur additional selling, general and administrative expenses due to continued investment in our sales, marketing and customer service efforts to support the anticipated growth of our business. We also expect increased infrastructure costs, as well as increased costs for accounting, human resources, legal, insurance, investor relations and other costs associated with being a public company. We expect to continue our hiring, in the United States as well as internationally, in all these areas in line with the continued growth of our business. We also expect allocated facilities costs to increase in future periods as a result of higher costs associated with the transition to our global headquarters and research and development center in Pleasanton, California. We also expect allocated information technology costs to increase following the expected implementation of a new enterprise resource planning system in 2020. As a result of these and other initiatives, we expect selling, general and administrative expenses to vary from period to period as a percentage of revenue, increase in absolute dollars in future periods and decrease as a percentage of revenue. We expect our stock-based compensation expense allocated to cost of revenue, research and development expenses and selling, general and administrative expenses to increase in absolute dollars.
Accrued contingent liabilities
Accrued contingent liabilitiesAnnual Report, which is comprised of changes in our litigation reserve, primarily relating to our litigationwith Bio-Rad discussed below under “Part II, Item 1 –Legal Proceedings. The litigation reserve currently consists of accruals we make for our estimated losses in these pending legal proceedings. We record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination of which requires significant judgment. Changes in the reserve are made as we change our estimates or make payments in damages or settlement. In the fourth quarter of 2018, we took a $30.6 million charge to reflect our best estimate of loss in resolving our ongoing disputes. In the three months ended September 30, 2019, we recorded no charge related to additionalpre- and post- judgment interest. In the nine months ended September 30, 2019, we recorded a $1.4 million charge related to additionalpre- and post- judgment interest. Beginning in the fourth quarter of 2018, we began recording an accrual for estimated royalties as cost of revenue. For the three and nine months ended September 30, 2019, we accrued royalties of $7.2 million and $23.1 million, respectively. As of September 30, 2019, we have accrued a total of $62.5 million related toincorporated by reference into this matter. Should we ultimately obtain a more favorable outcome in this litigation any reversal of the accrual related to the litigation would be reflected as a change to this item in the period in which it occurs. Any reversal for amounts recorded as estimated royalty accruals would be credited to our cost of revenue in such period.
Interest income
Interest income consists of interest earned on our cash and cash equivalents which are invested in bank deposit and in money market funds.
Interest expense
Interest expense consists of interest on our outstanding debt.
Other income (expense), net
Other income (expense), net primarily consists of realized and unrealized gains and losses related to foreign exchange rate remeasurements recorded from consolidating our foreign subsidiarieseach period-end.
Provision for income taxes
Our provision for income taxes consists primarily of foreign taxes and state minimum taxes in the United States. As we expand the scale and scope of our international business activities, any changes in the United States and foreign taxation of such activities may increase our overall provision for income taxes in the future.
Quarterly Report.Results of Operations
| | | | | | | | | | | | | | | | |
| | | Three months
ended September 30, | | | Nine months
ended September 30, | |
(in thousands) | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Revenue | | $ | 61,207 | | | $ | 36,607 | | | $ | 170,604 | | | $ | 95,759 | |
Cost of revenue | | | 15,480 | | | | 5,241 | | | | 44,451 | | | | 13,761 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 45,727 | | | | 31,366 | | | | 126,153 | | | | 81,998 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Research and development | | | 22,209 | | | | 11,085 | | | | 55,208 | | | | 34,457 | |
In-process research and development | | | — | | | | 16,104 | | | | — | | | | 22,310 | |
Selling, general and administrative | | | 32,614 | | | | 19,110 | | | | 92,078 | | | | 61,030 | |
Accrued contingent liabilities | | | — | | | | — | | | | 1,360 | | | | — | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 54,823 | | | | 46,299 | | | | 148,646 | | | | 117,797 | |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (9,096 | ) | | | (14,933 | ) | | | (22,493 | ) | | | (35,799 | ) |
Other income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | 481 | | | | 294 | | | | 986 | | | | 755 | |
Interest expense | | | (708 | ) | | | (659 | ) | | | (2,087 | ) | | | (1,721 | ) |
Other income (expense), net | | | (272 | ) | | | (31 | ) | | | (413 | ) | | | (151 | ) |
| | | | | | | | | | | | | | | | |
Total other income (expense) | | | (499 | ) | | | (396 | ) | | | (1,514 | ) | | | (1,117 | ) |
| | | | | | | | | | | | | | | | |
Loss before provision for income taxes | | $ | (9,595) | | | $ | (15,329 | ) | | $ | (24,007) | | | $ | (36,916 | ) |
Provision for income taxes | | | 8 | | | | 16 | | | | 110 | | | | 45 | |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (9,603 | ) | | $ | (15,345 | ) | | $ | (24,117 | ) | | $ | (36,961 | ) |
| | | | | | | | | | | | | | | | |
|
The following table sets forth our consolidated results of operations data as a percentage of revenue for the periods presented. | |
| | | Three months
ended September 30, | | | Nine months
ended September 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of revenue | | | 25.3 | % | | | 14.3 | % | | | 26.1 | % | | | 14.4 | % |
| | | | | | | | | | | | | | | | |
Gross profit | | | 74.7 | % | | | 85.7 | % | | | 73.9 | % | | | 85.6 | % |
Operating expenses: | | | | | | | | | | | | | | | | |
Research and development | | | 36.3 | % | | | 30.3 | % | | | 32.4 | % | | | 36.0 | % |
In-process research and development | | | — | | | | 44.0 | % | | | — | | | | 23.3 | % |
Selling, general and administrative | | | 53.3 | % | | | 52.2 | % | | | 53.9 | % | | | 63.7 | % |
Accrued contingent liabilities | | | — | | | | — | | | | 0.8 | % | | | — | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 89.6 | % | | | 126.5 | % | | | 87.1 | % | | | 123.0 | % |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (14.9 | )% | | | (40.8 | )% | | | (13.2 | )% | | | (37.4 | )% |
Other income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | 0.8 | % | | | 0.8 | % | | | 0.5 | % | | | 0.8 | % |
Interest expense | | | (1.2 | )% | | | (1.8 | )% | | | (1.2 | )% | | | (1.8 | )% |
Other income (expense), net | | | (0.4 | )% | | | (0.1 | )% | | | (0.2 | )% | | | (0.2 | )% |
| | | | | | | | | | | | | | | | |
Total other income (expense) | | | (0.8 | )% | | | (1.1 | )% | | | (0.9 | )% | | | (1.2 | )% |
| | | | | | | | | | | | | | | | |
Loss before provision for income taxes | | | (15.7 | )% | | | (41.9 | )% | | | (14.1 | )% | | | (38.6 | )% |
Provision for income taxes | | | 0 | % | | | 0 | % | | | 0.1 | % | | | 0 | % |
| | | | | | | | | | | | | | | | |
Net loss | | | (15.7 | )% | | | (41.9 | )% | | | (14.2 | )% | | | (38.6 | )% |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | $ | 131,072 | | | $ | 125,297 | | | $ | 360,177 | | | $ | 346,960 | |
| Cost of revenue | 30,377 | | | 24,518 | | | 83,559 | | | 46,493 | |
| Gross profit | 100,695 | | | 100,779 | | | 276,618 | | | 300,467 | |
| Operating expenses: | | | | | | | |
| Research and development | 67,290 | | | 54,582 | | | 202,053 | | | 149,867 | |
| | | | | | | |
| Selling, general and administrative | 73,401 | | | 62,076 | | | 219,413 | | | 187,683 | |
| Accrued contingent liabilities | — | | | — | | | — | | | (660) | |
| Total operating expenses | 140,691 | | | 116,658 | | | 421,466 | | | 336,890 | |
| Loss from operations | (39,996) | | | (15,879) | | | (144,848) | | | (36,423) | |
| Other income (expense): | | | | | | | |
| Interest income | 2,025 | | | 49 | | | 3,832 | | | 157 | |
| Interest expense | (114) | | | (219) | | | (351) | | | (649) | |
| Other expense, net | (1,950) | | | (599) | | | (4,193) | | | (807) | |
| | | | | | | |
| Total other expense | (39) | | | (769) | | | (712) | | | (1,299) | |
| Loss before provision for income taxes | (40,035) | | | (16,648) | | | (145,560) | | | (37,722) | |
| Provision for income taxes | 1,879 | | | 523 | | | 3,225 | | | 2,052 | |
| Net loss | $ | (41,914) | | | $ | (17,171) | | | $ | (148,785) | | | $ | (39,774) | |
Comparison of the Three
and Nine Months Ended September 30,
20192022 and
20182021
Revenue
| | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | Change | |
(dollars in thousands) | | 2019 | | | 2018 | | | $ | | | % | |
Revenue | | $ | 61,207 | | | $ | 36,607 | | | $ | 24,600 | | | | 67 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| (dollars in thousands) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Instruments | $ | 20,899 | | | $ | 17,121 | | | $ | 3,778 | | | 22 | % | | $ | 50,064 | | | $ | 45,123 | | | $ | 4,941 | | | 11 | % |
| Consumables | 108,107 | | | 106,117 | | | 1,990 | | | 2 | | | 303,991 | | | 296,342 | | | 7,649 | | | 3 | |
| Services | 2,066 | | | 2,059 | | | 7 | | | — | | | 6,122 | | | 5,495 | | | 627 | | | 11 | |
| Total revenue | $ | 131,072 | | | $ | 125,297 | | | $ | 5,775 | | | 5 | % | | $ | 360,177 | | | $ | 346,960 | | | $ | 13,217 | | | 4 | % |
Revenue increased
$24.6$5.8 million, or
67%5%,
to $131.1 million for the three months ended September 30,
20192022 as compared to the three months ended September 30,
2018. The increase was driven primarily by an increase in consumables revenue. Consumables2021. Instruments revenue increased
$22.9$3.8 million, or
86%22%, to
$49.7$20.9 million for the three months ended September 30,
20192022 as compared to the three months ended September 30,
2018. The growth in consumables revenue was substantially driven by the growth in the instrument installed base. We experienced continued increases in revenue from our Single Cell Gene Expression and Single Cell Immune Profiling consumables as well as from sales2021, primarily due to higher volume of
our Single Cell ATAC consumables which were introduced in the fourth quarter of 2018.Instrumentinstruments sold. Consumables revenue increased $1.2$2.0 million, or 13%2%, to $10.4$108.1 million for the three months ended September 30, 20192022 as compared to the three months ended September 30, 20182021, primarily driven by growth due to the addition of new customers, partially offset by unfavorable currency fluctuations.
Revenue increased $13.2 million, or 4%, to $360.2 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Instruments revenue increased $4.9 million, or 11%, to $50.1 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 primarily due to higher volume of instruments
sold, partiallysold. Consumables revenue increased $7.6 million, or 3%, to $304.0 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 primarily driven by growth due to increased usage by existing customers and the addition of new customers, largely offset by
lower average selling prices. Lower average selling prices weredecreased demand due to limited laboratory productivity arising from the
resultcontinued impact of
the global COVID-19 pandemic, including lockdowns in China, delayed purchases by customers impacted by a previously disclosed process breakdown in our
2019 first quarter list price reduction for our fully-enabled Chromium Controllerlogistics cold-chain, execution challenges and
various discount incentives to drive product adoption.unfavorable currency fluctuations.
Cost of revenue, gross profit and gross margin
| | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | Change | |
(dollars in thousands) | | 2019 | | | 2018 | | | $ | | | % | |
Cost of revenue | | $ | 15,480 | | | $ | 5,241 | | | $ | 10,239 | | | | 195 | % |
Gross profit | | $ | 45,727 | | | $ | 31,366 | | | $ | 14,361 | | | | 46 | % |
Gross margin | | | 75 | % | | | 86 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| (dollars in thousands) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Cost of revenue | $ | 30,377 | | | $ | 24,518 | | | $ | 5,859 | | | 24 | % | | $ | 83,559 | | | $ | 46,493 | | | $ | 37,066 | | | 80 | % |
| Gross profit | $ | 100,695 | | | $ | 100,779 | | | $ | (84) | | | — | % | | $ | 276,618 | | | $ | 300,467 | | | $ | (23,849) | | | (8) | % |
| Gross margin | 77 | % | | 80 | % | | | | | | 77 | % | | 87 | % | | | | |
Cost of revenue increased $10.2$5.9 million, or 195%24%, into $30.4 million for the three months ended September 30, 20192022 as compared to the three months ended September 30, 2018. In addition to higher cost of sales in line with revenue growth, the2021. The increase was primarily driven by higher manufacturing costs of $4.2 million due to additionalincreased sales and higher costs of newly introduced products, $0.9 million of higher warranty costs and $0.9 million of loss on a purchase commitment.
Cost of revenue increased $37.1 million, or 80%, to $83.6 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase was primarily driven by a one-time reversal of $14.7 million of accrued royalties
of $7.2resulting from the Settlement and Patent Cross License Agreement (the "Bio-Rad Agreement") with Bio-Rad Laboratories during the nine months ended September 30, 2021, $15.4 million
relatedfrom higher manufacturing costs due to
the judgment in theBio-Rad litigationincreased sales and higher
costs of newly introduced products, $3.3 million of higher royalty expenses, $2.4 million of higher inventory
reserves, partially offset by lowerscrap and excess and obsolete inventory charges, and $1.7 million of higher warranty costs.
Gross profit
We expect our gross margin will trend lower due in part to change in product mix with newly introduced products and the impacts of inflation and increased $14.4supply chain costs.
Operating expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| (dollars in thousands) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Research and development | $ | 67,290 | | | $ | 54,582 | | | $ | 12,708 | | | 23 | % | | $ | 202,053 | | | $ | 149,867 | | | $ | 52,186 | | | 35 | % |
| | | | | | | | | | | | | | | |
| Selling, general and administrative | 73,401 | | | 62,076 | | | 11,325 | | | 18 | | | 219,413 | | | 187,683 | | | 31,730 | | | 17 | |
| Accrued contingent liabilities | — | | | — | | | — | | | N/A | | — | | | (660) | | | 660 | | | (100) | |
| Total operating expenses | $ | 140,691 | | | $ | 116,658 | | | $ | 24,033 | | | 21 | % | | $ | 421,466 | | | $ | 336,890 | | | $ | 84,576 | | | 25 | % |
Research and development expenses increased $12.7 million, or
46%23%,
to $67.3 million for the three months ended September 30,
20192022, as compared to the three months ended September 30,
2018, primarily due to increased revenue partially offset by the additional accrued royalties. Gross margin percentage decreased by 11% for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018, driven almost exclusively by higher accrued royalties related to the judgment in theBio-Rad litigation in the three months ended September 30, 2019.Operating expenses
| | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | Change | |
(dollars in thousands) | | 2019 | | | 2018 | | | $ | | | % | |
Research and development | | $ | 22,209 | | | $ | 11,085 | | | $ | 11,124 | | | | 100 | % |
In-process research and development | | | — | | | | 16,104 | | | | (16,104 | ) | | | (100 | )% |
Selling, general and administrative | | | 32,614 | | | | 19,110 | | | | 13,504 | | | | 71 | % |
| | | | | | | | | | | | | | | | |
Total operating expenses | | $ | 54,823 | | | $ | 46,299 | | | $ | 8,524 | | | | 18 | % |
| | | | | | | | | | | | | | | | |
Research and development expense increased $11.1 million, or 100%, for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018.2021. The increase was primarily driven by an increase in personnel expenses of $6.2$8.2 million, including $3.3 million in stock-based compensation expense and $1.4 million in restructuring expense, $2.1 million of higher costs for facilities and information technology to support operational expansion, and higher costs of laboratory materials and supplies and equipment expenses of $3.0$2.1 million used to support our research and development efforts. In addition, we incurred $2.0 million of higher allocated costs for facilities and information technology to support the expansion of our operations.
In-process research
Research and development
expenseexpenses increased $52.2 million, or 35%, to $202.1 million for the
threenine months ended September 30,
2018 relates2022, as compared to
intellectual property we purchased in connection with our acquisition of Epinomics Inc. There were no similar purchases in the
threenine months ended September 30,
2019.Selling, general and administrative expenses increased $13.5 million, or 71%, for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018.2021. The increase in expenses was primarily driven by an increase in personnel expenses of $7.5$30.6 million, including $11.2 million in stock-based compensation expense and $2.1$1.4 million in restructuring expense, higher costs of increasedlaboratory materials and supplies of $10.1 million used to support our research and
development efforts, $8.9 million of higher costs for facilities and information technology-related expensestechnology to support our future sales growthoperational expansion, higher consulting and the overall expansionprofessional services of our operations. In addition, the three months ended September 30, 2019 includes $1.3$1.4 million for product development, and $0.9 million of higher outside legaldepreciation.
Selling, general and administrative expenses
comparedincreased $11.3 million, or 18%, to
the three months ended September 30, 2018.Other income (expense), net
| | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | Change | |
(dollars in thousands) | | 2019 | | | 2018 | | | $ | | | % | |
Interest income | | $ | 481 | | | $ | 294 | | | $ | 187 | | | | 64 | % |
Interest expense | | | (708 | ) | | | (659 | ) | | | (49 | ) | | | 7 | % |
Other income (expense) | | | (272 | ) | | | (31 | ) | | | (241 | ) | | | N/M | |
| | | | | | | | | | | | | | | | |
Total other income (expense), net | | $ | (499 | ) | | $ | (396 | ) | | $ | (103 | ) | | | 26 | % |
| | | | | | | | | | | | | | | | |
N/M: result not meaningful.
Interest income increased by $0.2 million to $0.5$73.4 million for the three months ended September 30, 2019 from $0.3 million for the three months ended September 30, 2018. The increase was primarily due to interest income earned from the investment of the net proceeds from the IPO completed in September 2019.
Interest expense increased nominally for the three months ended September 30, 2019 from the three months ended September 30, 2018. The slight increase was driven primarily by higher interest rates on our outstanding term loan borrowings and the interest paid on the revolving credit facility.
The change in other income (expense) for the three months ended September 30, 20192022, as compared to the three months ended September 30, 20182021. The increase was primarily driven by increased personnel expenses of $11.3 million, including $3.9 million in stock-based compensation expense and $2.5 million in restructuring expense, $1.7 million of higher outside legal expenses, and $1.0 million of higher costs for facilities and information technology to support operational expansion, partially offset by decreased marketing expenses related to conferences and seminars of $2.4 million.
Selling, general and administrative expenses increased $31.7 million, or 17%, to $219.4 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The increase was primarily driven by increased personnel expenses of $41.0 million, including $14.1 million in stock-based compensation expense and $2.5 million in restructuring expense, $3.0 million of higher costs for facilities and information technology to support operational expansion, partially offset by decreased outside legal expenses of $11.0 million and $3.0 million of consulting and professional services.
We expect our operating expenditures to continue to increase in the fourth quarter of 2022 and beyond as we increase our investment to support new and existing research and development projects and incentivize and retain key talent, which we expect to result in increased stock-based compensation expense in future periods.
Other expense, net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| (dollars in thousands) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Interest income | $ | 2,025 | | | $ | 49 | | | $ | 1,976 | | | 4,033 | % | | $ | 3,832 | | | $ | 157 | | | $ | 3,675 | | | 2,341 | % |
| Interest expense | (114) | | | (219) | | | 105 | | | (48) | | | (351) | | | (649) | | | 298 | | | (46) | |
| Other expense, net | (1,950) | | | (599) | | | (1,351) | | | 226 | | | (4,193) | | | (807) | | | (3,386) | | | 420 | |
| | | | | | | | | | | | | | | |
| Total other expense | $ | (39) | | | $ | (769) | | | $ | 730 | | | (95) | % | | $ | (712) | | | $ | (1,299) | | | $ | 587 | | | (45) | % |
Interest income increased by $2.0 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Interest income increased by $3.7 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increases for the three and nine ended September 30, 2022 as compared to the corresponding prior year periods were primarily due to interest income generated from our cash equivalents and marketable securities during the three and nine months ended September 30, 2022 and an increase in interest rates.
Interest expense decreased by $0.1 million, or 48% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Interest expense decreased by $0.3 million, or 46% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The decreases for the three and nine months ended September 30, 2022 were driven primarily by lower interest expense recognized on accrued license fees.
The change in other expense, net for the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021 was driven by realized and unrealized losses from foreign currency rate measurement fluctuations.
Comparison of
Provision for Income Taxes
The Company's provision for income taxes was $1.9 million and $3.2 million, respectively, for the
Nine Months Ended September 30, 2019three and
2018Revenue
| | | | | | | | | | | | | | | | |
| | | Nine months ended
September 30, | | | Change | |
(dollars in thousands) | | 2019 | | | 2018 | | | $ | | | % | |
Revenue | | $ | 170,604 | | | $ | 95,759 | | | $ | 74,845 | | | | 78 | % |
Revenue increased $74.8 million, or 78%, for the nine months ended September 30, 2019 as compared to2022 and $0.5 million and $2.1 million, respectively, for the three and nine months ended September 30, 2018.2021. The increase was drivenprovision for income taxes consists primarily by an increase in consumables revenue. Consumables revenue increased $72.8 million, or 105%,of foreign taxes. Deferred tax assets related to $142.1 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The growth in consumables revenue was substantially driven by the growth in the instrument installed base. We experienced continued increases in revenue from our Single Cell Gene Expression and Single Cell Immune Profiling consumables as well as from sales of our Single Cell ATAC consumables which was introduced in the fourth quarter of 2018.
Instrument revenue increased $0.5 million, or 2%, to $25.5 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 due to higher volumes of instruments sold, partiallydomestic operations are fully offset by lower average selling prices. Lower average selling prices were the resulta valuation allowance.
