10x Genomics, Inc. - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
_____________________
(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, 2022
OR
| ☐ | 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
10x Genomics, Inc.
(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) | ||||
(925) 401-7300
(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 Regulation S-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, 2022, the registrant had 95,596,266 shares of Class A common stock, $0.00001 par value per share, outstanding and 18,867,255 shares of Class B common stock, $0.00001 par value per share, outstanding.
Table of Contents
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10x Genomics, Inc.
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, including statements concerning our plans, objectives, goals, beliefs, business strategies, 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,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” 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 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” in this Quarterly Report and Part I, Item 1A of our Annual Report on Form 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. 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” in our Annual Report and this Quarterly Report, as such risk factors may be updated from time to time in our periodic filings with the U.S. Securities and Exchange 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 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 to reflect events or circumstances after the date of this Quarterly Report 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, 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,” “10x” and similar references refer to 10x Genomics, Inc. and its subsidiaries.
1
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 and
https://www.linkedin.com/company/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 and 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.
2
10x Genomics, Inc.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
10x Genomics, Inc.
Condensed Consolidated Balance Sheets
(In 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.
3
10x Genomics, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
| 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.
4
10x Genomics, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
| 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.
5
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, 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 | |||||||||||||||||||||||||||
6
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.
7
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.
8
o
1. Description of Business and Basis of Presentation
Organization and Description of Business
10x Genomics, Inc. (the “Company”) is 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. The Company’s integrated solutions include the Company’s Chromium Controller, Chromium Connect and Chromium X Series instruments, which the Company refers to as “Chromium instruments,” the Company's Visium CytAssist instrument and the Company’s proprietary microfluidic chips, slides, reagents and other consumables for the Company's Chromium and Visium solutions, which the Company refers to as “consumables.” The Company bundles its software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. The Company was incorporated in the state of Delaware in July 2012 and began commercial and manufacturing operations and selling its instruments and consumables in 2015. The Company is headquartered in Pleasanton, California and has wholly-owned subsidiaries in Asia, Europe and North America.
Basis of Presentation
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, 2021 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 transactions and balances have been 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, 2021 included in the Company's Annual Report on Form 10-K filed with the SEC on February 18, 2022 (our "Annual Report").
2. Summary of Significant Accounting Policies
There were no material changes in the Company's significant accounting policies during the three and nine months ended September 30, 2022, except as set forth below. See Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's Annual Report, for information regarding the Company's significant accounting policies.
Marketable Securities
The Company designates investments in debt securities as available-for-sale. Available-for-sale debt securities with original maturities of three months or less from the date of purchase are 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
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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 are comprised of money market funds and cash which are classified as Level 1 in 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 most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 - Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3 - Unobservable inputs that are significant to the measurement of the fair value of the assets or 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 market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third party-data providers, including but not limited to, benchmark yields, interest rate curves, reported trades, broker/dealer quotes and reference data.
Revenue Recognition
The Company generates revenue from sales of products and services, and its products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-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
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
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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 equity 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 not 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 performance 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 RSUs based on the closing price of its stock, which is listed on the Nasdaq Stock Market LLC, at the date of the grant. The Company estimates the fair value of stock option awards under an equity incentive plan and stock purchase rights under an ESPP on the grant date using the Black-Scholes option-pricing model. The fair values of stock-based awards excluding 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.
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. The Company calculated the expected term using the simplified method, which is the mid-point between the vesting and contractual term. Due to the short trading period of the Company's stock, the Company has estimated volatility by reference to the historical volatilities 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.
For PSAs, the Company derives the requisite service period for each separately vesting portion of the 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. The derived service period is the median duration of the successful stock price paths to meet the respective escalating stock price thresholds as simulated in the Monte Carlo valuation model which uses assumptions such as volatility, risk-free interest rate, cost of equity and dividend estimated for the performance 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 a cumulative catch-up expense will be recorded during the period in which the market condition is met.
3. Restructuring
On August 3, 2022, the Company implemented a reduction in force plan in order to decrease costs and maintain a streamlined organization to support the business. Restructuring charges of $4.2 million associated with this plan, comprised primarily of severance-related costs, were recorded in the three months ended September 30, 2022.
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The following table is a summary of restructuring costs related to the restructuring as of September 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 $2.5 million were recorded in cost of revenue, research and development expense, and selling, general and administrative expense, respectively, in the Company's condensed consolidated statements of operations during the three months ended September 30, 2022. No additional restructuring charges are expected to be incurred and the restructuring activities are expected to be substantially completed by the end of the fourth quarter of 2022.