Table of our 2019 first quarter list price reduction for our fully-enabled Chromium Controller and various discount incentives to drive product adoption.Cost of revenue, gross profit and gross margin
| | | | | | | | | | | | | | | | |
| | | Nine months ended
September 30, | | | Change | |
(dollars in thousands) | | 2019 | | | 2018 | | | $ | | | % | |
Cost of revenue | | $ | 44,451 | | | $ | 13,761 | | | $ | 30,690 | | | | 223 | % |
Gross profit | | $ | 126,153 | | | $ | 81,998 | | | $ | 44,155 | | | | 54 | % |
Gross margin | | | 74 | % | | | 86 | % | | | | | | | | |
Cost of revenue increased $30.7 million, or 223%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. In addition to higher cost of sales in line with revenue growth, the increase was primarily due to additional accrued royalties of $23.1 million related to the judgment in theBio-Rad litigation.
Gross profit increased $44.2 million, or 54%, for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, primarily due to increased revenue partially offset by the additional accrued royalties. Gross margin percentage decreased by 12% for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, driven almost exclusively by higher accrued royalties in the nine months ended September 30, 2019.
Operating expenses
| | | | | | | | | | | | | | | | |
| | | Nine months ended
September 30, | | | Change | |
(dollars in thousands) | | 2019 | | | 2018 | | | $ | | | % | |
Research and development | | $ | 55,208 | | | $ | 34,457 | | | $ | 20,751 | | | | 60 | % |
In-process research and development | | | — | | | | 22,310 | | | $ | (22,310 | ) | | | (100 | )% |
Selling, general and administrative | | | 92,078 | | | | 61,030 | | | $ | 31,048 | | | | 51 | % |
Accrued contingent liabilities | | | 1,360 | | | | — | | | $ | 1,360 | | | | 100 | % |
| | | | | | | | | | | | | | | | |
Total operating expenses | | $ | 148,646 | | | $ | 117,797 | | | $ | 30,849 | | | | 26 | % |
| | | | | | | | | | | | | | | | |
Research and development expense increased $20.8 million, or 60%, for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increase was primarily driven by an increase in personnel expenses of $12.9 million and laboratory materials, supplies and equipment expenses of $4.7 million used to support our research and development efforts. In addition, we incurred increased allocated costs of $2.9 million for facilities and information technology to support the expansion of our operations.
In-process research and development expense for the nine months ended September 30, 2018 relates to intellectual property we purchased in connection with our acquisition of Epinomics Inc. There were no similar purchases in the nine months ended September 30, 2019.
Selling, general and administrative expenses increased $31.0 million, or 51%, for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increase in expenses was primarily driven by an increase in personnel expenses of $21.4 million to support our future sales growth and the overall expansion of our operations and increased allocated costs of $6.1 million for facilities and information technology.
Accrued contingent liabilities for the nine months ended September 30, 2019 consisted of $1.4 million of expenses forpre- and post-judgment interest relating to the litigation withBio-Rad, for which we established an accrual in November 2018.
Contents Other income (expense), net
| | | | | | | | | | | | | | | | |
| | | Nine months ended
September 30, | | | Change | |
(dollars in thousands) | | 2019 | | | 2018 | | | $ | | | % | |
Interest income | | $ | 986 | | | $ | 755 | | | $ | 231 | | | | 31 | % |
Interest expense | | | (2,087 | ) | | | (1,721 | ) | | $ | (366 | ) | | | 21 | % |
Other income (expense) | | | (413 | ) | | | (151 | ) | | $ | (262 | ) | | | 174 | % |
| | | | | | | | | | | | | | | | |
Total other income (expense), net | | $ | (1,514 | ) | | $ | (1,117 | ) | | $ | (397 | ) | | | 36 | % |
| | | | | | | | | | | | | | | | |
Interest income increased by $0.2 million to $1.0 million for the nine months ended September 30, 2019 from $0.8 million for the nine months ended September 30, 2018. The increase was driven primarily by higher cash and cash equivalent balances in interest bearing accounts, including the amounts received from the IPO.
Interest expense increased by $0.4 million to $2.1 million for the nine months ended September 30, 2019 from $1.7 million for the nine months ended September 30, 2018. The increase was driven primarily by higher interest rates on our outstanding term loan borrowings, including the increase in borrowings in February 2018, and interest paid on the draw from our revolving line of credit.
The change in other income (expense) for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 was driven by realized and unrealized losses from foreign currency rate measurement fluctuations. Foreign currency losses increased compared to the nine months ended September 30, 2018 as a result of the overall strengthening of the U.S. dollar when compared to the foreign currencies in which we operate.
Liquidity and Capital Resources
As of September 30,
2019,2022, we had
approximately $427.4$234.0 million in cash and cash equivalents which were primarily held in U.S. bank deposit accounts and money market funds
$26.2and $218.4 million in
accounts receivablemarketable securities. Short-term restricted cash of $0.5 million and
an accumulated deficitlong-term restricted cash of
$255.2 million. Approximately $5.0$7.1 million
of cash, whichprimarily serves as collateral for
an outstanding
letterletters of credit
and $45.0 million of cash, which serves as collateral for
a bond in connection with theBio-Rad litigation, were classified as noncurrent restricted cash as of September 30, 2019. While we generated positive cash flows from operations of $27.9 million for the nine months ended September 30, 2019, wefacilities. We have generated negative
cumulative cash flows from operations since inception through the nine months ended September 30,
20192022, and we have generated losses from operations since inception as reflected in our accumulated deficit of
$255.2 million. We expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make and as a result we may require additional capital resources to execute strategic initiatives to grow our business.In August 2019, the U.S. District Court for the District of Delaware entered final judgment in the amount of approximately $35 million and subsequently ordered that we may post a bond in the amount of $52 million in lieu of payment of the final judgment. On September 13, 2019, we posted a $52 million bond in lieu of payment of the final judgment pending our ongoing appeal. In connection with the bond, we deposited $45 million as collateral in a segregated cash account, where it will be held until the conclusion of the appeal. On October 10, 2019, the Court denied our motion to decrease the bond amount and stayed any execution or enforcement of the judgment until the completion of appeal, and for thirty days thereafter.
Pursuant to the judgment, we will place into an escrow each quarter of an amount equal to 15% of net sales of our GEM microfluidic chips and associated consumables subsequent to the effective date of the injunction, which was August 28, 2019. The amounts will be held until conclusion of the appeal and classified as noncurrent restricted cash.
$1.0 billion.
We currently anticipate making aggregate capital expenditures of between approximately $45.0$80 million and $55.0$90 million during the next 1812 months, approximately two thirds of which includes thewe expect to incur for construction costs of the facilities on our property in Pleasanton, California, as well as other global expansionfacilities and for equipment to be used for manufacturing and research and development.
Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the impacts of the COVID-19 pandemic, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities the timing of capital expenditures relating to our planned implementation of a new enterprise resource planning system and the introduction of new products. We havetake a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs. We regularly review opportunities that meet our long-term growth objectives.
WeWhile we expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make, we believe that our existing cash and cash equivalents and cash generated from sales of our products and either, or a combination of, the deferral of anticipated capital expenditures or partially borrowing under our existing credit agreements will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect.
We intend to continue to evaluate market conditions and may in the future pursue additional sources of funding, such as mortgage or other financing, to further enhance our financial position and to execute our business strategy. In addition, should prevailing economic, financial, business or other factors adversely affect our ability to meet our operating cash requirements, we could be required to obtain funding though traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all.
Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales
of our products and
issuancesthe incurrence of
debt.indebtedness. In September 2019, we completed our
IPOinitial public offering for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and
commissions of $37.7 million.Silicon Valley Bank Loan and Security Agreement
We are party tocommissions. In September 2020, we completed a Second Amended and Restated Loan and Security Agreement, dated February 9, 2018, with Silicon Valley Bank (as amended, restated or supplemented from time to time, the “Loan and Security Agreement”), under which (i) $30.0 million of term loan borrowings were outstanding, (ii) no borrowings were outstanding under the $25.0 million revolving line of credit and (iii) no borrowings were outstanding under the $20.0 million of additional term loan borrowings, which, subject to certain conditions, are available to be drawn before December 31, 2019, in each case as of September 30, 2019. We are obligated to issue warrants to purchase 133,000 sharespublic offering of our Class A common stock at an exercise pricefor aggregate proceeds of $1.62 per share to the lender if we elect to borrow the additional term loan referred to in the preceding sentence. In August 2019, we borrowed $11.0$482.3 million, under our existing revolving line of credit. As of September 30, 2019, the entire $11.0 million was repaid.
Borrowings under the term loan mature on December 1, 2022after deducting offering costs, underwriting discounts and accrue interest at a floating rate equal to the greater of The Wall Street Journal prime rate plus 2.0% or 6.25% per annum. Monthly payments of interest are due on the term loan through December 31, 2019, after which equal monthly installments of principal and interest are due. The revolving line of credit terminates on December 1, 2022 and the amount available under the revolving line of credit is based on 80% of eligible receivables and is subject to a borrowing base calculation. Borrowings under the revolving line of credit accrue interest which is payable monthly at a floating rate equal to the greater of The Wall Street Journal prime rate plus 0.25% or 4.5% per annum.
The Loan and Security Agreement contains affirmative and negative covenants, including a covenant requiring us to maintain minimum revenue equal to at least 70% of projected revenue for the applicable periods through and including December 31, 2020 and covenants that restrict, among other things, our ability to dispose of assets, change our business, management, ownership or business locations, enter into mergers or acquisitions, incur additional indebtedness or encumber any of our assets. Because the minimum revenue requirements referred to above are based on the revenue forecasts we provide to the lender, our inability to accurately forecast our revenue for future periods could result in a failure to comply with this covenant, which would be an event of default under the Loan and Security Agreement. Various facts and circumstances could adversely impact our ability to meet these minimum revenue requirements in the near to intermediate term. If we were to suffer an adverse event during the remainder of 2019 that resulted in revenue shortfalls well in excess of 50% in each month of the fourth quarter of 2019, we may be unable to comply with this covenant. For example, were the ITC to reverse the judge’s Initial Determination that our Next GEM microfluidic chips do not infringe any claims asserted against them and enter an exclusion order against our Next GEM microfluidic chips barring their importation into the United States, our revenue and resulting ability to comply with these minimum revenue requirements may be adversely affected. See “Part II, Item 1. Legal Proceedings–The ITC 1068 Action.” If we default under the Loan and Security Agreement and if the default is not cured or waived, the lender could terminate its commitments to lend to us and cause any amounts outstanding to be payable immediately. Under certain circumstances, the lender could also exercise its rights with respect to the collateral securing such loans. Such a default could also result in cross-defaults under other debt instruments. Moreover, any such default would limit our ability to obtain additional financing, which may have an adverse effect on our cash flow and liquidity.
We were in compliance with all covenants under the Loan and Security Agreement as of September 30, 2019 and currently remain in compliance with such covenants. In September 2019, our Loan and Security Agreement was amended to facilitate the posting of a surety bond and to permit us to establish related escrow and cash collateral accounts, in each case in connection with the litigation withBio-Rad referred to in the section titled “Risk factors–Risks related to litigation and our intellectual property”.
commissions.Cash flow summary
The following table summarizes our cash flows for the periods indicated:
| | | | | | | | |
| | | Nine Months Ended
September 30, | |
| | | 2019 | | | 2018 | |
| | | (in thousands) | |
Net cash provided by (used in): | | | | | | | | |
Operating activities | | $ | 27,927 | | | $ | (25,410 | ) |
Investing activities | | | (36,186 | ) | | | (3,880 | ) |
Financing activities | | | 415,697 | | | | 69,489 | |
Effect of exchange rates on cash, cash equivalents and restricted cash | | | (37 | ) | | | 9 | |
| | | | | | | | |
Net increase in cash, cash equivalents and restricted cash | | $ | 407,401 | | | $ | 40,208 | |
| | | | | | | | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| (in thousands) | 2022 | | 2021 |
| Net cash (used in) provided by: | | | |
| Operating activities | $ | (47,329) | | | $ | (27,178) | |
| Investing activities | (317,715) | | | (79,111) | |
| Financing activities | 10,816 | | | 26,394 | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (295) | | | 316 | |
| Net decrease in cash, cash equivalents, and restricted cash | $ | (354,523) | | | $ | (79,579) | |
Operating activities
The net cash provided by operating activities of $27.9 million in the nine months ended September 30, 2019 was due primarily to a net loss of $24.1 million with adjustments for stock-based compensation expense of $8.3 million and depreciation and amortization of $4.2 million. The inflow from operating assets and liabilities was primarily due to an increase in accrued contingent liabilities of $24.5 million, an increase in noncurrent deferred rent of $12.8 million, an increase in accounts payable of $2.7 million, an increase in accrued expenses and other current liabilities of $2.6 million, and a decrease in accounts receivable of $1.9 million partially offset by an increase in inventory of $4.7 million, and an increase in prepaid expenses and other assets of $2.8 million.
The net cash used in operating activities of $25.4$47.3 million infor the nine months ended September 30, 20182022 was primarily due primarily to a net loss of $37.0$148.8 million, with adjustments fornet cash outflow from changes in operating assets and liabilities of $20.1 million, partially offset by stock-based compensation expense of $95.9 million, depreciation and amortization of $3.0$18.8 million, amortization of leased
right-of-use assets of $5.7 million, amortization of premium and accretion of discount on marketable securities, net of $0.7 million, and stock-based compensation expenseloss on disposal of $1.6property and equipment of $0.5 million. The net cash outflow from operating assets and liabilities was primarily due to an increase in accounts receivable of $5.8 million, an increase in inventory of $2.0$19.8 million due to ramp-up of inventory for anticipated demand and supply chain management, a decrease of $4.6 million due to payment of operating lease liabilities, a decrease in accounts payableaccrued compensation and other related benefits of $1.8$3.2 million due to the prior year annual bonus payments, a decrease in other noncurrent liabilities of $3.0 million, and an increase in prepaid expenses and other current assets of $2.5 million. The net cash outflow from operating assets and other assets of $1.0 million,liabilities was partially offset by an increase in accounts payable of $6.1 million due to timing of vendor payments, an increase in accrued expenses and other current liabilities of $16.2$2.9 million, and an increase in deferred revenue of $1.3$1.8 million, and a decrease in accounts receivable of $1.7 million due to timing of collections.
The net cash used in operating activities of $27.2 million for the nine months ended September 30, 2021 was due primarily to a net loss of $39.8 million, net cash outflow from changes in operating assets and liabilities of $77.5 million, partially offset by adjustments for stock-based compensation expense of $69.1 million, depreciation and amortization of $15.3 million and amortization of leased right-of-use assets of $5.6 million.
The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued contingent liabilities of $44.2 million, of which $29.4 million was paid as cash settlement arising from the Bio-Rad Agreement, an increase in accounts receivable of $27.2 million due to increase in sales and timing of collections, an increase in inventory of $21.3 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand, a decrease in accrued expenses and other current liabilities of $2.5 million due to the timing of payments including license fees, a decrease in other noncurrent liabilities of $4.1 million, an increase in prepaid expenses and other current assets of $1.2 million and a decrease of $2.5 million due to payment of operating lease liabilities. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $12.2 million due to timing of vendor payments and an increase in accrued compensation and other related benefits of $11.9 million.
The net cash used in investing activities of
$36.2$317.7 million in the nine months ended September 30,
20192022 was due to purchases of
marketable securities of $282.9 million and property and
equipment.equipment of $91.9 million, and payment of acquisition-related holdback cash of $1.5 million, partially offset by proceeds from sales and maturities of marketable securities of $41.4 million and $17.2 million, respectively.
The net cash used in investing activities of
$3.9$79.1 million in the nine months ended September 30,
20182021 was due to purchases of property and
equipment.equipment of $73.7 million including the purchase of land for $28.1 million, and cash paid for the acquisition of Tetramer Shop ApS of $5.5 million.
The net cash provided by financing activities of
$415.7$10.8 million in the nine months ended September 30,
20192022 was primarily from proceeds of
$412.7 million from issuance of Class A common stock in our IPO, net of issuance costs and proceeds of $3.0 million from the issuance of common stock from the exercise of stock options.The net cash provided by financing activities of $69.5 million in the nine months ended September 30, 2018 was primarily from proceeds from the issuance of convertible preferred stock, net of issuance costs, of $49.9 million, proceeds from additional borrowings of $19.5 million and proceeds of $0.9$16.2 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of debt obligations$5.4 million.
The net cash provided by financing activities of $0.7 million.
Concentrations of credit risk
As of December 31, 2018 and September 30, 2019, no single customer represented 10% or more of our accounts receivable balance. There was no single customer that individually exceeded 10% of our revenue during the three months ended September 30, 2018 and 2019 or for$26.4 million in the nine months ended September 30, 20182021 was primarily from proceeds of $31.4 million from the issuance of common stock from the exercise of stock options and 2019.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations as of September 30, 2019, as compared to those disclosed in the Prospectus as of June 30, 2019.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, anyoff-balance sheetemployee stock purchase plan purchases partially offset by payments on financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limited purposes.
$5.0 million.
Critical Accounting
PoliciesEstimates
Our
management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements
which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”)
. for interim financial information and the applicable rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes in our critical accounting policies and estimates during the three and nine months ended September 30, 2022 as compared to the critical accounting policies and estimates disclosed in the section titled “Management’s
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Prospectusour most recent Annual Report on Form 10-K filed with the SEC on February 18, 2022, except as set forth below.
Stock-Based Compensation
In the three months ended September
12, 2019. For additional information, please refer30, 2022, we started to
Note 2 to our unaudited condensed consolidated financial statementsissue market-based performance stock awards ("PSAs") comprising of performance stock options and performance restricted stock units. The PSAs each vest in
this Quarterly Reportequal installments upon the achievement of escalating stock price thresholds of $60, $80 and $105, respectively, calculated based on
Form10-Q.Recent Accounting Pronouncements
See Note 2, “Summary20 consecutive days of Significant Accounting Policies” in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form10-Q for a discussion of recent accounting pronouncements.
Emerging Growth Company Status
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companiestrading at each respective threshold. The escalating stock price thresholds can delay adopting new or revised accounting standards issued subsequentbe met any time prior to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlierfourth anniversary of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt outof grant. We estimated the value of the extended transition period providedPSA awards granted in the JOBS Act. Asthree months ended September 30, 2022 to be approximately $16.0 million using a result, our financial statements may notMonte Carlo simulation model, using assumptions including volatility, risk-free interest rate, cost of equity and dividends. We will recognize the compensation expense over the derived service period using the accelerated attribution method commencing on the grant date. The derived service period is the median duration of the successful stock price paths to meet the escalating stock price thresholds as simulated in the Monte Carlo valuation model. If the related market condition is achieved earlier than its estimated derived service period, the stock-based compensation expense will be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
accelerated, and a cumulative catch-up expense will be recorded during the period in which the market condition is met. Item 3. Quantitative and Qualitative Disclosures About Market Risk.We are exposed to
For financial market risks
in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position duerelated to
adverse changes in
financial market pricesinterest rates and
rates. Our market risk exposure is primarily the result of fluctuations in foreign currency exchange
rates.rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report. Our exposure to market risk has not changed materially since December 31, 2021 except as shown below.
Interest Rate Risk
We have exposure to interest rate risk that relates primarily to our cash
During the three and
cash equivalents held in bank deposit and money market funds and our borrowings that bear variable interest rates under our credit facility. We maintain our portfolio of cash equivalents in money market funds. All of our cash equivalents are carried at fair market value. Our credit facility provides for (a) a secured term loan facility with an initial aggregate principal amount of up to $30.0 million with the option to draw an additional $20.0 million and (b) a secured revolving loan facility in an aggregate principal amount of up to $25.0 million . Our borrowings under our credit facility are subject to interest rates based on the Wall Street Journal Prime Rate. If this rate increases significantly, our costs to borrow these funds will also increase.In February 2018, we drew $30.0 million under the Initial Term Loan with a maturity date of December 2022, of which $30.0 million remains outstanding as of September 30, 2019. As of September 30, 2019, no amounts are borrowed under our revolving line of credit.
The primary objective of our investment activities is to preserve principal while at the same time improving yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents in asset types including bank deposits and money market funds. As a result of the increase in cash and cash equivalents resulting from the proceeds of our IPO, a 100 basis point change in interest rates would not significantly change our interest income for the nine months ended September 30, 2019. A hypothetical 10.0% change2022, we invested in debt securities which were designated as available-for-sale. Our marketable securities as of September 30, 2022 was $218.4 million.
Our exposure to market risk for changes in interest rates
would not significantly increase our interest expense as it relates
primarily to our
borrowings that bear variable interest rates.Foreign Currency Exchange Risk
Our reporting currency isinvestment portfolio comprising of marketable securities. We invest in a number of securities including corporate bonds, U.S. agency notes, asset-backed securities, commercial paper, U.S. treasuries and money market funds. We attempt to ensure the U.S. dollarsafety and the functional currency of eachpreservation of our subsidiaries is either its local currency or the U.S dollar depending on the circumstances. Historically, mostinvested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in high grade investment securities. The fair market value of our revenue has been denominated in U.S. dollars, although we have sold our products and services in local currency outside of the United States, principally the Euro. For the nine months ended September 30, 2019, approximately 14% of our sales were denominated in currencies other than U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. As our operations in countries outside of the United States grow, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue couldfixed rate securities may be adversely affectedimpacted by increases in interest rates while income earned may decline as we convert revenue from local currencies to U.S. dollars. In addition, because we conduct businessa result of decreases in currencies other than U.S. dollars, but report our results of operations in U.S. dollars, we also face remeasurement exposure to fluctuations in currency exchanges rates, which could hinder our ability to predict our future results and earning and could materially impact our results of operations. We do not currently maintain a program to hedge exposures tonon-U.S. dollar currencies. We believe that an immediate 10.0%interest rates. A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to rates at September 30, 2022 would have affected the relativefair value of the U.S. dollar to other currencies would not have a material effect on our operating results.
investment portfolio by approximately $1.9 million.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant toRule 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report.Quarterly Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2019.2022.
Changes in Internal Control over Financial Reporting
There was not any changehave been no changes in our internal control over financial reporting (as such term is defined inRules 13a-15(f) under the Exchange Act) during the quarter ended September 30, 20192022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are regularly subject to
lawsuits, claims,
lawsuits, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving
intellectual property disputes, commercial disputes, competition
intellectual property disputes and other matters, and we may become subject to additional types of
lawsuits, claims,
lawsuits, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future and as our business grows, including proceedings related to product liability or our acquisitions, securities issuances or our business practices, including public disclosures about our business. Our success depends in part on our
non-infringement of the patents or proprietary rights of third parties.
ThirdIn the past, third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. We have been involved in multiple patent litigation matters
and other proceedings in the past
several years and we expect that given the litigious history of our industry and the high profile of operating as a public company,
other third parties
in addition to the parties identified herein, may claim that our products infringe their intellectual property rights.
We have also initiated litigation to defend our technology including technology developed through our significant investments in research and development. It is our general policy not to out-license our patents but to protect our sole right to own and practice them. There are inherent uncertainties in these legal matters, some of which are beyond management’s control, making the ultimate outcomes difficult to predict.
We are currently involved in the following litigation matters:The 2015 Delaware Action
In February 2015, Raindance Technologies, Inc. (“Raindance”) and the University of Chicago
Nanostring
On May 6, 2021, we filed suit against
usNanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that
substantially allNanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219 (the "GeoMx Action"). On May 19, 2021, we filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, we filed an amended complaint in the GeoMx Action additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing our claim of
our products that use our GEM microfluidic chips are infringing seven U.S. patents owned by or exclusively licensed to Raindance (the “Delaware Action”). In May 2017,Bio-Rad Laboratories, Inc. (“Bio-Rad”) was substituted as the plaintiff following its acquisition of Raindance. A jury trial was held in November 2018. The jury found that all of our accused products infringed one or moreinfringement of U.S. Patent
Nos. 8,304,193, 8,329,407 and 8,889,083. The jury also concluded that our infringement was willful and awardedBio-Rad approximately $24 million in damages. Post-trial,Bio-Rad moved for a permanent injunction, treble damages for willful infringement, attorneys’ fees, supplemental damages for the period from the second quarter of 2018 through the end of the trial as well aspre- and post-judgment interest.The Court deniedBio-Rad’s request for attorneys’ fees and enhanced damages for willful infringement. The Court awarded supplemental damages for the period from the second quarter of 2018 through the end of trial as well aspre- and post-judgment interest. The Court entered final judgment against us in the amount of approximately $35 million in August 2019. There could be additional future damages from the final judgment until the patents in suit expire in 2023.
In the fourth quarter of 2018, we began recording an accrual for estimated royalties as cost of revenue. This accrual is based on an estimated royalty rate of 15% of worldwide sales of our Chromium instruments operating our GEM microfluidic chips and associated consumables. As of September 30, 2019, we had accrued a total of $62.5 million relating to this matter which includes the $35 million judgment and our estimated 15% royalty for sales through that date.
The Court also grantedBio-Rad a permanent injunction against our GEM microfluidic chips and associated consumables that were found to infringe theBio-Rad patents, which have historically constituted substantially all of our product sales. However, under the injunction, we are permitted to continue to sell our GEM microfluidic chips and associated consumables for use with our historical installed base of instruments provided that we pay a royalty of 15% into escrow on our net revenue related to such sales. We appealed the injunctionNo. 10,662,467. Nanostring filed its answer to the Federal Circuit. The Federal Circuit granted an interim order staying the injunction pending resolution of our motion with respect to our Single Cell CNVGeoMx Action on May 18, 2022. Discovery is in progress. A Markman hearing is scheduled for November 2022 and Linked-Read solutions subject to the 15% royalty payment described above. trial is scheduled for August 2023.
On
September 24, 2019, the Federal Circuit extended the stay with respect to the Single Cell CNV and Linked-Read solutions for the pendency of the appeal, but otherwise denied our request to stay the injunction. We also appealed the judgment to the Federal Circuit.We have dedicated significant resources to designing and manufacturing our Next GEM microfluidic chips which use fundamentally different physics from our GEM microfluidic chips. Neither the jury verdict nor the injunction relate to our Next GEM microfluidic chips based on our new proprietary design and associated consumables whichFebruary 28, 2022, we launched in May 2019 for three of our single cell solutions – Single Cell Gene Expression, Single Cell Immune Profiling and Single Cell ATAC. Since August 28, 2019, all Chromium instruments that we sell and have sold operate exclusively with our Next GEM solutions and we currently expect that our Chromium products utilizing our Next GEM microfluidic chips will constitute substantially all of our Chromium consumables sales by the end of 2020.
The ITC 1068 Action
On July 31, 2017,Bio-Rad and Lawrence Livermore National Security, LLC filed a complaint against us in the U.S. International Trade Commission (“ITC”) pursuant to Section 337 of the Tariff Act of 1930, alleging that substantially all of our products infringe U.S. Patents Nos. 9,089,844, 9,126,160, 9,500,664, 9,636,682 and 9,649,635 (the “ITC 1068 Action”).Bio-Rad is seeking an exclusion order preventing us from importing the accused microfluidic chips, including (1) our GEM microfluidic chip, (2) our gel bead manufacturing microfluidic chip and (3) our Next GEM microfluidic chip, into the United States and a cease and desist order
preventing us from selling such imported chips. An evidentiary hearing for the ITC 1068 Action was held in May of 2018 and the presiding judge issued an Initial Determination in September 2018, finding that our GEM microfluidic chips infringe the ‘664, ‘682 and ‘635 patents but not the ‘160 patent. The judge further found that our gel bead manufacturing microfluidic chip and Next GEM microfluidic chip do not infringe any claim asserted against them.
The judge recommended entry of an exclusion order against our GEM microfluidic chips. If the ITC were to adopt the judge’s recommendation regarding the exclusion order, we would be prevented from importing such chips, which are used in substantially all of our products, into the United States. The judge also recommended a cease and desist order that would prevent us from selling such imported chips. The ITC is not reviewing the judge’s findings that our GEM microfluidic chips directly infringe the ‘664, ‘682 and ‘635 patents. The ITC is currently reviewing the judge’s findings that (1) we indirectly infringe the ‘682 and ‘635 patents, (2) our gel bead manufacturing microfluidic chip does not infringe certain claims in the ‘664 patent and (3) our Next GEM microfluidic chip does not infringe certain claims in the ‘160 and ‘664 patents. A Final Determination is expected to be issued in December 2019. The Final Determination is subject to a60-day presidential review period before taking effect. If the Initial Determination were to be upheld, then we would be unable to import our GEM microfluidic chips and sell such imported chips. The judge recommended a bond of 100% of the entered value of accused products imported during the Presidential review period.
In order to allow our customers to continue their important research, we have dedicated significant resources to developing the capabilities to manufacture our microfluidic chips in the United States prior to the entry of an exclusion order or cease and desist order which could take effect in February 2020. Prior to the second quarter of 2019, all of our microfluidic chips were manufactured outside of the United States. Our United States manufacturing facilities achieved volume production of certain of our GEM microfluidic chips accounting for the majority of our United States consumable revenue beginning in the third quarter of 2019.
The Northern District of California Action
On July 31, 2017,Bio-Rad and Lawrence Livermore National Security, LLC also filed suit against us in the U.S. District Court for the Northern District of California, alleging that substantially all of our products infringe U.S. Patents Nos. 9,216,392, 9,347,059 and the five patents asserted in the ITC 1068 Action. The complaint seeks injunctive relief, unspecified monetary damages, costs and attorneys’ fees. This litigation has been stayed pending resolution of the ITC 1068 Action.
The Germany Action
On February 13, 2018,Bio-Rad filed suit against us in Germany in the Munich Region Court alleging that our Chromium instruments, GEM microfluidic chips and certain accessories infringe German Utility Model No. DE 20 2011 110 979.Bio-Rad seeks unspecified damages and an injunction prohibiting sales of these products in Germany and requiring us to recall these products sold in Germany subsequent to February 11, 2018. An initial hearing was held on November 27, 2018, and a subsequent hearing was held on May 15, 2019. The court is expected to issue a ruling on the merits on November 20, 2019.
The 2018 Delaware Action
On October 25, 2018,Bio-Rad filed suit against usNanostring in the U.S. District Court for the District of Delaware alleging that substantially all of our products, including our GEM productsNanostring's CosMx Spatial Molecular Imager and Next GEMassociated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737 (the "CosMx Action"). On May 12, 2022, we filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe U.S. Patent Nos. 9,562,83711,293,051, 11,293,052 and 9,896,722.Bio-Rad seeks injunctive relief, unspecified monetary damages, costs and attorneys’ fees.11,293,054. Nanostring filed its answer to the CosMx Action on May 26, 2022. Discovery is in progress. A Markman hearing is scheduled for May 2023 and trial is scheduled for June 2024.
On August 16, 2022, Nanostring filed a counterclaim in the CosMx Action alleging that our Visium products infringe U.S. Patent No. 11,377,689. We filed our answer to Nanostring's counterclaim in the CosMx Action on August 30, 2022. Discovery and trial are consolidated with our claims against Nanostring in the CosMx Action. We believe Nanostring's counterclaim in the CosMx Action is meritless and we intend to vigorously defend ourselves.
On October
25, 2019, we20, 2022, Nanostring filed
petitions in the U.S. Patent and Trademark Office requestinginter partes review of the asserted patents.The 2019 Delaware Action
On September 11, 2019,Bio-Rad fileda separate suit against us in the U.S. District Court for the District of Delaware alleging that our Next GEMVisium products also infringe certain claimsU.S. Patent No. 11,473,142, a continuation of U.S. Patent No. 8,871,444. On November 5, 2019,Bio-Rad amended the complaint to additionally allege that our Next GEM products infringe certain claims of U.S. Patent Nos. 9,919,27711,377,689 (the "Nanostring Action"). We have not yet responded. Discovery has not yet commenced and 10,190,115.no case schedule has been set. We believe thatNanostring's claim in the asserted patents are invalid and not infringed,Nanostring Action is meritless and we intend to vigorously defend ourselves vigorously.
The Becton, Dickinsonourselves.
On March 9, 2022, we filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1 (the "Germany CosMx Action"). Nanostring filed its statement of defense to the Germany CosMx Action
on August 26, 2022. A hearing on infringement is scheduled for March 2023 and a decision is expected around May 2023. On November 15, 2018, Becton, Dickinson and Company (“BD”) and Cellular Research, Inc.July 29, 2022, Nanostring filed a nullity action with the German Federal Patent Court challenging the validity of EP Patent No. 2794928B1. A preliminary decision in the nullity action is expected by February 2023.
Vizgen
In May 2022, we filed suit against usVizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that weVizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and
reagents, infringe U.S. Patent Nos. 8,835,358, 9,845,502, 9,315,857, 9,816,137, 9,708,659, 9,290,808, 9,290,809, 9,567,645, 9,567,646, 9,598,73611,021,737, 11,293,051, 11,293,052, 11,293,054 and 9,637,799. In11,299,767. On July 25, 2022, Vizgen filed a motion to dismiss our claims for willful and indirect infringement, which the Court denied on September 2019, we19, 2022. Discovery is in progress. A Markman hearing is scheduled for July 2023 and trial is scheduled for July 2024.
On August 30, 2022, Vizgen filed its answer and counterclaims alleging that our forthcoming Xenium product infringes U.S. Patent No. 11,098,303. Vizgen also filed counterclaims alleging that BDwe tortiously interfered with Vizgen's contractual and Cellular Research, Inc. infringed a number of our patents. This case was dismissedbusiness relationship with prejudice on October 21, 2019 following the entrance by the parties into a settlementHarvard and patent cross license agreement.that we engaged in unfair practices under Massachusetts state law. We consider this matter closed. See Note 6, “Commitmentshave not yet responded. We believe these claims are meritless and Contingencies”, and Note 10, “Subsequent Events”, in our Notesintend to Unaudited Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information.vigorously defend ourselves.
On
January 11, 2018,August 24, 2022, we filed
a complaintsuit against
Bio-Rad at Parse Biosciences, Inc. ("Parse") in the
ITC pursuant to Section 337U.S. District Court for the District of
the Tariff Act of 1930Delaware alleging that
Bio-Rad infringes our Parse’s Evercode Whole Transcriptomics and ATAC-seq products infringe U.S. Patent Nos.
9,644,204, 9,689,024, 9,695,46810,155,981, 10,697,013, 10,240,197, 10,150,995, 10,619,207, and
9,856,530 (the “ITC 1100 Action”). The judge issued an Initial Determination on July 12, 2019 finding10,738,357. On October 17, 2022, Parse filed a motion to dismiss alleging that
Bio-Rad’s ddSEQ product for single cell analysis infringes the ‘024, ‘468 and ‘530 patents. The judge also found all of our asserted patents to be valid and rejectedBio-Rad’s claim of ownership in all of the asserted
patents. The ITC is currently reviewing all of the judge’s findings relatedclaims are directed to
Bio-Rad’s violation of the ‘024, ‘468 patent ineligible subject matter. We have not yet filed our response. Discovery has not yet commenced and
‘530 patents,Bio-Rad’s noninfringement of the ‘204 patent andBio-Rad’s inventorship and ownership defenses. The Target Date for the Final Determination is scheduled for December 19, 2019, when we expect the ITC to issue an exclusion order preventingBio-Rad from importing into the United States infringing microfluidic devices, components thereof and products containing same, including the ddSEQ single cell analysis products. We also expect the ITC to issue a cease and desist order preventingBio-Rad from selling such imported products in the United States.no case schedule has been set.
For further discussion of the risks relating to intellectual property and our pending litigation, see the section titled “Risk factors—Factors—Risks related to litigation and our intellectual property” under Part I, Item 1A below.of our Annual Report, which is incorporated by reference into this Quarterly Report.
Item 1A. Risk Factors.
Investing in
There have been no material changes to our
Class A common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Quarterly Report on Form10-Q, including our financial statements and the related notes and the section titled “Management’s discussion and analysis of financial condition and results of operations” in this Quarterly Report on Form10-Q, before deciding whether to invest in our Class A common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our Class A common stock could decline and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us orrisk factors that we
currently deem immaterial also may impair our business operations and the market price of our Class A common stock.Risks relatedbelieve are material to our business and industry
We have incurred significant losses since inception, we expect to incur losses in the future and we may not be able to generate sufficient revenue to achieve and maintain profitability.
We have incurred significant losses since we were formed in 2012 and expect to incur losses in the future. We incurred net losses of $24.1 million and $37.0 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of $255.2 million. We expect that our losses will continue in the near term as we continue to invest significant additional funds toward ongoing research and development and toward the timely commercialization of both new products and improved versions of existing products. We also expect that our operating expenses will increase as a result of being a public company and will continue to increase as we grow our business. To date, we have financed our operations principally from the sale of convertible preferred stock, the sale of Class A common stock in our IPO, revenue from sales of our products and the incurrence of indebtedness. There can be no assurance that our revenue and gross profit will increase sufficiently such that our net losses decline, or we attain profitability, in the future. Further, our limited operating history and rapid revenue growth over the last several years make it difficult to effectively plan for and model future growth and operating expenses. Our ability to achieve or sustain profitability is based on numerous factors, many of which are beyond our control, including the impact of market acceptance of our products, future product development, our market penetration and margins and current and future litigation. We may never be able to generate sufficient revenue to achieve or sustain profitability and our recent and historical growth should not be considered indicative of our future performance. Our failure to achieve or maintain profitability could negatively impact the value of our Class A common stock.
In particular, we are subject to significant risks of losses related to current litigation matters. See “—Risks related to litigation and our intellectual property”.
Our markets are highly competitive. If we fail to compete effectively, our business and operating results will suffer.
We face significant competition. We currently compete with both established and early-stage companies that design, manufacture and market instruments, consumables and software for, among other applications, genomics, single cell analysis, spatial analysis and immunology. We believe our competitors include Becton, Dickinson and Company,Bio-Rad and Nanostring Technologies, Inc., each of which has products that compete to varying degrees with some but not all of our product solutions, as well as a number of other emerging and established companies.
Some of our current competitors are large publicly-traded companies, or are divisions of large publicly-traded companies, and may enjoy a number of competitive advantages over us, including:
greater name and brand recognition;
greater financial and human resources;
larger sales forces and more established distributor networks;
substantial intellectual property portfolios;
larger and more established customer bases and relationships; and
better established, larger scale and lower cost manufacturing capabilities.
We also face competition from researchers developing their own solutions. The area in which we compete involves rapid innovation and some of our customers have in the past, and more may in the future, elect to create their own platform or assays rather than rely on a third-party supplier such as ourselves. This is particularly true for the largest research centers and labs who are continually testing and trying new technologies, whether from a third-party vendor or developed internally. We also compete for the resources our customers allocate for purchasing a wide range of products used to analyze biological systems, some of which are additive to or complementary with our own but not directly competitive.
We cannot assure investors that our products will compete favorably or that we will be successful in the face of increasing competition from products and technologies introduced by our existing competitors, companies entering our markets or developed by our customers internally. In addition, we cannot assure investors that our competitors do not have or will not develop products or
technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours or that are able to run comparable experiments at a lower total experiment cost. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results.
Our business depends significantly on the success of our Next GEM microfluidic chip.
Since our inception through the first nine months of 2019, substantially all of our Chromium instruments utilized our GEM microfluidic chips and associated consumables. In November 2018, a jury concluded that our Chromium instruments operating these chips and associated consumables infringe certain ofBio-Rad’s patents. We have dedicated significant resources to designing and manufacturing our new Next GEM microfluidic chip, which uses a microfluidic architecture with fundamentally different physics from our GEM microfluidic chip. We introduced our Next GEM microfluidic chips for our Single Cell Gene Expression, Single Cell Immune Profiling and Single Cell ATAC solutions in the second quarter of 2019. We plan to gradually phase out our GEM microfluidic chips and anticipate that our Chromium products utilizing our Next GEM microfluidic chips will become an increasing percentage of our sales and will constitute substantially all of our Chromium consumables sales by the end of 2020. In addition, we have not yet developed Next GEM microfluidic chips for our Single Cell CNV and Linked-Read solutions. Although the Federal Circuit has stayed the injunction with respect to our Single Cell and Linked-Read solutions during the pendency of the appeal, we have not yet released a new version of our instrument that would allow our customers to use these solutions using our GEM microfluidic chip during the pendency of the appeal. Furthermore, it is possible that the injunction could be reinstated with respect to our Single Cell and Linked-Read solutions using our GEM microfluidic chips after the appeal if the Federal Circuit does not rule in our favor. Until we develop a Next GEM microfluidic chip for our Single Cell CNV and Linked-Read solutions, our sales and growth of these solutions will be constrained. Until we are able to completely transition to our Next GEM microfluidic chip design, our margins will be negatively impacted by any royalty obligations that result from ongoing litigation matters.
Although our Next GEM microfluidic chips were designed to replace our GEM microfluidic chips, we cannot assure you that we will be able to make our Next GEM microfluidic chip work with all of our solutions, that our Next GEM microfluidic chip will allow our customers to retain the level of performance or quality they have come to expect using our GEM microfluidic chip, that our Next GEM microfluidic chip will replace the sales of our GEM microfluidic chip or that we will be able to manufacture our Next GEM microfluidic chip in sufficient volumes and in sufficient quality in a timely fashion. While we believe that our Chromium solutions, when used with our Next GEM microfluidic chip, do not infringe the assertedBio-Rad patents, we cannot assure you that our Next GEM microfluidic chip would not be found to infringe the assertedBio-Rad patents or other patents, which could prevent us from making, selling and importing our Next GEM microfluidic chips or substantially all of our products. Since August 28, 2019, all Chromium instruments that we sell and have sold operate exclusively with our Next GEM solutions. We believe that these solutions are very important to our customers’ research but the delay caused by the injunction may slow customer adoption of our products or cause customers to investigate the availability of competing products or technologies.
We expect to incur increased research and development expenses in the near term and increased inventory and other expenses related to the introduction of, and transition to, our Next GEM microfluidic chip. Our failure to effectively manage product transitions or accurately forecast customer demand with respect to both instruments and consumables may lead to an increased risk of insufficient, excess or obsolete inventory and resulting charges. We expect that as we transition to our Next GEM microfluidic chips we may need to write down the value of our GEM microfluidic chips and associated consumables we currently hold in inventory. As we transition to our Next GEM microfluidic chips, we cannot guarantee that our customers will quickly switch to using our Next GEM microfluidic chips in their research. Customers may delay transitioning to our Next GEM microfluidic chips for a variety of reasons, including if they have experiments underway for which they do not want to introduce additional variables. More significantly, customers may decline to purchase our products altogether if they do not believe that our Next GEM microfluidic chips can produce results that are reliable, consistent and comparable to our GEM microfluidic chips.
For additional information relating to this litigation, see the section titled“Risk factors—Risks related to litigation and our intellectual property—We are involved in significant litigation which has consumed significant resources and management time and adverse resolution of these lawsuits could require us to pay significant damages, and prevent us from selling our products, which would severely adversely impact our business, financial condition or results of operations”.
We are significantly dependent upon revenue generated from the sale of our Chromium solutions, and in particular our Single Cell Gene Expression solutions.
We currently generate substantially all of our revenue from the sale of our Chromium instruments, which we refer to as “instruments”, and our proprietary microfluidic chips, slides, reagents and other consumables for both our Visium and Chromium solutions, which we refer to as “consumables”. In particular, we are dependent upon revenue generated from sales of our Single Cell Gene Expression consumables. There can be no assurance that we will be able to design future products, particularlynon-Chromium product lines, that will meet the expectations of our customers or that our future products will become commercially viable. As technologies change in the future for research equipment in general and in genomics solutions specifically, we will be expected to upgrade or adapt our products in order to keep up with the latest technology. To date we have limited experience simultaneously designing, testing, manufacturing and sellingnon-Chromium products and there can be no assurance we will be able to do so. Our sales expectations are based in part on the assumption that our Chromium Connect instrument will increase workflows for our future customers and their
associated purchases of our consumables. If sales of our Chromium Connect instruments fail to materialize so will the related consumable sales and associated revenue. Our sales expectations are also based in part on the continued success of our Single Cell Gene Expression solutions. If our Single Cell Immune Profiling consumables, which were introduced in 2017, and Single Cell ATAC consumables, which were introduced in 2018, or our upcoming Visium solution, fail to achieve sufficient market acceptance or sales of our Single Cell Gene Expression consumables decrease, our consumables revenue could be materially and adversely impacted.