4. Other Financial Statement Information
Available-for-sale Securities
Available-for-sale securities at September 30, 2022 consisted of the following (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 December 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 following (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 | |||||||
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Accrued Compensation and Related Benefits
Accrued compensation and related benefits were comprised of the following as of the dates indicated (in thousands):
| 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, 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 | |||||||
Product Warranties
Changes in the reserve for product warranties were as follows for the periods indicated (in thousands):
| 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, 2022, the aggregate amount of 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 $9.4 million, of which approximately $6.6 million is expected to be recognized to revenue in the next 12 months, with the
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remainder thereafter. The contract liabilities of $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.
The following revenue recognized for the periods were included in contract liabilities as of December 31, 2021 and 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, | ||||||||||||||||||||||
| 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, | ||||||||||||||||||||||
| 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 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 commenced in the nine months ended September 30, 2022. The sole outstanding component is expected to commence in 2023 and 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.
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Future net lease payments related to the Company’s operating lease liabilities as of September 30, 2022 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 operating leases as of September 30, 2022:
| 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 | % | |||||||
Litigation
The Company is regularly 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 future.
Nanostring
On May 6, 2021, the Company filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring'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 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, 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 infringement of U.S. Patent No. 10,662,467. Nanostring filed its answer to the 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 filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring'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 U.S. Patent Nos. 11,293,051, 11,293,052 and 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 the Company's Visium products infringe U.S. Patent No. 11,377,689. The Company filed its answer to Nanostring's counterclaim in the CosMx Action on August 30, 2022. Discovery and trial are consolidated with the Company's claims against Nanostring in the CosMx Action. The Company believes Nanostring's counterclaim in the CosMx Action is meritless and intends to vigorously defend itself.
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On October 20, 2022, Nanostring filed a separate suit against the Company in the U.S. District Court for the District of Delaware alleging that the Company'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 no case schedule has been set. The Company believes Nanostring's claim in the Nanostring Action is meritless and intends to vigorously defend itself.
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 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, the Company filed suit against Vizgen, 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 claims for 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. 11,098,303. Vizgen also filed counterclaims alleging that the Company tortiously interfered with Vizgen's contractual and 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 these claims are meritless and intends to vigorously defend itself.
Parse
On August 24, 2022, the Company filed suit against Parse Biosciences, Inc. ("Parse") in the U.S. District Court for the District of Delaware alleging that Parse’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 a motion to dismiss alleging that the asserted claims are directed to patent ineligible subject matter. The Company has not yet filed its response. Discovery has not yet commenced and no case schedule has been set.
6. Capital Stock
As of September 30, 2022, the number of shares of Class A common stock and Class B common stock issued and outstanding were 95,561,247 and 18,867,255, respectively.
The following table represents the number of shares of Class B common 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 | |||||||||||||||||||
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7. Equity Incentive Plans
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, | ||||||||||||||||||||||
| 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 the nine months ended September 30, 2022 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 nine months ended September 30, 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 granted 709,025 PSAs including performance stock options and RSUs under the 2019 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 met any time prior to the fourth anniversary of the date of grant. The vesting of the PSAs can also be triggered upon certain change in control events and achievement of certain change in control price thresholds, or in the event of death or disability.
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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:
| 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 | |||||||||||||||||||
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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 and our audited consolidated financial statements and notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on 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” in this Quarterly Report and Part I, Item 1A of 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 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.
Overview
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 Controller, Chromium Connect and Chromium X Series, which we refer to as “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 our Chromium and Visium solutions, which we refer to as “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. Customers purchase instruments and consumables from us for use in their experiments. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our instruments.
Since our inception in 2012, we have incurred net losses in each year. Our net losses were $41.9 million and $148.8 million for the three and nine months ended September 30, 2022 and $17.2 million and $39.8 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, we had an accumulated deficit of $1.0 billion, and, cash, cash equivalents and marketable securities totaling $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.
Operational Effectiveness in the COVID-19 Environment
We continue to closely monitor developments surrounding the COVID-19 pandemic including, among other developments, the potential impacts of variants. Many of our customers continue to navigate COVID-19 related challenges that we believe 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 procuring materials, equipment and components required for their experiments. For example, we believe COVID-19 related lockdowns in China have continued to negatively impact our revenues in the quarter ended September 30,
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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 experienced any material impacts as a result of such challenges.
There is considerable uncertainty about the duration of the ongoing impacts of COVID-19. We expect COVID-19 to continue to impact our operating results, however, the extent of the financial impact and duration cannot be reasonably estimated at this time. For further discussion of the risks relating to the impacts of the COVID-19 pandemic, see the section titled “Risk Factors,” generally, and “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 Annual Report, which is incorporated by reference into this Quarterly Report.
Results of Operations
| 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, 2022 and 2021
Revenue
| 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 $5.8 million, or 5%, to $131.1 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Instruments revenue increased $3.8 million, or 22%, to $20.9 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to higher volume of instruments sold. Consumables revenue increased $2.0 million, or 2%, to $108.1 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by growth due to the addition of new customers, partially offset by unfavorable currency fluctuations.