Our business currently depends significantly on research and development spending by academic institutions, a reduction in which could limit demand for our products and adversely affect our business and operating results.
In the nine months ended September 30, 2019, approximately 70% of our direct sales revenue came from sales to academic institutions. Much of their funding was, in turn, provided by various state, federal and international government agencies. In the near term, we expect that a large portion of our revenue will continue to be derived from sales of Chromium products, including our instruments and consumables, to academic institutions. As a result, in the near term, the demand for our products will depend upon the research and development budgets of these customers, which are impacted by factors beyond our control, such as:
decreases in government funding of research and development;
changes to programs that provide funding to research laboratories and institutions, including changes in the amount of funds allocated to different areas of research or changes that have the effect of increasing the length of the funding process;
macroeconomic conditions and the political climate;
scientists’ and customers’ opinions of the utility of new products or services;
citation of new products or services in published research;
changes in the regulatory environment;
differences in budgetary cycles;
competitor product offerings or pricing;
market-driven pressures to consolidate operations and reduce costs; and
market acceptance of relatively new technologies, such as ours.
In addition, various state, federal and international agencies that provide grants and other funding may be subject to stringent budgetary constraints that could result in spending reductions, reduced grant making, reduced allocations or budget cutbacks, which could jeopardize the ability of these customers, or the customers to whom they provide funding, to purchase our products. For example, congressional appropriations to the National Institutes of Health (the “NIH”) have generally increased year-over-year for the last 18 years, and reached a new high in 2018, but the NIH also experiences occasional year-over-year decreases in appropriations, including as recently as 2013. In addition, funding for life sciences research has increased more slowly during the past several years compared to previous years and has actually declined in some countries. There is no guarantee that NIH appropriations will not decrease in the future, and a decrease may be more likely under the current administration, whose annual budget proposals have repeatedly decreased NIH appropriations. A decrease in the amount of, or delay in the approval of, appropriations to NIH or other similar United States or international organizations, such as the Medical Research Council in the United Kingdom, could result in fewer grants benefiting life sciences research. These reductions or delays could also result in a decrease in the aggregate amount of grants awarded for life sciences research or the redirection of existing funding to other projects or priorities, any of which in turn could cause our customers and potential customers to reduce or delay purchases of our products. Our operating results may fluctuate substantially due to any such reductions and delays. Any decrease in our customers’ budgets or expenditures, or in the size, scope or frequency of their capital or operating expenditures, could materially and adversely affect our business, operating results and financial condition.
Our failure to effectively manage product transitions or accurately forecast customer demand could result in excess or obsolete inventory and resulting charges.
Because the market for our products is characterized by rapid technological advances, we frequently introduce new products with improvedease-of-use, improved performance or additional features and functionality. Wepre-announce products and services, in some cases before such products and services have been fully developed or tested, and risk failing to meet expectations when such products and services become available. The risks associated with the introduction of new products include the difficulties of predicting customer demand and effectively managing inventory levels to ensure adequate supply of the new product and avoiding excess supply of the legacy product.
We may strategically enter intonon-cancelable commitments with vendors to purchase materials for our products in advance of demand to take advantage of favorable pricing, address concerns about the availability of future supplies or build safety stock to help ensure customer shipments are not delayed should we experience higher than anticipated demand for materials with long lead times.
Our future success is dependent upon our ability to increase penetration in our existing markets.
Our customer base includes academic, government, biopharmaceutical, biotechnology and other institutions. In the nine months ended September 30, 2019, approximately 70% of our direct sales revenue came from sales to academic institutions. Our success will depend upon our ability to increase our market penetration among these customers and to expand our market by developing and marketing new products and new applications for existing products. We recently announced our intention to introduce our Visium product line for spatial analysis and our future success will partially depend on our ability to commercialize this product line. As we continue to scale our business, we may find that certain of our products, certain customers or certain markets, including the biopharmaceutical market, may require a dedicated sales force or sales personnel with different experience than those we currently employ. Identifying, recruiting and training additional qualified personnel would require significant time, expense and attention.
We cannot assure investors that we will be able to further penetrate our existing market or that the market will be able to sustain our current and future product offerings. Any failure to increase penetration in our existing markets would adversely affect our ability to improve our operating results.
We may not be able to develop new products, enhance the capabilities of our existing products to keep pace with rapidly changing technology and customer requirements or successfully manage the transition to new product offerings, any of which could have a material adverse effect on our business and operating results.
Our success depends on our ability to develop new products and applications for our technology in existing and new markets, while improving the performance and cost-effectiveness of our existing products, in each case in ways that address current and anticipated customer requirements. Such success is dependent upon several factors, including functionality, competitive pricing and integration with existing and emerging technologies. New technologies, techniques or products could emerge that might offer better combinations of price and performance or better address customer requirements as compared to our current or future products. Existing markets for our products, including the genomics, single cell analysis, spatial analysis and other relevant markets, are characterized by rapid technological change and innovation. Competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Due to the significant lead time involved in bringing a new product to market, we are required to make a number of assumptions and estimates regarding the commercial feasibility of a new product, including assumptions and estimates regarding the biological analytes that researchers will want to measure, the appropriate method of measuring such analytes, how researchers intend to use the resulting data and the scope and type of data that will be most useful to researchers. As a result, it is possible that we may introduce a new product that uses technologies or methods of analysis that have been displaced by the time of launch, addresses a market that no longer exists or is smaller than previously thought, targets biological analytes or produces data that provides less utility to researchers than previously thought or otherwise is not competitive at the time of launch. We anticipate that we will face increased competition in the future as existing companies and competitors develop new or improved products and as new companies enter the market with new technologies. Our ability to mitigate downward pressure on our selling prices will be dependent upon our ability to maintain or increase the value we offer to researchers. The expenses or losses associated with unsuccessful product development or launch activities, or a lack of market acceptance of our new products, could adversely affect our business, financial condition or results of operations.
Because our solutions are used with other products, such as sequencers, to conduct an experiment, we also expect to face competition from these complementary products, either directly or indirectly, as researchers and labs look to reduce the total cost of any given experiment. For example, if a sequencer manufacturer was successful in vertically integrating their product to provide functionality equivalent to our instruments, they would likely be able to deliver a solution that is capable of running comparable experiments with a total experiment cost that is significantly less than the cost of running such experiments using our products together with third-party sequencers. Conversely, if genome sequencing falls out of favor as a preferred approach for genomic research, whether through the development of alternative solutions or real or perceived problems with sequencing itself, the utility of our products could be significantly impacted. It is critical to our success that we anticipate changes such as these in technology and customer requirements and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. If we do not successfully innovate and introduce new technology into our product lines, our business and operating results will be adversely impacted.
Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing solutions and to introduce compelling new solutions. The success of any enhancement to our solutions depends on several factors, including timely completion and delivery, competitive pricing, adequate quality testing, integration with existing technologies and overall market acceptance. Any new solution that we develop may not be introduced in a timely or cost-effective manner, may contain errors, vulnerabilities or bugs, or may not achieve the market acceptance necessary to generate significant revenue. If we are unable to successfully develop new solutions, enhance our existing solutions to meet customer requirements, or otherwise gain market acceptance, our business, results of operations and financial condition would be harmed.
Our ability to attract new customersfrom the risk factors previously disclosed in our Annual Report, and increase revenue from existing customers also dependsany documents incorporated by reference therein, which is accessible on our ability to deliver any enhanced or new solutions to our customers in a format where they can be easilythe SEC's website at www.sec.gov.
Item 5. Other Information
On October 28, 2022, the Company adopted Amended and consistently deployed by most or all users without significant customer service. If our customers believeRestated Bylaws (the “Bylaws”), effective as of that deploying our enhanced or new solutions would be overly time-consuming, confusing or technically challenging, then our ability to grow our business would be substantially harmed. We need to create and deliver a repeatable, user-friendly, prescriptive approach to deployment that allows users of all kinds to effectively and easily deploy our solutions, and if we fail to do so, our business and results of operations would be harmed.
The typical development cycle of new life sciences products can be lengthy and complicated and may require new scientific discoveries or advancements and complex technology and engineering. Such developments may involve external suppliers and service providers, making the management of development projects complex and subject to risks and uncertainties regarding timing, timely delivery of required components or services and satisfactory technical performance of such components or assembled products. If we do not achieve the required technical specifications or successfully manage new product development processes, or if development work is not performed according to schedule, then such new technologies or products may be adversely impacted and our business and operating results may be harmed.
If our existing and new products fail to achieve and sustain sufficient scientific acceptance, we will not generate expected revenue and our prospects may be harmed.
The life sciences scientific community is comprised of a small number of early adopters and key opinion leaders who significantly influence the rest of the community. The success of life sciences products is due, in large part, to acceptance by the scientific community and their adoption of certain products as best practicedate. Amendments contained in the applicable fieldBylaws include the addition of research. The current system of academic and scientific research views publishing in a peer-reviewed journal as a measure of success. In such journal publications, the researchers will describe, not only their discoveries, but also the methods and typically the products used to fuel such discoveries. Mentions in peer-reviewed journal publications is a good barometer for the general acceptance of our products as best practices. Ensuring that early adopters and key opinion leaders publish research involving the use of our products is critical to ensuring our products gain widespread acceptance and market growth. Continuing to maintain good relationships with such key opinion leaders is vital to growing our market. The number of times our products were mentioned in peer-reviewed publications has increased significantly in recent years. During this time our revenue has also increased significantly. We cannot assure investors that our products will continue to be mentioned in peer-reviewed articles with any frequency or that any new products that we introduce in the future will be mentioned in peer-reviewed articles. If too few researchers describe the use of our products, too many researchers shift to a competing product and publish research outlining their use of that product or too many researchers negatively describe the use of our products in publications, it may drive existing and potential customers away from our products, which could harm our operating results.
If we do not sustain or successfully manage our growth and anticipated growth, our business and prospects will be harmed.
We have experienced rapid growth in recent periods. This growth and our anticipated growth will place significant strains on our management, operational and manufacturing systems and processes, financial systems and internal controls and other aspects of our business. For example, we consummated two acquisitions in 2018 and intend to continue to make investments that meet management’s criteria to expand or add key technologies that we believe will facilitate the commercialization of new products in the future. In addition, we intend to launch additional new products and new versions of existing products in the next six to twelve months. Further development and commercialization of our current and future products are key elements of our growth strategy. Developing and launching new products and innovating and improving our existing products have required us to hire and retain additional scientific, sales and marketing, software, manufacturing, distribution and quality assurance personnel. As a result, we have experienced rapid headcount growth from 110 employees as of December 31, 2015 to 557 employees as of September 30, 2019. As we have grown, our employees have become more geographically dispersed. We currently serve thousands of researchers in many countries and plan to continue to expand to new international jurisdictions as part of our growth strategy which will lead to increased dispersion of our employees. Moreover, we expect that we will need to hire additional accounting, finance and other personnel in connection with our efforts to comply with the requirements of being a public company. As a public company, our management and other personnel must devote a substantial amount of time towards maintaining compliance with these requirements. We may face challenges integrating, developing and motivating our rapidly growing and increasingly dispersed employee base. In addition, certain members of our management have not previously worked together for an extended period of time, do not have experience managing a public company or do not have experience managing a global business, which may affect how they manage our growth. To effectively manage our growth, we must continue to improve our operational and manufacturing systems and processes, our financial systems and internal controls and other aspects of our business and continue to effectively expand, train and manage our personnel. As our organization continues to grow, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the benefits of our corporate culture, including our ability to quickly develop and launch new and innovative products. If we do not successfully manage our anticipated growth, our business, results of operations and growth prospects will be harmed.
Our limited operating history and rapid revenue growth make it difficult to evaluate our future prospects and the risks and challenges we may encounter.
We launched our first product inmid-2015 and have experienced significant revenue growth in recent periods. In addition, we operate in highly competitive markets characterized by rapid technological advances and our business has, and we expect it to continue, to evolve over time to remain competitive. Our limited operating history, evolving business and rapid growth make it difficult to evaluate our future prospects and the risks and challenges we may encounter and may increase the risk that we will not continue to grow at or near historical rates.
If we faillanguage to address the risks and difficulties that we face, including those described elsewhere in this “Risk factors” section, our business, financial condition and results of operations could be adversely affected. We have encountered in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies with limited operating histories in rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations and our business, financial condition and results of operations could be adversely affected.
Our operating results have in the past fluctuated significantly and may continue to fluctuate significantly in the future, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.
Our quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited to:
the level of demand for our products, which may vary significantly, and our ability to increase penetration in our existing markets and expand into new markets;
customers accelerating, canceling, reducing or delaying orders as a result of developments related to our litigation or to our transition to Next GEM microfluidic chips;
the outcomes of and related rulings in the litigation and administrative proceedings in which we are currently or may in the future become involved;
our ability to successfully manufacture and transition our existing customers to our Next GEM microfluidic chips;
the timing and cost of, and level of investment in, research and development and commercialization activities relating to our products, which may change from time to time;
the volume and mix of our instrument and consumable sales or changes in the manufacturing or sales costs related to our instruments and consumables;
the success of our recently announced products, such as our Chromium Connect and Visium platform, and the introduction of other new products or product enhancements by us or others in our industry;
the timing and amount of expenditures that we may incur to acquire, develop or commercialize additional products and technologies or for other purposes, such as the expansion of our facilities;
changes in governmental funding of life sciences research and development or changes that impact budgets, budget cycles or seasonal spending patterns of our customers;
future accounting pronouncements or changes in our accounting policies;
the outcome of any future litigation or governmental investigations involving us, our industry or both;
difficulties encountered by our commercial carriers in delivering our instruments or consumables, whether as a result of external factors such as weather or internal issues such as labor disputes;
general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors;
higher than anticipated warranty costs; and
| • | | the other factors described in this “Risk factors” section.
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The cumulative effects of the factors discussed above could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on aperiod-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance.
This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our Class A common stock could decline substantially. Such a stock price decline could occur even when we have met or exceeded any previously publicly stated guidance we may provide.
The sizes of the markets for our solutions may be smaller than estimated and new market opportunities may not develop as quickly as we expect, or at all, limiting our ability to successfully sell our solutions.
The market for genomics products is new and evolving, making it difficult to predict with any accuracy the sizes of the markets for our current and future solutions. Our estimates of the annual total addressable market for our current and future solutions are based on a number of internal and third-party estimates and assumptions. In particular, our estimates are based on our expectations that: (a) researchers in the market for certain life sciences research tools and technologies will view our solutions as competitive alternatives to, or better options than, such existing tools and technologies; (b) researchers who already own such existing tools and technologies will recognize the ability of our solutions to complement, enhance and enable new applications of their current tools and technologies and find the value proposition offered by our solutions convincing enough to purchase our solutions in addition to the tools and technologies they already own; and (c) the trends we have seen among our customers with respect to placements of our instruments are representative of the broader market. Underlying each of these expectations are a number of estimates and assumptions, including the assumption that government or other sources of funding will continue to be available to life sciences researchers at times and in amounts necessary to allow them to purchaser our solutions.
In addition, our growth strategy involves launching new solutions and expanding sales of existing solutions into new markets in which we have limited or no experience, such as the biopharmaceutical market. Sales of new or existing solutions into new market opportunities may take several years to develop and mature and we cannot be certain that these market opportunities will develop as we expect. For example, new life sciences technology is often not adopted by the relevant market until a sufficient amount of research conducted using such technology has been published in peer-reviewed publications. Because there can be a considerable delay between the launch of a new life sciences product and publication of research using such product, new life sciences products do not generally contribute a meaningful amount of revenue in the year they are introduced. In certain markets, such as the biopharmaceutical market, new life sciences technology, even if sufficiently covered in peer-reviewed publications, may not be adopted until the consistency and accuracy of such technology, method or device has been proven. As a result, the sizes of the annual total addressable market for new markets and new products are even more difficult to predict.
While we believe our assumptions and the data underlying our estimates of the total annual addressable market for our solutions are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates, or those underlying the third-party data we have used, may change at any time, thereby reducing the accuracy of our estimates. As a result, our estimates of the annual total addressable market for our solutions may be incorrect.
The future growth of the market for our current and future solutions depends on many factors beyond our control, including recognition and acceptance of our solutions by the scientific community as best practice and the growth, prevalence and costs of competing products and solutions. Such recognition and acceptance may not occur in the near term, or at all. If the markets for our current and future solutions are smaller than estimated or do not develop as we expect, our growth may be limited and our business, financial condition and operational results may be adversely affected.
Our management uses certain key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions and such metrics may not accurately reflect all of the aspects of our business needed to make such evaluations and decisions, in particular as our business continues to grow.
In addition to our consolidated financial results, our management regularly reviews a number of operating and financial metrics, including our instrument installed base and consumable pull-through per instrument, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We define the instrument installed base as the cumulative number of instruments sold since inception and define consumable pull-through per instrument as the total consumables revenue in the relevant period divided by the average instrument installed base during that period. We believe that these metrics are representative of our current business; however, these metrics may not accurately reflect all aspects of our business and we anticipate that these metrics may change or may be substituted for additional or different metrics as our business grows and as we introduce new products. For example, we expect that our expansion into new markets and adoption by new customers who may not have the same financial resources to devote to consumable purchases as our existing customer base could adversely impact our pull-through figures. These metrics also do not accurately reflect information relating to customers who purchase consumables but do not own an instrument, whom we refer to as “halo users”. Halo users and the future introduction of consumables that may not use instruments, such as our recently announced Visium solution, or instruments that are expected to use a greater amount of consumables, such as our Chromium Connect instrument, could reduce the utility of our consumable pull-through per instrument metric and make it difficult to compare such figures over time. Moreover, we expect some of our halo users to purchase instruments of their own which would decrease the consumables sold per instrument and therefore decrease our annual consumable pull-through per instrument. Though we expect the introduction of enhanced features and additional solutions on our Chromium instrument to increase consumable pull-through per instrument and to offset this decline, there are no assurances we will be successful in doing so. If our management fails to review other relevant information or change or substitute the key business metrics they review as our business grows and we introduce new products, their ability to accurately formulate financial projections and make strategic decisions may be compromised and our business, financial results and future growth prospects may be adversely impacted.
We are dependent on single source and sole source suppliers for some of the components and materials used in our products and the loss of any of these suppliers could harm our business.
We do not have long-term contracts with our suppliers for the significant majority of the services, materials and components we use for the manufacture and delivery of our products. In certain cases, we also rely on single suppliers for all of our requirements for some of our materials or components. In most cases we do not have long term contracts with these suppliers, and even in the cases where we do the contracts include significant qualifications that would make it extremely difficult for us to force the supplier to provide us with their services, materials or components should they choose not to do so. We are therefore subject to the risk that these third-party suppliers will not be able or willing to continue to provide us with materials and components that meet our specifications, quality standards and delivery schedules. Factors that could impact our suppliers’ willingness and ability to continue to provide us with the required materials and components include disruption at or affecting our suppliers’ facilities, such as work stoppages or natural disasters, adverse weather or other conditions that affect their supply, the financial condition of our suppliers, deterioration in our relationships with these suppliers or the decision by such suppliers to introduce products that compete directly with our solutions. In addition, we cannot be sure that we will be able to obtain these materials and components on satisfactory terms. Any increase in material and component costs could reduce our sales and harm our gross margins. In addition, any loss of a material supplier may permanently cause a change in one or more of our products that may not be accepted by our customers or cause us to eliminate that product altogether.
For example, we depend on a limited number of suppliers for enzymes and amplification mixes used in our consumables. In some cases, these manufacturers are the sole source of certain types of enzymes and reagents. We do not have long-term contracts with any of these sole source suppliers. Lead times for some of these components can be several months or more. In the event that demand increases, a manufacturing ‘lot’ does not meet our specifications or we fail to forecast and place purchase orders sufficiently in advance, this could result in a material shortage. Some of the components and formulations are proprietary to our vendors, thereby making second sourcing and development of a replacement difficult. Furthermore, such vendors may have intellectual property rights that could prevent us from sourcing such reagents from other vendors. Some vendors could choose to use their enzymes, amplification mixes or other components to create products that directly compete with our consumables and end our current supplier-customer relationship. If enzymes and reagents become unavailable from our current suppliers and we are unable to find acceptable substitutes for these suppliers, we may be required to produce them internally or change our product designs.
We have not qualified secondary sources for all materials or components that we source through a single supplier and we cannot assure investors that the qualification of a secondary supplier will prevent future supply issues. Disruption in the supply of materials or components would impair our ability to sell our products and meet customer demand, and also could delay the launch of new products, any of which could harm our business and results of operations. If we were to have to change suppliers, the new supplier may not be able to provide us materials or components in a timely manner and in adequate quantities that are consistent with our quality standards and on satisfactory pricing terms. In addition, alternative sources of supply may not be available for materials that are scarce or components for which there are a limited number of suppliers.
If our facilities or our third-party manufacturers’ facilities become unavailable or inoperable, our research and development programs could be adversely impacted and manufacturing of our instruments and consumables could be interrupted.
The manufacturing process for our Chromium Controller takes place at our third-party manufacturer’s facilities in California. The majority of our consumables are manufactured at our facilities in Pleasanton, California using proprietary equipment. Certain raw materials, such as oligonucleotides and enzymes, are custom manufactured by outside partners. We periodically review the manufacturing capacity of our consumables and we expect to manufacture an increasing amount of consumablesin-house. Our Pleasanton facilities also house the majority of our research and development and quality assurance teams. Our planned Chromium Connect will be manufactured by our partner at their facility. The facilities and the equipment we and our third-party manufacturers use to manufacture our instruments and consumables and that we use in our research and development programs would be costly to replace and could require substantial lead times to repair or replace.
Our facilities in Pleasanton are vulnerable to natural disasters and catastrophic events. For example, our Pleasanton facilities are located near earthquake fault zones and are vulnerable to damage from earthquakes as well as other types of disasters, including fires, floods, power loss, communications failures and similar events. If any disaster or catastrophic event were to occur, our ability to operate our business would be seriously, or potentially completely, impaired. If our facilities or any of our third-party manufacturers’ facilities become unavailable for any reason, we cannot provide assurances that we will be able to secure alternative manufacturing facilities with the necessary capabilities and equipment on acceptable terms, if at all. We may encounter particular difficulties in replacing our Pleasanton facilities given the specialized equipment housed within it. The inability to manufacture our instruments and/or consumables, combined with our limited inventory of manufactured instruments and consumables, may result in the loss of customers or harm our reputation, and we may be unable to reestablish relationships with those customers in the future. Because certain of our consumables and the raw materials we use to manufacture consumables at our Pleasanton facilities are perishable and must be kept in temperature controlled storage, the loss of power to our facilities, mechanical or other issues with our storage facilities or other events that impact our temperature controlled storage could result in the loss of some or all of such consumables and raw materials and we may not be able to replace them without disruption to our customers or at all.
In the nine months ended September 30, 2019, approximately 70% of our direct sales revenue came from sales to academic institutions, whose research often requires long uninterrupted studies performed on a consistent basis over time; thus interruptions in our ability to supply consumables could be particularly damaging to these studies and our reputation. In addition, the budgetary planning and approval process for academic research programs can be lengthy and begin well in advance of the planned purchase of our instrument and/or consumables. If our products become unavailable during the planning process, researchers may use alternative products.
If our research and development programs were disrupted by a disaster or catastrophe, the launch of new products and the timing of improvements to existing products could be significantly delayed and could adversely impact our ability to compete with other available products and solutions. If our or our third-party manufacturers’ capabilities are impaired, we may not be able to manufacture and ship our products in a timely manner, which would adversely impact our business. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
Our instruments, consumables and related components are specialized, complex and difficult to manufacture. We could experience production problems that impact our ability to manufacture and ship our instruments, consumables and related components, which would adversely affect our business, financial condition and results of operations.
The manufacturing processes we and our third-party manufacturers use to produce our instruments, consumables and related components are specialized and highly complex and require high-quality components. We may have quality variations, supply issues, backorders or production difficulties of needed components and may require components that are difficult to obtain or manufacture at the necessary quantities and necessary quality, in a timely manner or in accordance with regulatory requirements.
Such issues, issues with our manufacturing processes or the manufacturing processes of our third-party manufacturers, shipping issues, inaccurate demand forecasts or other production issues could result in our inability to supply our products to our customers, backorders, insufficient inventory, excess inventory, shipping delays, product deficiencies or other operational failures. If we cannot supply our products to our customers in a timely manner, our customers may delay or cancel their orders. Furthermore, even if we have inventory, if we do not have adequate inventory of products in the geographic regions in which they are ordered, we may not be able to deliver products to our customers in a timely manner and customers may delay or cancel their orders. Many other factors could cause production or shipping delays or interruptions, including difficulties in transporting materials, raw material shortages, raw material failures, equipment malfunctions, facility contamination, labor problems, natural disasters, disruption in utility services, terrorist activities or circumstances beyond our control. Additionally, we and our third-party manufacturers may encounter problems in hiring and retaining the experienced specialized personnel needed to develop and operate our manufacturing processes or the manufacturing processes of our third-party manufacturers, which could result in backorders, delays in our production or difficulties in maintaining compliance with applicable regulatory requirements.
These issues, or any other problems with the production or timely manufacture and shipment of our instruments, consumables and related components, could materially harm our business, financial condition and results of operations.
We may be unable to consistently manufacture our instruments and consumables to the necessary specifications or in quantities necessary to meet demand at an acceptable cost or at an acceptable performance level.
Our products are integrated solutions with many different components that work together. As such, a quality defect in a single component can compromise the performance of the entire solution. Certain of our consumables are manufactured at our Pleasanton, California facilities using complex processes, sophisticated equipment and strict adherence to specifications and quality systems procedures. In many cases, the consumables we manufacture are bundled with products or components that we source from third parties and assemble, package and perform quality assurance testing at our Pleasanton facilities. Our Chromium Controllers are manufactured by our third-party manufacturers at their facilities. In order to successfully generate revenue from our products, we need to supply our customers with products that meet their expectations for quality and functionality in accordance with established specifications. In order to ensure we are able to meet these expectations, our Pleasanton, California manufacturing facilities, as well as the facilities of our third-party manufacturers, have obtained International Organization for Standardization (“ISO”) quality management certifications and employ other quality control measures. While customer complaints regarding defects in our products and consumables have historically been low, our customers have experienced quality control and manufacturing defects in the past. For example, a manufacturing defect in certain of our Chromium Controllers resulted in an unacceptable level of LCD screen failures and we launched a free replacement program in 2018 to allow customers to replace affected LCD screens as a result. As we continue to grow and introduce new products, and as our products incorporate increasingly sophisticated technology, it will be increasingly difficult to ensure our products are produced in the necessary quantities without sacrificing quality. There is no assurance that we or our third-party manufacturers will be able to continue to manufacture our products so that they consistently achieve the product specifications and quality that our customers expect. Certain of our consumables are subjected to a shelf life, after which their performance is not ensured. Shipment of consumables that effectively expire early or shipment of defective instruments or consumables to customers may result in recalls and warrantee replacements, which would increase our costs, and depending upon current inventory levels and the availability and lead time for additional inventory, could lead to availability issues. Any future design issues, unforeseen manufacturing problems, such as contamination of our or their facilities, equipment malfunctions, aging components, quality issues with components and materials sourced from third-party suppliers, or failures to strictly follow procedures or meet specifications, may have a material adverse effect on our brand, business, financial condition and operating results and could
result in us or our third-party manufacturers losing ISO quality management certifications. If we or our third-party manufacturers fail to maintain ISO quality management certifications, our customers might choose not to purchase products from us. Furthermore, we or our third-party manufacturers may not be able to increase manufacturing to meet anticipated demand or may experience downtime.
In addition, as we increase manufacturing capacity, we will also need to make corresponding improvements to other operational functions, such as our customer service and billing systems, compliance programs and our internal quality assurance programs. We will also need additional equipment, manufacturing and warehouse space and trained personnel to process higher volumes of products. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully implemented or that equipment, manufacturing and warehouse space and appropriate personnel will be available. As we develop additional products, we may need to bring new equipmenton-line, implement new systems, technology, controls and procedures and hire personnel with different qualifications. Our ability to increase our manufacturing capacity at our Pleasanton, California location is complicated by the use of our proprietary equipment that is not readily available from third-party manufacturers.
The risk of manufacturing defects or quality control issues is generally higher for new products, whether produced by us or a third-party manufacturer, products that are transitioned from one manufacturer to another, particularly if manufacturing is transitioned or initiated with a manufacturer we have not worked with in the past, and products that are transferred from one manufacturing facility to another. Our current product roadmap calls for the introduction of new instruments, such as our Chromium Connect, which integrates our Chromium Controller with complex robotics manufactured by our partner. We also started to transition manufacturing of our Chromium Controller to a new third-party manufacturer with greater capacity.
As a result, both of our instruments will be manufactured by companies with which we have no prior manufacturing experience and the risk of manufacturing defects or quality control issues could increase as a result. Similarly, we also expect to expand our manufacturing facilities in Pleasanton, California during 2019. This expansion will result in the relocation of certain manufacturing processes and the risk of manufacturing defects or quality control issues in the consumables we manufacture there could increase as a result. We cannot assure investors that we and our third-party manufacturers will be able to launch new products on time, transition manufacturing of existing products to new manufacturers, transition our manufacturing capabilities to a new location or transition manufacturing of any additional consumablesin-house without manufacturing defects.
An inability to manufacture products and components that consistently meet specifications, in necessary quantities and at commercially acceptable costs will have a negative impact and may have a material adverse effect on our business, financial condition and results of operations.
Undetected errors or defects in our solutions could harm our reputation and decrease market acceptance of our solutions.
Our instruments and consumables, as well as the software that accompanies them, may contain undetected errors or defects when first introduced or as new versions are released. Disruptions or other performance problems with our products or software may adversely impact our customers’ research or business, harm our reputation and result in reduced revenue or increased costs associated with product repairs or replacements. If that occurs, we may also incur significant costs, the attention of our key personnel could be diverted or other significant customer relations problems may arise. We may also be subject to warranty claims or breach of contract for damages related to errors or defects in our solutions.
Certain disruptions in supply of, and changes in the competitive environment for, raw materials integral to the manufacturing of our products may adversely affect our profitability.
We use a broad range of materials and supplies, including metals, chemicals and other electronic components, in our products. A significant disruption in the supply of these materials could decrease production and shipping levels, materially increase our operating costs and materially adversely affect our profit margins. Shortages of materials or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism or other interruptions to or difficulties in the employment of labor or transportation in the markets in which we purchase materials, components and supplies for the production of our products, in each case may adversely affect our ability to maintain production of our products and sustain profitability. Unforeseenend-of-life for certain components, such as enzymes, could cause backorders as we modify our product specifications to accommodate replacement components. If we were to experience a significant or prolonged shortage of critical components from any of our suppliers and could not procure the components from other sources, we would be unable to manufacture our products and to ship such products to our customers in a timely fashion, which would adversely affect our sales, margins and customer relations.
We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling our products.
We rely on licenses in order to be able to use various proprietary technologies that are used in a substantial majority of our consumables. We do not own the patents that are the subject matter of these licenses. Our rights to use these patented technologies in our business are subject to the continuation of and compliance with the terms of those licenses.
We may need to license other technologies to commercialize future products. We may also need to negotiate licenses to patents and patent applications after launching new products. Our business may suffer if the technologies, patents or patent applications are unavailable for license or if we are unable to enter into necessary licenses on acceptable terms.
If we fail to offer high quality customer service, our business and reputation could suffer.
We differentiate ourselves from our competition through our commitment to an exceptional customer experience. Accordingly, high quality customer service is important for the growth of our business and any failure to maintain such standards of customer service, or a related market perception, could affect our ability to sell products to existing and prospective customers. Additionally, we believe our customer service team has a positive influence on recurring consumables revenue. Providing an exceptional customer experience requires significant time and resources from our customer service team. Therefore, failure to scale our customer service organization adequately may adversely impact our business results and financial condition.
Customers utilize our service teams and online content for help with a variety of topics, including how to use our products efficiently, how to integrate our products into existing workflows, how to determine which of our other products may be needed for a given experiment and how to resolve technical, analysis and operational issues if and when they arise. While we have developed significant resources for remote training, including an extensive library of online videos, we may need to rely more on these resources for future customer training, or we may experience increased expenses to enhance our online and remote solutions. If our customers do not adopt these resources, we may be required to increase the staffing of our customer service team, which would increase our costs. Also, as our business scales, we may need to engage third-party customer service providers, which could increase our costs and negatively impact the quality of the customer experience if such third parties are unable to provide service levels equivalent to ours.
The number of our customers has grown significantly and such growth, as well as any future growth, will put additional pressure on our customer service organization. We may be unable to hire qualified staff quickly enough or to the extent necessary to accommodate increases in demand.
In addition, as we continue to grow our operations and reach a global customer base, we need to be able to provide efficient customer service that meets our customers’ needs globally at scale. In geographies where we sell through distributors, we rely on those distributors to provide customer service. If these third-party distributors do not provide a high quality customer experience, our business operations and reputation may suffer.
We depend on our key personnel and other highly qualified personnel, and if we are unable to recruit, train and retain our personnel, we may not achieve our goals.
Our future success depends on our ability to recruit, train, retain and motivate key personnel, including our senior management, research and development, manufacturing and sales, customer service and marketing personnel. In particular, Dr. Saxonov, our Chief Executive Officer and one of ourco-founders, and Dr. Hindson, our Chief Scientific Officer, President and one of ourco-founders, are critical to our vision, strategic direction, culture and products. Competition for qualified personnel is intense, particularly in the San Francisco Bay Area. As we grow, we may continue to make changes to our management team, which could make it difficult to execute on our business plans and strategies. New hires also require significant training and, in most cases, take significant time before they achieve full productivity. Our failure to successfully integrate these key personnel into our business could adversely affect our business.
Our continued growth depends, in part, on attracting, retaining and motivating highly-trained sales personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and sell to potential new customers. In addition, the continued development of complementary software tools, such as our analysis tools and visualization software, requires us to compete for highly trained software engineers in the San Francisco Bay Area and for highly trained customer service personnel globally. We also compete for computational biologists and qualified scientific personnel with other life sciences companies, academic institutions and research institutions. Many of our scientific personnel are qualified foreign nationals whose ability to live and work in the United States is contingent upon the continued availability of appropriate visas. Due to the competition for qualified personnel in the San Francisco Bay Area, we expect to continue to rely on foreign nationals to fill part of our recruiting needs. As a result, changes to United States immigration policies could restrain the flow of technical and professional talent into the United States and may inhibit our ability to hire qualified personnel. The current United States administration has made restricting immigration and reforming the work visa process a key focus of its initiatives and these efforts may adversely affect our ability to find qualified personnel.
We do not maintain key man life insurance or fixed term employment contracts with any of our employees. As a result, our employees could leave our company with little or no prior notice and would be free to work for a competitor. Because of the complex and technical nature of our products and the dynamic market in which we compete, any failure to attract, train, retain and motivate qualified personnel could materially harm our operating results and growth prospects.
Acquisitions could disrupt our business, cause dilution to our stockholders and otherwise harm our business.
We have and may continue to acquire other businesses and legal entities to add specialized employees, products or technologies as well as pursue technology licenses or investments in complementary businesses. In 2018, we acquired Epinomics, Inc. (“Epinomics”), an epigenetics company based in California, and Spatial Transcriptomics Holdings AB (“Spatial Transcriptomics”), a spatial analysis company based in Stockholm, Sweden. We believe we are successfully integrating the technologies acquired from those companies
into our business, but the long-term success of these acquisitions is not guaranteed. These transactions and any future transactions could be material to our financial condition and operating results and expose us to many risks, including:
disruption in our relationships with customers, distributors, manufacturers or suppliers as a result of such a transaction;
unanticipated liabilities related to acquired companies, including liabilities related to acquired intellectual property or litigation relating thereto;
difficulties integrating acquired personnel, technologies and operations into our existing business;
diversion of management time and focus from operating our business;
failure to realize anticipated benefits or synergies from such a transaction;
increases in our expenses and reductions in our cash available for operations and other uses;
possible write-offs or impairment charges relating to acquired businesses; and
potential higher taxes if our tax position relating to the acquisitions were challenged.
Foreign acquisitions, such as our acquisition of Spatial Transcriptomics, involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.
Even if we identify a strategic transaction that we wish to pursue, we may be prohibited from consummating such transaction due to the terms of our existing or any future indebtedness. For example, our Second Amended and Restated Loan and Security Agreement, dated February 9, 2018, with Silicon Valley Bank (as amended, restated or supplemented from time to time, the “Loan and Security Agreement”) includes a covenant that limits our ability to consummate acquisitions and the exceptions to this covenant are limited. If we were to pursue an acquisition that is not permitted by the Loan and Security Agreement, we would be required to seek a waiver from the lender under the Loan and Security Agreement and we cannot assure investors that the lender would grant such a waiver.
Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future acquisitions, or the effect that any such transactions might have on our operating results.
Seasonality may cause fluctuations in our revenue and results of operations.
We operate on a December 31st year end and believe that there are significant seasonal factors which may cause sales of our products, and particularly our Chromium Controller, to vary on a quarterly or yearly basis and increase the magnitude of quarterly or annual fluctuations in our operating results. We believe that this seasonality results from a number of factors, including the procurement and budgeting cycles of many of our customers, especially government- or grant-funded customers, whose cycles often coincide with government fiscal year ends. For example, the United States government’s fiscal year end occurs in our third quarter and may result in increased sales of our products during such quarter if government-funded customers have unused funds that may be forfeited, or future budgets that may be reduced, if such funds remain unspent at such fiscal year end. Furthermore, the academic budgetary cycle similarly requires grantees to ‘use or lose’ their grant funding, which seems to be tied disproportionately to the end of the calendar year, driving sales higher during the fourth quarter. Similarly, our biopharmaceutical customers typically have calendar year fiscal years which also result in a disproportionate amount of their purchasing activity occurring during our fourth quarter. These factors have contributed, and may contribute in the future, to substantial fluctuations in our quarterly operating results. Because of these fluctuations, it is possible that in some quarters our operating results will fall below the expectations of securities analysts or investors. If that happens, the market price of our Class A common stock would likely decrease. These fluctuations, among other factors, also mean that our operating results in any particular period may not be relied upon as an indication of future performance. Seasonal or cyclical variations in our sales have in the past, and may in the future, become more or less pronounced over time, and have in the past materially affected, and may in the future materially affect, our business, financial condition, results of operations and prospects.
Our reliance on distributors for sales of our products in certain geographies outside of the United States could limit or prevent us from selling our products and impact our revenue.
We sell our products through third-party distributors in Asia, certain regions of Europe, South America, the Middle East and Africa. We intend to continue to grow our business internationally and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Most of our distribution relationships arenon-exclusive and permit such distributors to distribute competing products. As such, our distributors may not commit the necessary resources to market our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately or we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long-term international revenue growth.
We rely exclusively on commercial carriers to transport our products, including perishable consumables, to our customers in a timely and cost-efficient manner and if these delivery services are disrupted, our business will be harmed.
Our business depends on our ability to quickly and reliably deliver our products and in particular, our consumables, to our customers. Certain of our consumables are perishable and must be kept below certain temperatures. As such, we ship certain of our refrigerated consumables on dry ice and only ship such consumables on certain days of the week to reach customers on a timely basis. Disruptions in the delivery of our products, whether due to labor disruptions, bad weather, natural disasters, terrorist acts or threats or for other reasons could result in our customers receiving consumables that are not fit for usage, and if used, could result in inaccurate results or ruined experiments. While we work with customers to replace any consumables that are impacted by delivery disruptions, our reputation and our business may be adversely impacted even if we replace perished consumables free of charge. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected.
In addition, should our commercial carriers encounter difficulties in delivering our instruments or consumables to customers, particularly at the end of any financial quarter, it could adversely impact our ability to recognize revenue for those products in that period and accordingly adversely affect our financial results for that period.
Ethical, legal, privacy and social concerns or governmental restrictions surrounding the use of the genomic and multi-omic information and gene editing could reduce demand for our products.
While we do not make gene sequencing or gene editing products, our products are used to better understand genomic information that could further gene editing endeavors. For example, our single cell gene expression solutions allow users to examine cells that have been genetically perturbed using clustered regularly interspaced short palindromic repeats (“CRISPR”) gene editing technology. Recent advances in genome editing or gene therapy, using CRISPR systems such as CRISPR Cas9 technology have been subject to negative publicity and increased regulatory scrutiny, in part due to the underlying ethical, legal, privacy and social concerns regarding the use or potential misuse of such technology. Governmental authorities could, for safety, social or other purposes, call for limits on or regulation of technologies and products used in the genome editing or gene therapy fields. Such concerns or governmental restrictions could limit the use of our products. Because the science and technology of genome editing or gene therapy is incredibly complex, any regulations or restrictions placed on such technology or aimed at curtailing its usage could, intentionally or inadvertently, limit or restrict the usage of our products. Any such restrictions or any reduction in usage of our products as a result of concerns regarding the usage of genome editing technology could have a material adverse effect on our business, financial condition and results of operations.
We are subject to certain manufacturing restrictions related to licensed technologies that were developed with the financial assistance of United States government grants.
We are subject to certain United States government regulations because we have licensed technologies that were developed with United States government grants. Such licensed technologies are used, for example, in a substantial majority of our consumables. In accordance with these regulations, these licenses provide that products embodying the technologies are subject to domestic manufacturing requirements. If this domestic manufacturing requirement is not met, the government agency that funded the relevant grant is entitled to exercise specified rights(“march-in rights”) which if exercised would allow the government agency to require the licensors or us to grant anon-exclusive, partially exclusive or exclusive license in any field of use to a third-party designated by such agency. The exercise ofmarch-in rights or the termination of our license of the relevant technologies could materially adversely affect our business, operations and financial condition. As of September 30, 2019, all of our products embodying licensed technology subject tomarch-in rights were manufactured in the United States. While we do not expect to move manufacturing of these products to facilities located outside of the United States, we cannot assure investors that such products will always be manufactured in the United States or that the applicable government agency would grant a waiver of such requirement. These restrictions may limit our ability to manufacture our products in geographies where it may be more economically favorable to do so which could limit our ability to respond to competitive developments or otherwise adversely affect our results of operations.
Our products could become subject to government regulation and the regulatory approval and maintenance process for such products may be expensive, time-consuming and uncertain both in timing and in outcome.
Our products are not subject to the clearance or approval of the U.S. Food and Drug Administration (the “FDA”), as they are not intended to be used for the diagnosis, treatment or prevention of disease. However, as we continue to expand our product line and the applications and uses of our existing products into new fields, certain of our current or future products could become subject to regulation by the FDA, or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. Such regulatory approval processes or clearances may be expensive, time-consuming and uncertain, and our failure to obtain or comply with such approvals and clearances could have an adverse effect on our business, financial condition and operating results. In addition, changes to the current regulatory framework, including the imposition of additional or new regulations, including regulation of our products, could arise at any time during the development or marketing of our products, which may negatively affect our ability to obtain or maintain FDA or comparable regulatory approval of our products, if required. Further, sales of devices for diagnostic purposes may subject us to additional healthcare regulation and enforcement by the applicable government agencies. Such laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy and security and physician sunshine laws and regulations.
Diagnostic products are regulated as medical devices by the FDA and comparable international agencies and may require either clearance from the FDA following the 510(k)pre-market notification process orpre-market approval from the FDA, in each case prior to marketing. Obtaining the requisite regulatory approvals can be expensive and may involve considerable delay. None of our products are currently regulated as medical devices, however, if our products labeled as “For Research Use Only. Not for use in diagnostic procedures” (“RUO”) are used, or could be used, for the diagnosis of disease, the regulatory requirements related to marketing, selling and supporting such products could change or be uncertain, even if such use by our customers is without our consent.
If the FDA or other regulatory authorities assert that any of our products are subject to regulatory clearance or approval, our business, financial condition or results of operations could be adversely affected.
Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers may materially harm our business.
We are continuing to expand our international operations as part of our growth strategy and have experienced an increasing concentration of sales in certain regions outside the United States, especially in the Asia-Pacific region. For the year ended December 31, 2018 and the nine months ended September 30, 2019, sales outside of North America constituted approximately 42% and 43%, respectively, of our sales revenue and our largest markets outside of North America were China and Germany. There is currently significant uncertainty about the future relationship between the United States and various other countries, most significantly China, with respect to trade policies, treaties, government regulations and tariffs. The current United States presidential administration has called for substantial changes to United States foreign trade policy with respect to China and other countries, including the possibility of imposing greater restrictions on international trade and significant increases in tariffs on goods imported into the United States. In September 2018, the United States Trade Representative (the “USTR”) enacted a tariff on the import of other Chinese products with a combined import value of approximately $200 billion. The tariff became effective on September 24, 2018, with an initial rate of 10% and increased to 25% effective on May 10, 2019.
Additionally, our business may be adversely impacted by retaliatory trade measures taken by China or other countries. Such measures could include restrictions on our ability to sell or import our instruments and/or consumables into certain countries or have the effect of increasing the prices of our instruments and/or consumables. For example, China has promised to impose retaliatory tariffs in response to the USTR tariffs referred to above and any such retaliatory tariffs could adversely impact our ability to sell instruments and consumables in China. While at this time neither the United States nor China has specifically imposed additional tariffs on healthcare related products, the nature of this dispute is evolving and additional products such as ours could become subject to tariffs, which could adversely affect the marketability of our products and our results of operations. Further, the continued threats of tariffs, trade restrictions and trade barriers could have a generally disruptive impact on the global economy and, therefore, negatively impact our sales. Given the relatively fluid regulatory environment in China and the United States and uncertainty how the United States or foreign governments will act with respect to tariffs, international trade agreements and policies, there could be additional tax or other regulatory changes in the future. Any such changes could directly and adversely impact our financial results and results of operations.
Additionally, in November 2018, the United States Commerce Department’s Bureau of Industry and Security released an advance notice of proposed rulemaking to control the export of emerging technologies. This notice included “[b]iotechnology, including nanobiology; synthetic biology; genomic and genetic engineering; or neurotech” as possible areas of increased export controls. Therefore, it is possible that our ability to export our products may be restricted in the future.
The imposition of new, or changes in existing, tariffs, trade restrictions, trade barriers, export controls or retaliatory trade measures taken by other countries could adversely impact our business, financial condition and results of operations.
Doing business internationally creates operational and financial risks for our business.
We currently serve thousands of researchers in more than 40 countries and plan to continue to expand to new international jurisdictions as part of our growth strategy. For the nine months ended September 30, 2019, approximately 43% of our revenue was generated from sales to customers located outside of North America. We believe that a significant portion of our future revenue will come from international sources. We sell directly in North America and certain regions of Europe and have a significant portion of our sales and customer service personnel in the United States. We sell our products through third-party distributors in Asia, certain regions of Europe, South America, the Middle East and Africa. As a result, we or our distribution partners may be subject to additional regulations. Conducting operations on an international scale requires close coordination of activities across multiple jurisdictions and time zones. If we fail to coordinate and manage these activities effectively, our business, financial condition or results of operations could be materially and adversely affected and failure to comply with laws and regulations applicable to business operations in foreign jurisdictions may also subject us to significant liabilities and other penalties. International operations entail a variety of other risks, including, without limitation:
challenges in staffing and managing foreign operations;
potentially longer sales cycles and more time required to engage and educate customers on the benefits of our products outside of the United States;
the potential need for localized software, documentation and post-sales support;
reduced protection for intellectual property rights in some countries and practical difficulties of enforcing intellectual property and contract rights abroad;
complexities associated with managing a third-party contract manufacturer located outside of the United States;
United States and foreign government trade restrictions, including those which may impose restrictions on the importation, exportation,re-exportation, sale, shipment or other transfer of programming, technology, components and/or services to foreign persons;
changes in diplomatic and trade relationships, including new tariffs, trade protection measures, import or export licensing requirements, trade embargoes and other trade barriers;
tariffs imposed by the United States on goods from other countries and tariffs imposed by other countries on United States goods, or increases in existing tariffs;
deterioration of political relations between the United States and Canada, China, the United Kingdom and the European Union, which could have a material adverse effect on our sales and operations in these countries;
changes in social, political and economic conditions or in laws, regulations and policies governing foreign trade, manufacturing, development and investment both domestically as well as in the other countries and jurisdictions into which we sell our products, including as a result of the referendum held in the United Kingdom approving the separation of the United Kingdom from the European Union;
difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays or our inability to sell our products in certain countries;
increased financial accounting and reporting burdens and complexities; and
significant taxes or other burdens of complying with a variety of foreign laws, including laws relating to privacy and data protection such as the General Data Protection Regulation (the “GDPR”) which took effect in the European Union in 2018.
In conducting our international operations, we are subject to United States laws relating to our international activities, such as the Foreign Corrupt Practices Act of 1977, as well as foreign laws relating to our activities in other countries, such as the United Kingdom Bribery Act of 2010. Additionally, we are subject to laws that prohibit the conduct of business with persons that are subject to “sanctions”, including but not limited to persons listed on the United States Department of Commerce’s List of Denied Persons and the United States Department of Treasury’s Specially Designated Nationals and Blocked Persons List. Failure to comply with these laws and other applicable laws may subject us to claims or financial and/or other penalties in the United States and/or foreign countries that could materially and adversely impact our operations or financial condition. These risks have become increasingly prevalent as we have expanded our sales into countries that are generally recognized as having a higher risk of corruption.
Historically, most of our revenue has been denominated in U.S. dollars, although we have sold our products and services in local currency outside of the United States, principally the euro. For the nine months ended September 30, 2019, approximately 14% of our sales were denominated in currencies other than U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. As our operations in countries outside of the United States grow, our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars. In addition, because we conduct business in currencies other than U.S. dollars, but report our results of operations in U.S. dollars, we also face remeasurement exposure to fluctuations in currency exchange rates, which could hinder our ability to predict our future results and earnings and could materially impact our results of operations. We do not currently maintain a program to hedge exposures tonon-U.S. dollar currencies.
Violations of complex foreign and United States laws and regulations could result in fines and penalties, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international growth efforts, our ability to attract and retain employees, our business and our operating results. Even if we implement policies or procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our distribution partners, our employees, contractors or agents will not violate our policies and subject us to potential claims or penalties.
Significant U.K. or European developments stemming from the U.K.’s decision to withdraw from the European Union could have a material adverse effect on us.
In June 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union, and in March 2017, the government of the United Kingdom formally initiated the withdrawal process. Negotiations for the United Kingdom’s exit from the European Union (“Brexit”) have created political and economic uncertainty, particularly in the United Kingdom and the European Union, and this uncertainty may last for years. Our business in the United Kingdom, the European Union and worldwide could be affected during this period of uncertainty, and perhaps longer, by the impact of the United Kingdom’s referendum. There are many ways in which this business could be affected, only some of which we are able to currently identify.
The decision of the United Kingdom to withdraw from the European Union has caused and, along with events that could occur in the future as a consequence of the United Kingdom’s withdrawal, may continue to cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the United Kingdom, Europe or globally, which could adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new trade agreements or data transfer agreements between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory and immigration barriers in the United Kingdom. In addition, access to European Union research funding by research scientists based in the United Kingdom may be reduced or cut off altogether. It also is unclear whether Brexit may limit the ability or willingness of the United Kingdom’s Medical Research Council to continue funding genomic or single cell research by local research centers and labs. For the nine months ended September 30, 2019, the United Kingdom comprised approximately $8.4 million of our worldwide product revenue. The impact of the United Kingdom’s withdrawal from the European Union could negatively impact our revenue as a result of currency fluctuations, a slowdown in research funding or restricted budgets. In addition, the growth of sales in the United Kingdom may be slowed or those sales may even decline as a result of this withdrawal. Additionally, distribution costs for products sold in the United Kingdom may be increased due to trade agreements and incremental importation expenses. These possible negative impacts, and others resulting from the United Kingdom’s actual or threatened withdrawal from the European Union, may increase our cost of doing business in Europe, disrupt our European operations and adversely affect our operating results and growth prospects.
The illegal distribution and sale by third parties of counterfeit or unfit versions of our products or stolen products could have a negative impact on our reputation and business.
Third parties might illegally distribute and sell counterfeit or unfit versions of our products, which do not meet our rigorous manufacturing, distribution and quality standards. As we expand our business internationally, we expect to encounter counterfeit versions of our products, particularly our consumables. A researcher who receives and uses counterfeit consumables could obtain erroneous results, experience failed experiments or potentially damage his or her instrument. Our reputation and business could suffer harm as a result of counterfeit products sold under our brand name. In addition, inventory that is stolen from warehouses, plants or whilein-transit, and that is subsequently improperly stored and sold through unauthorized channels, could adversely impact our customers’ experiments, our reputation and our business.
We currently plan to implement a new company-wide enterprise resource planning system in 2020 and such implementation could adversely affect our business and results of operations or the effectiveness of internal control over financial reporting.
We currently plan to implement a new company-wide enterprise resource planning (“ERP”) system in 2020 to handle the business and financial processes within our operations, manufacturing and corporate functions. ERP implementations are complex and time-consuming projects that involve substantial expenditures on system software, the need to hire consultants and additional personnel for the implementation and implementation activities that can continue for several years. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system. Our business and results of operations could be adversely affected if we experience operating problems and/or cost overruns during the ERP implementation process, or if the ERP system and the associated process changes do not give rise to the benefits that we expect. If we do not effectively implement and transition to the new ERP system as planned or if the system does not operate as intended, our business, results of operations and internal controls over financial reporting could be adversely affected.
Our solutions contain third-party open source software components and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.
Our solutions contain software tools licensed by third parties under open source software licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source software licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source software licenses contain requirements that the licensee make its source code publicly available if the licensee creates modifications or derivative works using the open source software, depending on the type of open source software the licensee uses and how the licensee uses it. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source software licenses, be required to release the source code of our proprietary software to the public for free. This would allow our competitors to create similar products with less development effort and time and ultimately could result in a loss of product sales and revenue. In addition, some companies that use third-party open source software have faced claims challenging their use of such open source software and their compliance with the terms of the applicable open source license. We may be subject to suits by third parties
claiming ownership of what we believe to be open source software, or claimingnon-compliance with the applicable open source licensing terms. Use of open source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to compromise or attempt to compromise our technology platform and systems.
Although we review our use of open source software to avoid subjecting our solutions to conditions we do not intend, the terms of many open source software licenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. Moreover, we cannot assure investors that our processes for monitoring and controlling our use of open source software in our solutions will be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our solutions on terms that are not economically feasible, tore-engineer our solutions, to discontinue the sale of our solutions ifre-engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results and financial condition.
We collect, process, store, share, disclose and use personal information and other data, which subjects us to governmental regulations and other legal obligations related to privacy and security, and our actual or perceived failure to comply with such obligations could harm our business.
We collect, process, store, transmit, disclose and use information from our employees, customers and others, including personal information and other data, some of which may be sensitive in nature. There are numerous federal, state and foreign laws and regulations regarding data protection, privacy and security. We strive to comply with applicable laws, our posted policies and legal contractual obligations relating to privacy and data protection. However, the scope of these laws is changing, is subject to differing interpretations, may be costly to comply with and may be inconsistent among countries and jurisdictions or conflict with other rules. Our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted, interpreted or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices.
The global data protection landscape is rapidly evolving and new laws and regulations are likely to be enacted and violations of existing and new laws and regulations may subject companies to significant penalties and fines, government investigations and/or enforcement actions, private litigation and other claims. For example, the European Union’s recent adoption of the GDPR introduced stringent requirements for processing personal data. The GDPR is likely to increase compliance burdens on us, including by mandating potentially burdensome documentation requirements and granting certain rights to individuals to control how we collect, use, disclose, retain and leverage information about them or how we obtain consent from them. The processing of sensitive personal data, such as physical health condition, may impose heightened compliance burdens under the GDPR and is a topic of active interest among foreign regulators. In addition, the GDPR provides for breach reporting requirements, more robust regulatory enforcement and greater penalties for noncompliance than previous data protection laws, including fines of up to €20 million or 4% of a noncompliant company’s global annual revenue for the preceding financial year, whichever is greater. As we continue to expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.
In the United States, California recently enacted the California Consumer Privacy Act (the “CCPA”), which may limit or impose requirements on how we may collect and use personal information and is expected to come into effect in January 2020. The impact of this law on us and others in our industry is and will remain unclear until proposed bills amending the CCPA have wound their way through the legislative process and until regulations are issued by the California Attorney General. Similar privacy and data protection laws have also been proposed in other states and at the federal level.
Any failure or perceived failure by us or our vendors or partners to comply with these laws and regulations, our privacy policies, our privacy-related obligations to employees, customers or other third parties or privacy or security-related legal obligations, or any actual or perceived compromise of security that results in the unauthorized access to or disclosure, alteration, theft, loss, transfer or use of personal or other information, including personally identifiable information or other sensitive data, may result in governmental enforcement actions, fines and penalties, litigation or public statements critical of us by consumer advocacy groups or others and could cause our customers, partners or others to lose trust in us, which could have an adverse effect on our business.
If we experience a significant disruption in our information technology systems or breaches of data security, our business could be adversely affected.
We rely on information technology systems to keep financial records, facilitate our research and development initiatives, manage our manufacturing operations, maintain quality control, fulfill customer orders, maintain corporate records, communicate with staff and external parties and operate other critical functions. Our information technology systems are potentially vulnerable to disruption due to breakdown, malicious intrusion and computer viruses or other disruptive events including but not limited to natural disasters and catastrophes. Cyberattacks and other malicious internet-based activity continue to increase and cloud-based platform providers of services have been and are expected to continue to be targeted. In addition to traditional computer “hackers”, malicious code (such as viruses and worms), employee theft or misuse,denial-of-service attacks and sophisticated nation-state and nation-state supported actors now engage in attacks (including advanced persistent threat intrusions). Despite significant efforts to create security barriers to such threats, it is virtually impossible for us to entirely mitigate these risks. If our security measures are compromised as a result of
third-party action, employee or customer error, malfeasance, stolen or fraudulently obtainedlog-in credentials or otherwise, our reputation could be damaged, our business may be harmed and we could incur significant liability. If we were to experience a prolonged system disruption in our information technology systems or those of certain of our vendors, it could negatively impact our ability to serve our customers, which could adversely impact our business. If operations at our facilities were disrupted, it may cause a material disruption in our business if we are not capable of restoring functionality on an acceptable timeframe. In addition, our information technology systems (and those of our vendors and partners) are potentially vulnerable to data security breaches, whether by internal bad actors (e.g., employees) or external bad actors (attacks of which are becoming increasingly sophisticated, including social engineering and phishing scams), which could lead to the exposure of personal data, sensitive data and confidential information to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the exposure of personal information (including sensitive personal information) of our employees, customers and others, any of which could have a material adverse effect on our business, reputation, financial condition and results of operations.
We have not always been able in the past and may be unable in the future to anticipate or prevent techniques used to obtain unauthorized access or to compromise our systems because the techniques used change frequently and are generally not detected until after an incident has occurred. Concerns regarding data privacy and security may cause some of our customers to stop using our solutions and fail to renew their subscriptions. This discontinuance in use or failure to renew could substantially harm our business, operating results and growth prospects.
In addition, any such access, disclosure or other loss or unauthorized use of information or data could result in legal claims or proceedings, regulatory investigations or actions, and other types of liability under laws that protect the privacy and security of personal information, including federal, state and foreign data protection and privacy regulations, violations of which could result in significant penalties and fines. In addition, although we seek to detect and investigate all data security incidents, security breaches and other incidents of unauthorized access to our information technology systems and data can be difficult to detect and any delay in identifying such breaches or incidents may lead to increased harm and legal exposure of the type described above.
The cost of investigating, mitigating and responding to potential data security breaches and complying with applicable breach notification obligations to individuals, regulators, partners and others can be significant. Our insurance policies may not be adequate to compensate us for the potential costs and other losses arising from such disruptions, failures or security breaches. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, defending a suit, regardless of its merit, could be costly, divert management attention and harm our reputation.
We rely onon-premise,co-located and third-party data centers and platforms to host our website and other online services, as well as for research and development purposes and any interruptions of service or failures may impair and harm our business.
Our proprietary software is a crucial component of our solutions, as our software allows our end users to visualize genomic and multi-omic information provided by our instruments and reagents. All of our software is currently downloadable free of charge from our website for installation and use by end users on their computer systems. Our website is hosted with various third-party service providers located in the United States. We rely onon-premises,co-located and third-party infrastructure in the San Francisco Bay Area and other regions in the United States to perform computationally demanding analysis tasks for our research and development programs and for other business purposes.
In the event of any technical problems that may arise in connection with ouron-premise,co-located or third-party data centers, we could experience interruptions in our ability to provide products and services to our customers or in our internal functions, including research and development, which rely on such services. Interruptions or failures may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud, spikes in customer usage and denial of service issues. Interruptions or failures in our operations or services may reduce our revenue, result in the loss of customers, adversely affect our ability to attract new customers or harm our reputation. Significant interruptions to our research and development programs could cause us to delay the introduction of new products or improvements to existing products, which could adversely impact our business, our results of operations and the competitiveness of our products.
Our current solutions are capable of generating large datasets, the analysis of which can be time consuming without access to a high-performance computing system. The visualization of such data can also be computationally intensive. As we iterate and improve our products and as the related technologies advance, our continued growth may require an ability to provide our customers with direct access to a high-performance computing system and/or alternative means of obtaining our software. As a result, we expect our reliance on internal and third-party data centers to increase in the future.
Further, as we rely on third-party and public-cloud infrastructure, we will depend in part on third-party security measures to protect against unauthorized access, cyberattacks and the mishandling of customer data. In addition, failures to meet customers’ expectations with respect to security and confidentiality of their data and information could damage our reputation and affect our ability to retain customers, attract new customers and grow our business. In addition, a cybersecurity event could result in significant increases in costs, including costs for remediating the effects of such an event, lost revenue due to a decrease in customer trust and network downtime; increases in insurance coverage due to cybersecurity incidents; and damages to our reputation because of any such incident.
Our indebtedness may impair our financial and operating flexibility.
The Loan and Security Agreement provides for up to $50.0 million of term loans and an up to $25.0 million revolving asset-backed credit facility. As of September 30, 2019, $30.0 million of term loan borrowings were outstanding. As of September 30, 2019, revolving loan borrowings of up to $25.0 million were available to be drawn and $20.0 million of additional term loan borrowings were available to be drawn before January 1, 2020, subject to certain conditions. In August 2019, we borrowed $11.0 million under our revolving line of credit, all of which we repaid prior to September 30, 2019. The Loan and Security Agreement contains affirmative and negative covenants, including a covenant requiring us to maintain minimum revenue over specified periods of time and covenants that restrict, among other things, our ability to dispose of assets, change our business, management, ownership or business locations, enter into mergers or acquisitions, incur additional indebtedness or encumber any of our assets. Borrowings under the Loan and Security Agreement are secured by substantially all of our assets, excluding our intellectual property but including the proceeds from the sale of any of our intellectual property. These restrictions could limit our operational flexibility and the need to make principal and interest payments on our debt will reduce our ability to fund other aspects of our business, such as our research and development programs. Our ability to make principal and interest payments on our indebtedness will depend on our ability to generate cash. If we default under the Loan and Security Agreement and if the default is not cured or waived, the lender could terminate its commitments to lend to us and cause any amounts outstanding to be payable immediately. Under certain circumstances, the lender could also exercise its rights with respect to the collateral securing such loans. Such a default could also result in cross-defaults under other debt instruments. Moreover, any such default would limit our ability to obtain additional financing, which may have an adverse effect on our cash flow and liquidity.
We may incur additional indebtedness in the future. The debt instruments governing such indebtedness could contain provisions that are as, or more, restrictive than our existing debt instruments. If we incur additional debt, a greater portion of our cash flows may be needed to satisfy our debt service obligations. While we do not anticipate that we will need to raise additional financing in the future to fund our operations, in the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all. As a result, we would be more vulnerable to general adverse economic, industry and capital markets conditions in addition to the risks associated with indebtedness described above.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.
As of December 31, 2018, we had federal net operating loss carryforwards (“NOLs”) of $116.1 million and federal tax credit carryforwards of $8.3 million. Our federal NOLs generated after January 1, 2018, which total $5.5 million, are carried forward indefinitely, while all of our other federal NOLs and tax credit carryforwards expire beginning in 2032. As of December 31, 2018, we had state NOLs of $93.5 million, which expire beginning in 2032. In addition, we had state tax credit carryforwards of $7.9 million, which carry forward indefinitely. Our ability to utilize such carryforwards for income tax savings is subject to certain conditions and may be subject to certain limitations in the future due to ownership changes as described below. As such, there can be no assurance that we will be able to utilize such carryforwards. We have experienced a history of losses and a lack of future taxable income would adversely affect our ability to utilize these NOLs and research and development credit carryforwards.
Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change”, the corporation’s ability to use itspre-change net operating loss carryforwards and otherpre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We completed a study in early 2019 to determine whether an ownership change had occurred under Section 382 or 383 of the Code as of December 31, 2018 and we determined at that time that an ownership change occurred in 2013. As a result, our net operating losses generated through November 1, 2013 may be subject to limitation under Section 382 of the Code. The amount ofpre-change loss carryforwards which may be subject to this limitation is $4.8 million. Our ability to use net operating loss carry forwards, research and development credit carryforwards and other tax attributes to reduce future taxable income and liabilities may be subject to limitations based on the ownership change in 2013, possible changes since the completion of the study including as a result of our initial public offering. As a result, if we earn net taxable income, our ability to use ourpre-change net operating loss carryforwards or otherpre-change tax attributes to offset United States federal and state taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.
We are subject to risks related to taxation in multiple jurisdictions.
We are subject to income taxes in both the United States and foreign jurisdictions. Significant judgments based on interpretations of existing tax laws or regulations are required in determining our provision for income taxes. Our effective income tax rate could be adversely affected by various factors, including, but not limited to, changes in the mix of earnings in tax jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in existing tax policies, laws, regulations or rates, changes in the level ofnon-deductible expenses (including share-based compensation), changes in the location of our operations, changes in our future levels of research and development spending, mergers and acquisitions or the result of examinations by various tax authorities. Although we believe our tax estimates are reasonable, if the United States Internal Revenue Service or other taxing authority disagrees with the positions taken on our tax returns, we could have additional tax liability, including interest and penalties.
If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position.
Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, the Tax Cuts and Jobs Act of 2017 significantly revised the Code. The recently enacted federal income tax law, among other things, contains significant changes to corporate taxation, including a reduction of the federal statutory rates from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income, elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and our business and financial condition could be adversely affected. It is also unknown if and to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on us and on holders of our Class A common stock is likewise uncertain and could be adverse.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002, as amended (“SOX”), and the rules and regulations of the applicable listing standards of the Nasdaq Global Select Market (“Nasdaq”). We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems and resources.
SOX requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the Securities and Exchange Commission (“SEC”) is accurately recorded, processed, summarizedof universal proxy rules requiring any stockholder submitting notice of nomination to use a proxy card color other than white and reported within the time periods specified in SEC rules and forms and that information requiredupdates to be disclosed in reports under the Exchange Act is accumulated and communicatedprovisions relating to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls andadjournment procedures and internal control over financial reporting, we have expended, and anticipate that we will continuelists of stockholders entitled to expend, significant resources including accounting-related costs and significant management oversight.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failurevote at stockholder meetings, each to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause usalign with recent amendments to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq. We are not currently required to comply with the SEC rules that implement Section 404 of SOX and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form10-K, which we expect will be filed in 2021.
We cannot provide any assurance that significant deficiencies or material weaknesses in our internal controls over financial reporting will not be identified in the future. If we fail to remediate any significant deficiencies or material weaknesses that may be identified in the future or encounter problems or delays in the implementation of internal controls over financial reporting, we may be unable to conclude that our internal controls over financial reporting are effective. We are currently implementing an internal audit function and any failure to correctly do so could lead to significant deficiencies or material weaknesses in our financial reporting. Any failure to develop or maintain effective controls or any difficulties encountered in our implementation of our internal controls over financial reporting could result in material misstatements that are not prevented or detected on a timely basis, which could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. Ineffective internal controls could cause investors to lose confidence in us and the reliability of our financial statements and cause a decline in the price of our Class A common stock.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until our first annual report filed with the SEC where we are an “accelerated filer” or a “large accelerated filer”. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could materially and adversely affect our business, results of operations and financial condition and could cause a decline in the trading price of our Class A common stock.
If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our Class A common stock.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. If our assumptions underlying our estimates and judgements relating to our critical accounting policies change or if actual circumstances differ from our assumptions, estimates or judgements, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our Class A common stock.
Risks related to litigation and our intellectual property
We are involved in significant litigation which has consumed significant resources and management time and adverse resolution of these lawsuits could require us to pay significant damages, and prevent us from selling our products, which would severely adversely impact our business, financial condition or results of operations.
Our success depends in part on ournon-infringement of the patents or proprietary rights of third parties. Third parties have asserted and may in the future assert that our products infringe patents that they have obtained and may in the future obtain. We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have an adverse impact on our business, financial condition or results of operations. Furthermore, parties making claims against us have obtained and may in the future be able to obtain injunctive or other relief, which effectively could block our ability to further develop, commercialize, market or sell products or services and have resulted and could in the future result in the award of substantial damages against us. In the event of a successful infringement claim against us, we may be required to pay damages and obtain one or more licenses from third parties or be prohibited from selling certain products or services. In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins and earnings per share. In addition, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products and the prohibition of sale of any of our products or services could adversely affect our ability to grow or achieve or maintain profitability. Regardless of merit or eventual outcome, lawsuits brought against us may result in decreased demand for our products, injury to our reputation and increased insurance costs.
We have been involved in multiple patent litigation matters in the past several years and we expect that given the litigious history of our industry and the high profile of operating as a public company, other third parties, in addition to the parties identified herein, may claim that our products infringe their intellectual property rights. Our success depends in part on our ability to defend ourselves against such claims and maintain the validity of our patents and other proprietary rights.
In particular, we are currently involved in the following litigation matters related to substantially all of our products, the loss of any of which could have a material adverse effect on our business, operations, financial results and reputation. Beginning in 2015,Bio-Rad has filed six separate patent infringement cases against substantially all of our products, including instruments and consumables. These litigations are generally distinct and involve differentBio-Rad patents, however, the patents asserted byBio-Rad in the U.S. International Trade Commission (“ITC”) are also asserted in the district court case filed in the Northern District of California.
The details of these litigation matters are described below:
The 2015 Delaware Action
In February 2015, Raindance Technologies, Inc. (“Raindance”) and the University of Chicago filed suit against us in the U.S. District Court for the District of Delaware, alleging that substantially all of our products that use our GEM microfluidic chips are infringing seven U.S. patents owned by or exclusively licensed to Raindance (the “Delaware Action”). In May 2017,Bio-Rad was substituted as the plaintiff following its acquisition of Raindance. A jury trial was held in November 2018. The jury found that all of our accused products infringed one or more of U.S. Patent Nos. 8,304,193, 8,329,407 and 8,889,083. The jury also concluded that our infringement was willful and awardedBio-Rad approximately $24 million in damages. Post-trial,Bio-Rad moved for a permanent injunction, treble damages for willful infringement, attorneys’ fees, supplemental damages for the period from the second quarter of 2018 through the end of the trial as well aspre- and post-judgment interest.
The Court deniedBio-Rad’s request for attorneys’ fees and enhanced damages for willful infringement. The Court awarded supplemental damages for the period from the second quarter of 2018 through the end of trial as well aspre- and post-judgment interest. The Court entered final judgment against us in the amount of approximately $35 million in August 2019. In the fourth quarter of 2018, we began recording an accrual for estimated royalties as cost of revenue. This accrual is based on an estimated royalty rate of 15% of worldwide sales of our Chromium instruments operating our GEM microfluidic chips and associated consumables. As of September 30, 2019, we had accrued a total of $62.5 million relating to this matter which includes the $35 million judgment and our estimated 15% royalty for sales through that date.
The Court also grantedBio-Rad a permanent injunction against our GEM microfluidic chips and associated consumables that were found to infringe theBio-Rad patents, which have historically constituted substantially all of our product sales. However, under the injunction, we are permitted to continue to sell our GEM microfluidic chips and associated consumables for use with our historical installed base of instruments provided that we pay a royalty of 15% into escrow on our net revenue related to such sales. We appealed the injunction to the Federal Circuit. The Federal Circuit granted an interim order staying the injunction pending resolution of our motion with respect to our Single Cell CNV and Linked-Read solutions subject to the 15% royalty payment described above. On September 24, 2019, the Federal Circuit extended the stay with respect to the Single Cell CNV and Linked-Read solutions for the pendency of the appeal, but otherwise denied our request to stay the injunction. We also appealed the judgment to the Federal Circuit.
We have dedicated significant resources to designing and manufacturing our Next GEM microfluidic chips which use fundamentally different physics from our GEM microfluidic chips. Neither the jury verdict nor the injunction relate to our Next GEM microfluidic chips based on our new proprietary design and associated consumables which we launched in May 2019 for three of our single cell solutions – Single Cell Gene Expression, Single Cell Immune Profiling and Single Cell ATAC. Since August 28, 2019, all Chromium instruments that we sell and have sold operate exclusively with our Next GEM solutions and we currently expect that our Chromium products utilizing our Next GEM microfluidic chips will constitute substantially all of our Chromium consumables sales by the end of 2020.
Although our Next GEM microfluidic chips were designed to replace our GEM microfluidic chips, we cannot assure you that we will be able to make our Next GEM microfluidic chip work with all of our solutions, that our Next GEM microfluidic chip will allow our customers to maintain the level of performance or quality of our GEM microfluidic chip, that our Next GEM microfluidic chip will replace the sales of the GEM microfluidic chip or that we will be able to manufacture the Next GEM microfluidic chips in sufficient volumes in a timely fashion. Our Next GEM microfluidic chips may be subject to future claims of infringement byBio-Rad or others and are currently the subject of the litigation described in this risk factor. While we believe that our Chromium solutions, when used with our Next GEM microfluidic chip, would not infringe the assertedBio-Rad patents, we cannot assure you that our Next GEM microfluidic chip would not become subject to additional patent infringement litigation, which could prevent us from making, selling and importing our Next GEM microfluidic chips. In addition, it is possible thatBio-Rad could, in the future, claim that our continued sale of products violates orders issued by the court and request that the court impose sanctions or other penalties on us for such violations.
In addition, we have not yet developed Next GEM microfluidic chips for our Single Cell CNV and Linked-Read solutions. Although the Federal Circuit has stayed the injunction with respect to our Single Cell and Linked-Read solutions during the pendency of the appeal, we have not yet released a new version of our instrument that would allow our customers to use these solutions using our GEM microfluidic chip during the pendency of the appeal. Furthermore, it is possible that the injunction could be reinstated with respect to our Single Cell and Linked-Read solutions using our GEM microfluidic chips after the appeal if the Federal Circuit does not rule in our favor. Until we develop a Next GEM microfluidic chip for our Single Cell CNV and Linked-Read solutions, our sales and growth of these solutions will be constrained. Though these solutions have not significantly contributed to our revenue to date, our Single Cell CNV solution, for example, has proved crucial in understanding how cancers evolve and providing researchers with valuable insights into cancer treatments. Developing a Next GEM microfluidic chip for these solutions may require significant uses of our resources and there may be a substantial delay before such products are available to sell to our customers.
As of September 30, 2019, we had accrued a total of $62.5 million relating to this matter. Depending upon the ultimate outcome of the litigation withBio-Rad, we may be required to pay damages, interest and other amounts at a time specified by the court in excess of these reserves should our accruals prove insufficient to cover the actual damages awarded in the case. While we will continue to evaluate and review our estimate of amounts payable from time to time for any indications that could require us to change our assumptions relating to the amounts already recorded, we cannot assure investors that our estimates and related reserves will be sufficient.
Also in 2015, we filed multiple petitions forinter partes review (“IPR”) at the Patent Trial and Appeal Board (“PTAB”) of the U.S. Patent and Trademark Office (“USPTO”) against Raindance and the University of Chicago relating to the patents asserted in the Delaware Action, including U.S. Patent Nos. 7,129,091, 8,658,430, 8,304,193, 8,273,573, 8,329,407, 8,889,083 and 8,822,148. Among these proceedings, all the claims in the ‘430 patent were determined by the PTAB to be invalid, all the claims in the ‘573 patent were canceled, and our invalidity challenges to the remainingBio-Rad patents were unsuccessful. Accordingly, we may be precluded from challenging the ‘091, ‘193, ‘407 and ‘148 patents at the PTAB in the future as a result of these decisions. Further, because all the claims in the ‘083 patent survived the IPR challenge, we will be precluded from making certain invalidity challenges to this patent at the PTAB, or in a district court or ITC litigation in the future.
The ITC 1068 Action
On July 31, 2017,Bio-Rad and Lawrence Livermore National Security, LLC filed a complaint against us in the ITC pursuant to Section 337 of the Tariff Act of 1930, alleging that substantially all of our products infringe U.S. Patents Nos. 9,089,844, 9,126,160, 9,500,664, 9,636,682 and 9,649,635 (the “ITC 1068 Action”).Bio-Rad is seeking an exclusion order preventing us from importing the accused microfluidic chips, including (1) our GEM microfluidic chip, (2) our gel bead manufacturing microfluidic chip and (3) our Next GEM microfluidic chip, into the United States and a cease and desist order preventing us from selling such imported chips. An evidentiary hearing for the ITC 1068 Action was held in May of 2018 and the presiding judge issued an Initial Determination in September 2018, finding that our GEM microfluidic chips infringe the ‘664, ‘682 and ‘635 patents but not the ‘160 patent. The judge further found that our gel bead manufacturing microfluidic chip and Next GEM microfluidic chip do not infringe any claim asserted against them.
The judge recommended entry of an exclusion order against our GEM microfluidic chips. If the ITC were to adopt the judge’s recommendation regarding the exclusion order, we would be prevented from importing such chips, which are used in substantially all of our products, into the United States. The judge also recommended a cease and desist order that would prevent us from selling such imported chips. The ITC is not reviewing the judge’s findings that our GEM microfluidic chips directly infringe the ‘664, ‘682 and ‘635 patents. The ITC is currently reviewing the judge’s findings that (1) we indirectly infringe the ‘682 and ‘635 patents, (2) our gel bead manufacturing microfluidic chip does not infringe certain claims in the ‘664 patent and (3) our Next GEM microfluidic chip does not infringe certain claims in the ‘160 and ‘664 patents. A Final Determination is expected to be issued in December 2019. The Final Determination is subject to a60-day presidential review period before taking effect. If the Initial Determination were to be upheld, then we would be unable to import our GEM microfluidic chips and sell such imported chips. The judge recommended a bond of 100% of the entered value of accused products imported during the Presidential review period.
In order to allow our customers to continue their important research, we have dedicated significant resources to developing the capabilities to manufacture our microfluidic chips in the United States prior to the entry of an exclusion order or cease and desist order which could take effect in February 2020. Prior to the second quarter of 2019, all of our microfluidic chips were manufactured outside of the United States. Our United States manufacturing facilities achieved volume production of certain of our GEM microfluidic chips accounting for the majority of our United States consumable revenue beginning in the third quarter of 2019. We cannot assure investors that our U.S. manufacturing facilities can produce our microfluidic chips to the same level of functionality, quality or quantity as our current foreign manufacturer. Moreover,Bio-Rad has also filed suit against us in the U.S. District Court for the Northern District of California, which is discussed separately below. IfBio-Rad succeeds in obtaining an injunction in the district court case, we could be prohibited from selling our GEM microfluidic chips, regardless of where they are manufactured. If we are prohibited from selling our GEM microfluidic chips, our business, operations, financial results and reputation would be significantly adversely impacted.
Further, although the Next GEM microfluidic chips were designed to replace our GEM microfluidic chips, we cannot assure investors that the ITC will not reverse the finding of the Initial Determination in its Final Determination currently expected to be issued in December 2019 that our Next GEM microfluidic chips or other products do not infringe the patents asserted against them in the ITC 1068 Action. We have not yet manufactured our Next GEM microfluidic chips in the United States. If the ITC reverses thenon-infringement finding about our Next GEM microfluidic chips and prohibits us from importing such chips or selling previously imported chips, our business, operations, financial results and reputation would be significantly adversely impacted.
In addition, ifBio-Rad obtains an exclusion order and/or cease and desist order in the ITC 1068 Action, it is possible thatBio-Rad could, in the future, file enforcement proceedings claiming that we have violated such orders and requesting that the ITC impose sanctions or other penalties on us for such violations. Our Next GEM microfluidic chips could also become subject to other patent infringement litigations. If we are prohibited from selling our Next GEM microfluidic chips, our business, operations, financial results and reputation would be significantly adversely impacted.
The Northern District of California Action
On July 31, 2017,Bio-Rad and Lawrence Livermore National Security, LLC also filed suit against us in the U.S. District Court for the Northern District of California, alleging that substantially all of our products infringe U.S. Patents Nos. 9,216,392, 9,347,059 and the five patents asserted in the ITC 1068 Action. The complaint seeks injunctive relief, unspecified monetary damages, costs and attorneys’ fees. This litigation has been stayed pending resolution of the ITC 1068 Action. If we are found to infringe these patents or if we are prohibited from selling our products, our business, operations, financial results and reputation could be significantly adversely impacted.
In 2017 and 2018, we filed multiple petitions for IPR at the PTAB againstBio-Rad regarding U.S. Patent Nos. 9,126,160, 9,216,392, 9,649,635, 9,089,844, 9,636,682 and 9,500,664, all of which were also asserted in the ITC 1068 Action or the Northern District of California Case. The PTAB denied institution of all the IPRs, which may preclude us from challenging these patents at the PTAB in the future.
The Germany Action
On February 13, 2018,Bio-Rad filed suit against us in Germany in the Munich Region Court alleging that our Chromium instruments, GEM microfluidic chips and certain accessories infringe German Utility Model No. DE 20 2011 110 979.Bio-Rad seeks unspecified damages and an injunction prohibiting sales of these products in Germany and requiring us to recall these products sold in Germany subsequent to February 11, 2018. An initial hearing was held on November 27, 2018, and a subsequent hearing was held on May 15, 2019. The court is expected to issue a ruling on the merits on November 20, 2019. If we are prohibited from selling our products in Germany, or if our products are recalled in Germany, our business, operations, financial results and reputation could be adversely impacted.
The 2018 Delaware Action
On October 25, 2018,Bio-Rad filed suit against us in the U.S. District Court for the District of Delaware, alleging that substantially all of our products, including our GEM products and Next GEM products, infringe U.S. Patent Nos. 9,562,837 and 9,896,722.Bio-Rad seeks injunctive relief, unspecified monetary damages, costs and attorneys’ fees. Discovery is in progress. If we are found to infringe these patents or if we are prohibited from selling our products, our business, operations, financial results and reputation could be significantly adversely impacted.
The 2019 Delaware Action
On September 11, 2019,Bio-Rad filed suit against us in the U.S. District Court for the District of Delaware alleging that our Next GEM products infringe certain claims of U.S. Patent No. 8,871,444. On November 5, 2019,Bio-Rad amended the complaint to additionally allege that our Next GEM products infringe certain claims of U.S. Patent Nos. 9,919,277 and 10,190,115. We believe that the asserted patents are invalid and not infringed, and we intend to defend ourselves vigorously.
We are involved in lawsuits to protect, enforce or defend our patents and other intellectual property rights, which are expensive, time consuming and could ultimately be unsuccessful.
On January 11, 2018, we filed a complaint againstBio-Rad at the ITC pursuant to Section 337 of the Tariff Act of 1930 alleging thatBio-Rad infringes our U.S. Patent Nos. 9,644,204, 9,689,024, 9,695,468 and 9,856,530 (the “ITC 1100 Action”). Our complaint in the ITC 1100 Action seeks an exclusion order preventingBio-Rad from importing certain microfluidic chips and other products into the United States and a cease and desist order preventingBio-Rad from selling such importing chips and other products. An evidentiary hearing for the ITC 1100 Action was held in March of 2019.
The judge issued an Initial Determination on July 12, 2019 finding thatBio-Rad’s ddSEQ product for single cell analysis infringes the ‘024, ‘468 and ‘530 patents. The judge also found all of our asserted patents to be valid and rejectedBio-Rad’s claim of ownership in all of the asserted patents. The ITC is currently reviewing all of the judge’s findings related toBio-Rad’s violation of the ‘024, ‘468 and ‘530 patents,Bio-Rad’s noninfringement of the ‘204 patent andBio-Rad’s inventorship and ownership defenses. The Target Date for the Final Determination is scheduled for December 19, 2019.
Also in January 2018, we filed a related but separate suit againstBio-Rad in the U.S. District Court for the Northern District of California, alleging thatBio-Rad infringes the ‘204, ‘024, ‘468 and ‘530 patents. The ‘204, ‘024, ‘468 and ‘530 patents generally relate to gel bead reagents that are used in our Chromium products, which historically have constituted substantially all of our current sales. This litigation has been stayed pending resolution of the ITC 1100 Action.
In January 2019,Bio-Rad also filed petitions for IPR of the ‘024, ‘468 and ‘530 patents at the PTAB seeking to invalidate these patents. In July and August of 2019, the PTAB denied institution of all of theseBio-Rad IPR petitions.
In addition to the litigation and legal proceedings discussed above, we are currently and may in the future be a party to other litigation or legal proceedings to determine the scope and validity of our intellectual property, which, if resolved adversely to us, could invalidate or render unenforceable our intellectual property or generally preclude us from restraining, enjoining or otherwise seeking to exclude competitors from commercializing products using technology developed or used by us. For example, our patents and any patents which wein-license may be challenged, narrowed, invalidated or circumvented. If patents we own or license are invalidated or otherwise limited, other companies may be better able to develop products that compete with ours, which would adversely affect our competitive position, business prospects, results of operations and financial condition.
The following are examples of litigation and other adversarial proceedings or disputes that we could become a party to involving our patents or patents licensed to us:
we have initiated, and in the future may initiate, litigation or other proceedings against third parties to enforce our patent rights;
third parties have initiated, and in the future may initiate, litigation or other proceedings seeking to invalidate patents owned by or licensed to us or to obtain a declaratory judgment that their product or technology does not infringe our patents or patents licensed to us or that such patents are invalid or unenforceable;
third parties have initiated, and in the future may initiate, oppositions, IPRs, post grant reviews or reexamination proceedings challenging the validity or scope of our patent rights, requiring us and/or licensors to participate in such proceedings to defend the validity and scope of our patents;
there are, and in the future may be, more challenges or disputes regarding inventorship or ownership of patents currently identified as being owned by or licensed to us; or
at our initiation or at the initiation of a third-party, the USPTO may initiate an interference between patents or patent applications owned by or licensed to us and those of our competitors, requiring us and/or licensors to participate in an interference proceeding to determine the priority of invention, which could jeopardize our patent rights.
Furthermore, many of our employees were previously employed at universities or other life sciences companies, including our competitors or potential competitors. We or our employees may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Although no such claims are currently pending, litigation may be necessary to defend against such claims if they arise in the future. If we fail to successfully defend such claims, in addition to paying monetary damages, we may be subject to injunctive relief and lose valuable intellectual property rights. A loss of key research personnel work product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
If we are unable to protect our intellectual property effectively, our business would be harmed.
We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. As of September 30, 2019, worldwide we owned or exclusively licensed over 185 issued or allowed patents and 465 pending patent applications. We also license additional patents on anon-exclusive and/or territory restricted basis. We continue to file new patent applications to attempt to obtain further legal protection of the full range of our technologies. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us and we may incur substantial litigation costs in our attempts to recover or restrict the use of our intellectual property.
Our success depends in part on obtaining patent protection for our products and processes, preserving trade secrets, patents, copyrights and trademarks, operating without infringing the proprietary rights of third parties and acquiring licenses for technology or products. We may exercise our business judgment and choose to relinquish rights in trade secrets by filing applications that disclose and describe our inventions and certain trade secrets when we seek patent protection for certain of our products and technology. We cannot assure investors that any of our currently pending or future patent applications will result in issued patents and we cannot predict how long it will take for such patents to be issued. Further, in some cases, we have only filed provisional patent applications on certain aspects of our products and technologies and each of these provisional patent applications is not eligible to become an issued patent until, among other things, we file anon-provisional patent application within 12 months of the filing date of the applicable provisional patent application. Such provisional patents may not become issued patents for a variety of reasons, including our failure to file anon-provisional patent application within the permitted timeframe or a decision that doing so no longer makes business or financial sense. Publications of discoveries in scientific literature often lag behind the actual discoveries and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or in some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain, despite the importance of seeking patent protection in our industry.
Further, we cannot assure investors that other parties will not challenge any patents issued to us or that courts or regulatory agencies will hold our patents to be valid or enforceable. We cannot guarantee investors that we will be successful in defending challenges made against our patents and patent applications, even if we spend significant resources defending such challenges. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents and could deprive us of the ability to prevent others from using the technologies claimed in such issued patents.
Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents.
In addition to pursuing patents on our technology, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time consuming and the outcome would be unpredictable.
We also seek trademark registration to protect key trademarks such as our 10X and CHROMIUM marks, however, we have not yet registered all of our trademarks in all of our current and potential markets. If we apply to register these trademarks, our applications may not be allowed for registration and our registered trademarks may not be maintained or enforced. In addition, opposition or cancellation proceedings may be filed against our trademark applications and registrations and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.
With respect to all categories of intellectual property protection, our competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. In addition, competitors may develop their own versions of our products in countries where we did not apply for patents, where our patents have not issued or where our intellectual property rights are not recognized and compete with us in those countries and markets.
The laws of some countries do not protect intellectual property rights to the same extent as the laws of the United States and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents. The legal systems in certain countries may also favor state-sponsored or companies headquartered in particular jurisdictions over our first-in-time patents and other intellectual property protection. We are aware of incidents where such entities have stolen the intellectual property of domestic companies in order to create competing products and we believe we may face such circumstances ourselves in the future. In the Office of the United States Trade Representative (“USTR”) annual “Special 301” Report released in 2019, the adequacy and effectiveness of intellectual property protection in a number of foreign countries were analyzed. A number of countries in which both we and our distributors operate are identified in the report as being on the Priority Watch List. In China, for instance, the USTR noted a range of IP-related concerns, including a need to “strengthen IP protection and enforcement, including as to trade secret theft, online piracy and counterfeiting, the high volume manufacture and export of counterfeit goods, and impediments to pharmaceutical innovation”. The absence of harmonized intellectual property protection laws and effective enforcement makes it difficult to ensure consistent respect for patent, trade secret, and other intellectual property rights on a worldwide basis. As a result, it is possible that we will not be able to enforce our rights against third parties that misappropriate our proprietary technology in those countries.
The U.S. law relating to the patentability of certain inventions in the life sciences is uncertain and rapidly changing, which may adversely impact our existing patents or our ability to obtain patents in the future.
Various courts, including the U.S. Supreme Court, have rendered decisions that impact the scope of patentability of certain inventions or discoveries relating to the life sciences. Specifically, these decisions stand for the proposition that patent claims that recite laws of nature (for example, the relationships between gene expression levels and the likelihood of risk of recurrence of cancer) are not themselves patentable unless those patent claims have sufficient additional features that provide practical assurance that the processes are genuine inventive applications of those laws rather than patent drafting efforts designed to monopolize the law of nature itself. What constitutes a “sufficient” additional feature is uncertain. Furthermore, in view of these decisions, in December 2014 the USPTO, published revised guidelines for patent examiners to apply when examining process claims for patent eligibility. This guidance was updated by the USPTO in July 2015 and additional illustrative examples provided in May 2016. The USPTO provided additional guidance on examination procedures pertaining to subject matter eligibility in April 2018 and June 2018. The guidance indicates that claims directed to a law of nature, a natural phenomenon or an abstract idea that do not meet the eligibility requirements should be rejected asnon-statutory, patent ineligible subject matter; however, method of treatment claims that practically apply natural relationships should be considered patent eligible. We cannot assure you that our patent portfolio will not be negatively impacted by the current uncertain state of the law, new court rulings or changes in guidance or procedures issued by the USPTO. From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the USPTO may change the standards of patentability and validity of patents within the life sciences and any such changes could have a negative impact on our business.
Risks related to ownership of our Class A common stock
The market price of our Class A common stock may be volatile, which could result in substantial losses for investors.
The trading price of our Class A common stock has been and may continue to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this report, these factors include:
the timing of our launch of future products and degree to which the launch and commercialization thereof meets the expectations of securities analysts and investors;
the outcomes of and related rulings in the litigation and administrative proceedings in which we are currently or may in the future become involved;
the timing and rate of market acceptance of our Next GEM microfluidic chips, the successful transition of our customers to our Next GEM microfluidic chips and our ability to make our Next GEM microfluidic chip work with all of our solutions;
the failure or discontinuation of any of our product development and research programs;
changes in the structure or funding of research at academic and research laboratories and institutions, including changes that would affect their ability to purchase our instruments or consumables;
the success of existing or new competitive businesses or technologies;
announcements about new research programs or products of our competitors;
developments or disputes concerning patent applications, issued patents or other proprietary rights;
the recruitment or departure of key personnel;
litigation and governmental investigations involving us, our industry or both;
regulatory or legal developments in the United States and other countries;
volatility and variations in market conditions in the life sciences sector generally, or the genomics sector specifically;
investor perceptions of us or our industry;
the level of expenses related to any of our research and development programs or products;
actual or anticipated changes in our estimates as to our financial results or development timelines, variations in our financial results or those of companies that are perceived to be similar to us or changes in estimates or recommendations by securities analysts, if any, that cover our Class A common stock or companies that are perceived to be similar to us;
whether our financial results meet the expectations of securities analysts or investors;
the announcement or expectation of additional financing efforts;
stock-based compensation expense under applicable accounting standards;
sales of our Class A common stock or Class B common stock by us, our insiders or other stockholders;
the expiration of market standoff orlock-up agreements;
general economic, industry and market conditions;
natural disasters or major catastrophic events; and
| • | | the other factors described in this “Risk factors” section.
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In recent years, stock markets in general, and the market for life sciences technology companies in particular (including companies in the genomics, biotechnology, diagnostics and related sectors), have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of the companies whose stock is experiencing those price and volume fluctuations. Broad market and industry factors may seriously affect the market price of our Class A common stock, regardless of our actual operating performance. In the past, when the market price of a stock has been volatile, securities class action litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
Sales of a substantial number of shares of our Class A common stock by our existing stockholders could cause the price of our Class A common stock to decline.
Sales of a substantial number of shares of our Class A common stock in the public market could occur at any time following the expiration of the market standoff andlock-up agreements executed in connection with our IPO, the early release of these agreements or the perception in the market that the holders of a large number of shares of Class A common stock intend to sell shares and any of these events could reduce the market price of our Class A common stock.
Moreover, holders of shares of our Class B common stock have rights, subject to conditions, to require us to file registration statements with the SEC covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We have also registered all shares of Class A common stock that we may issue under our equity compensation and employee stock purchase plans. These shares can be freely sold in the public market upon issuance and, if applicable, vesting, subject to volume limitations applicable to affiliates under Rule 144 and Rule 701 and thelock-up agreements described in preceding paragraph. Sales of Class A common stock in the public market as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the trading price of our Class A common stock to fall and make it more difficult for you to sell shares of our Class A common stock.
Raising additional capital may cause dilution to our existing stockholders or restrict our operations.
We anticipate that we will seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements in the future to fund our operations. We, and indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any
future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings. Our decision to issue debt or equity securities will also depend on contractual, legal and other restrictions that may limit our ability to raise additional capital. For example, the terms of our Loan and Security Agreement prohibit, subject to certain exceptions, our ability to incur additional indebtedness. Further, our election to borrow up to an additional $20.0 million of term loans under the Loan and Security Agreement would obligate us to issue warrants to purchase 133,000 shares of our Class A common stock at an exercise price of $1.62 per share to the lender thereof, which will result in further dilution of your ownership interest. To the extent that we raise additional capital through the sale of equity or debt securities, your ownership interest will be diluted and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of indebtedness would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Certain of the foregoing transactions may require us to obtain stockholder approval, which we may not be able to obtain.
The multi-class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of our IPO and may depress the trading price of our Class A common stock.
Our Class A common stock has one vote per share and our Class B common stock has ten votes per share, except as otherwise required by law. Because of theten-to-one voting ratio between our Class B common stock and Class A common stock, the holders of our Class B common stock collectively control a majority of the combined voting power of our common stock and therefore are able to control all matters submitted to our stockholders for approval. This concentrated control is expected to limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes where sole dispositive power and exclusive voting control with respect to the shares of Class B common stock is retained by the transferring holder and transfers between ourco-founders. In addition, each outstanding share of Class B common stock held by a stockholder who is a natural person, or held by the permitted entities of such stockholder (as described in our amended and restated certificate of incorporation), will convert automatically into one share of Class A common stock upon the death of such natural person. In the event of the death or permanent and total disability of aco-founder, shares of Class B common stock held by suchco-founder or his permitted entities will convert to Class A common stock, provided that the conversion will be deferred for nine months, or up to 18 months if approved by a majority of our independent directors, following his death or permanent and total disability. Transfers between ourco-founders are permitted transfers and will not result in conversion of the shares of Class B common stock that are transferred. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those individual holders of Class B common stock who retain their shares in the long term.
In addition, in July 2017, FTSE Russell and Standard & Poor’s announced that they would cease to allow most newly public companies utilizing dual or multi-class capital structures to be included in their indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which together make up the S&P Composite 1500. Under the announced policies, our multi-class capital structure makes us ineligible for inclusion in any of these indices, and as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will not be investing in our stock. These policies are new and it is as of yet unclear what effect, if any, they have had and will have on the valuations of publicly traded companies excluded from the indices, but it is possible that they may depress these valuations compared to those of other similar companies that are included.
We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our Class A common stock less attractive to investors.
We are an “emerging growth company”, as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted by SEC rules and plan to rely on exemptions from certain disclosure requirements that are applicable to otherSEC-registered public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the SOX, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, the information we provide stockholders will be different than the information that is available with respect to other public companies. We cannot predict whether investors will find our Class A common stock less attractive if we rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We have incurred and will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices, including maintaining an effective system of internal controls over financial reporting.
As a public company, and particularly after we are no longer an emerging growth company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. The Dodd-Frank Wall Street Reform and Consumer Protection Act, SOX, the listing requirements of Nasdaq and other applicable federal and Delaware rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. We expect that we will need to hire additional accounting, finance and other personnel in connection with our being a public company and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
The rules and regulations applicable to us as a public company and recent trends in the insurance market have made it more expensive for us to obtain director and officer liability insurance. We have currently obtained only director and officer liability coverage (commonly referred to as “Side A” coverage). This means that while our directors and officers have direct insurance coverage for acts which the company is not legally required or permitted to indemnify them, the company itself does not have coverage for amounts incurred in defending, among other things, stockholder derivative or securities class action lawsuits or in the event of certain investigative actions, for amounts it must pay as a result of such suits or amounts it must pay to indemnify our directors or officers. We are in essence self-insuring for these costs. Any costs incurred in connection with such litigation could have a material adverse effect on our business, financial condition and results of operations.
In September 2018, California enacted a law that requires publicly held companies headquartered in California to have at least one female director by the end of 2019 and at least three by the end of 2021, depending on the size of the board. The law would impose financial penalties for failure to comply. We are currently in compliance with the requirements of the law but we may incur costs associated with complying with the law in future years, including costs associated with expanding our board of directors or identifying qualified candidates for appointment to our board of directors, or financial penalties or harm to our brand and reputation if we fail to comply. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Pursuant to SOX Section 404, we will be required to furnish a report by our management on our internal control over financial reporting beginning with our second annual filing of an Annual Report on Form10-K with the SEC after we become a public company. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with SOX Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by SOX Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
As a public company, we are required to file with the SEC annual and quarterly information and other reports that are specified in Section 13 of the Exchange Act. We are also required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. We are also subject to other reporting and corporate governance requirements, including the requirements of Nasdaq and certain provisions of SOX and the regulations promulgated thereunder, which impose significant compliance obligations upon us. As a public company, we have to and will continue to, among other things:
prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and applicable Nasdaq rules;
create or expand the roles and duties of our board of directors and committees of the board;
institute more comprehensive financial reporting and disclosure compliance functions;
supplement our internal accounting, auditing and reporting function, including hiring additional staff with expertise in accounting and financial reporting for a public company;
enhance and formalize closing procedures at the end of our accounting periods;
enhance our internal audit and tax functions;
enhance our investor relations function;
establish new internal policies, including those relating to disclosure controls and procedures; and
involve and retain to a greater degree outside counsel and accountants in the activities listed above.
We may not be successful in implementing these requirements and the significant commitment of resources required for implementing them could adversely affect our business, financial condition and results of operations. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our results of operations on a timely and accurate basis could be impaired and we could suffer adverse regulatory consequences or violate the Nasdaq rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.
The requirements of being a public company require a significant commitment of resources and management oversight that has increased and may continue to increase our costs and might place a strain on our systems and resources. As a result, our management’s attention might be diverted from other business concerns. If we fail to maintain an effective internal control environment or to comply with the numerous legal and regulatory requirements imposed on public companies, we could make material errors in, and be required to restate, our financial statements. Any such restatement could result in a loss of public confidence in the reliability of our financial statements and sanctions imposed on us by the SEC. In addition, the rules and regulations imposed on public companies are often subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our Class A common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, may discourage, delayas amended, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporationaddress certain administrative and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:
any transaction that would result in a change in control of our company requires the approval of a majority of our outstanding Class B common stock voting as a separate class;
our multi-class common stock structure provides our holders of Class B common stock with the ability to significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majorityother nonmaterial matters. The foregoing summary and description of the sharesprovisions of our outstanding Class A common stock and Class B common stock;
our board of directors is classified into three classes of directors with staggered three-year terms and directors are only ablethe Bylaws does not purport to be removed from office for causecomplete and is qualified in its entirety by reference to the affirmative vote of holders of at leasttwo-thirdsfull text of the voting powerBylaws, a copy of our then outstanding capital stock;
certain amendments to our amendedwhich is filed as Exhibit 3.2 with this Quarterly Report on Form 10-Q and restated certificateis incorporated herein by reference.
Item 6. Exhibits.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit Number | | | | Incorporated by Reference |
| Exhibit Title | | Form | | File No. | | Exhibit | | Filing Date |
| 3.1 | | | | 8-K | | 001-39035 | | 3.1 | | 9/16/2019 |
| 3.2 | | | | | | | | | | |
| 4.1 | | | | S-1 | | 333-233361 | | 4.2 | | 8/19/2019 |
| 10.1+ | | | | | | | | | | |
| 10.2+ | | | | | | | | | | |
| 31.1 | | | | | | | | | | |
| 31.2 | | | | | | | | | | |
| 32.1* | | | | | | | | | | |
| 32.2* | | | | | | | | | | |
| 101.INS | | Inline XBRL Instance Document. | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | |
| 104 | | Cover Page Interactive Data File (the Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | | | | | | |
+ Management contract or compensatory plan or arrangement.
* This certification is deemed not filed for purposes of stockholders holdingtwo-thirdsSection 18 of the voting power of our then outstanding capital stock;
any stockholder-proposed amendment to our amended and restated bylaws requires the approval of stockholders holdingtwo-thirds of the voting power of our then outstanding capital stock;
our stockholders are only able to take action at a meeting of stockholders and are not able to take action by written consent for any matter;
our stockholders are able to act by written consent only if the action is first recommendedExchange Act, or approved by the board of directors;
vacancies on our board of directors are able to be filled only by our board of directors and not by stockholders;
only our chairman of the board of directors, chief executive officer or a majority of the board of directors are authorized to call a special meeting of stockholders;
certain litigation against us can only be brought in Delaware;
our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued, without the approval of the holders of our capital stock; and
advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our Class A common stock.
Our amended and restated bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated bylaws provide that, unless we consent in writingotherwise subject to the selectionliability of an alternative forum, (i)that section, nor shall it be deemed incorporated by reference into any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, stockholders or employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine of the law of the State of Delaware shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, the federal district court of the State of Delaware. Nothing in our amended and restated bylaws precludes stockholders that assert claimsfiling under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, or any successors thereto, from bringing such claims in state or federal court, subject to applicable law.
Any person or entity purchasing or otherwise acquiring or holding any interest in anyAct.
ContentsItem 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sales of Unregistered Securities
During the third quarter of 2019, we granted stock options to purchase an aggregate of 842,475 shares of Class A common stock to certain of our employees and service providers under our Amended and Restated 2012 Stock Plan (the “2012 Plan”) at an exercise price per share of $30.00, for an aggregate exercise price of approximately $25.3 million.
During the third quarter of 2019, we issued and sold to certain of our employees and service providers an aggregate of 508,120 shares of Class A common stock not otherwise registered under the Securities Act upon the exercise of options under our 2012 Plan at exercise prices per share ranging from $0.21 to $11.48, for an aggregate exercise price of approximately $1.0 million, representing a weighted-average exercise price per share of approximately $1.99.
On September 19, 2019, we issued an aggregate of 161,373 shares of Class A common stock (the “September 19 Warrant Shares”) to an accredited investor upon the cashless exercise of the investor’s then outstanding warrants to purchase an aggregate of 164,099 shares of Class A common stock. The aggregate exercise price of the September 19 Warrant Shares was approximately $0.2 million, representing a weighted-average exercise price per share of approximately $1.03.
On September 20, 2019, we issued an aggregate of 99,651 shares of Class A common stock (the “September 20 Warrant Shares” and, together with the September 19 Warrant Shares, the “Warrant Shares”) to two accredited investors upon the cashless exercises of the investors’ then outstanding warrants to purchase an aggregate of 102,000 shares of Class A common stock. The aggregate exercise price of the September 20 Warrant Shares was approximately $0.1 million, representing a weighted-average exercise price per share of approximately $1.41.
The offers, sales and issuances of the securities described above were exempt from registration under the Securities Act under either (1) Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under Rule 701 or (2) Section 4(a)(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients of such securities, other than the Warrant Shares, were our employees, consultants, directors or other service providers and they received the securities under our 2012 Plan. The recipients of the Warrant Shares are accredited investors. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions.
Use of Proceeds
On September 11, 2019, our Registration Statement on FormS-1 (FileNo. 333-233361) relating to the IPO of our Class A common stock was declared effective by the SEC. Pursuant to such Registration Statement, we sold an aggregate of 11,500,000 shares of our common stock, including 1,500,000 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, at a price of $39.00 per share. Including the underwriters’ option exercise, the aggregate gross proceeds from the offering were $448.5 million, before deducting underwriting discounts and commissions and estimated offering expenses. J.P. Morgan LLC, Goldman Sachs & Co. LLC and BofA Merrill Lynch acted as lead joint book-running managers for the offering. Cowen acted as lead manager for the offering. On September 16, 2019, we closed the sale of such shares, resulting in aggregate cash proceeds to us of approximately $410.8 million, net of underwriting discounts, commissions and offering expenses paid or payable by us. No offering expenses were paid or are payable, directly or indirectly, to our directors or officers, to persons owning 10% or more of any class of our equity securities or to any of our affiliates.
There has been no material change in the expected use of the net proceeds from our IPO, as described in our final prospectus filed with the SEC on September 12, 2019 pursuant to Rule 424(b) under the Securities Act.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
+ | Management contract or compensatory plan or arrangement.
|
* | This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
|
SignaturesSignatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | | | 10x Genomics, Inc. |
| | | |
Date: November 12, 2019 | | | 2, 2022 | By: | | /s/ Serge Saxonov |
| | | | | | Serge Saxonov |
| | | | | | Chief Executive Officer and Director |
| | | | | | (Principal Executive Officer) |
| | | |
Date: November 12, 2019 | | | 2, 2022 | By: | | /s/ Justin J. McAnear |
| | | | | | Justin J. McAnear |
| | | | | |
Chief Financial Officer |
| | | | | |
(Principal Financial and Accounting Officer) |