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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. 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 decreased demand due to limited laboratory productivity arising from the continued impact of the global COVID-19 pandemic, including lockdowns in China, delayed purchases by customers impacted by a previously disclosed process breakdown in our logistics cold-chain, execution challenges and unfavorable currency fluctuations.
Cost of revenue, gross profit and gross margin
| 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 $5.9 million, or 24%, to $30.4 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase was primarily driven by higher manufacturing costs of $4.2 million due to increased 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 resulting 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 from higher manufacturing costs due to increased sales and higher costs of newly introduced products, $3.3 million of higher royalty expenses, $2.4 million of higher inventory scrap and excess and obsolete inventory charges, and $1.7 million of higher warranty costs.
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 supply 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 23%, to $67.3 million for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. The increase was primarily driven by an increase in personnel expenses of $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 of $2.1 million used to support our research and development efforts.
Research and development expenses increased $52.2 million, or 35%, to $202.1 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 an increase in personnel expenses of $30.6 million, including $11.2 million in stock-based compensation expense and $1.4 million in restructuring expense, higher costs of laboratory materials and supplies of $10.1 million used to support our research and
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development efforts, $8.9 million of higher costs for facilities and information technology to support operational expansion, higher consulting and professional services of $1.4 million for product development, and $0.9 million of higher depreciation.
Selling, general and administrative expenses increased $11.3 million, or 18%, to $73.4 million for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. 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.
Provision for Income Taxes
The Company's provision for income taxes was $1.9 million and $3.2 million, respectively, for the three and nine months ended September 30, 2022 and $0.5 million and $2.1 million, respectively, for the three and nine months ended September 30, 2021. The provision for income taxes consists primarily of foreign taxes. Deferred tax assets related to our domestic operations are fully offset by a valuation allowance.
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Liquidity and Capital Resources
As of September 30, 2022, we had $234.0 million in cash and cash equivalents which were primarily held in U.S. bank deposit accounts and money market funds and $218.4 million in marketable securities. Short-term restricted cash of $0.5 million and long-term restricted cash of $7.1 million primarily serves as collateral for outstanding letters of credit for facilities. We have generated negative cumulative cash flows from operations since inception through the nine months ended September 30, 2022, and we have generated losses from operations since inception as reflected in our accumulated deficit of $1.0 billion.
We currently anticipate making aggregate capital expenditures of between approximately $80 million and $90 million during the next 12 months, approximately two thirds of which we expect to incur for construction costs of the facilities on our property in Pleasanton, California, as well as other global facilities and 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 and the introduction of new products. We take 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.
While 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 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.
Sources of liquidity
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 the incurrence of indebtedness. In September 2019, we completed our initial public offering for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, after deducting offering costs, underwriting discounts and commissions.
The following table summarizes our cash flows for the periods indicated:
| 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 used in operating activities of $47.3 million for the nine months ended September 30, 2022 was primarily due to a net loss of $148.8 million, net 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 $18.8 million, amortization of leased
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right-of-use assets of $5.7 million, amortization of premium and accretion of discount on marketable securities, net of $0.7 million, and loss on disposal of property and equipment of $0.5 million. The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory of $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 accrued compensation and other related benefits of $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 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 $2.9 million, an increase in deferred revenue of $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.
Investing activities
The net cash used in investing activities of $317.7 million in the nine months ended September 30, 2022 was due to purchases of marketable securities of $282.9 million and property and 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 $79.1 million in the nine months ended September 30, 2021 was due to purchases of property and 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.
Financing activities
The net cash provided by financing activities of $10.8 million in the nine months ended September 30, 2022 was primarily from proceeds of $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 $5.4 million.
The net cash provided by financing activities of $26.4 million in the nine months ended September 30, 2021 was primarily from proceeds of $31.4 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 $5.0 million.
Critical Accounting Estimates
Our condensed consolidated financial statements 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
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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 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 30, 2022, we started to issue market-based performance stock awards ("PSAs") comprising of performance stock options and performance restricted stock units. 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 met any time prior to the fourth anniversary of the date of grant. We estimated the value of the PSA awards granted in the three months ended September 30, 2022 to be approximately $16.0 million using a Monte 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 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.
For financial market risks related to changes in interest rates and foreign currency exchange 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
During the three and nine months ended September 30, 2022, 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 relates primarily to our investment 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 safety and preservation of our invested 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 fixed rate securities may be adversely impacted by increases in interest rates while income earned may decline as a result of decreases in 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 fair value of our 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 to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this 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, 2022.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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10x Genomics, Inc.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are regularly 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 we may become subject to additional types of lawsuits, claims, 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. In 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 and we expect that given the litigious history of our industry and the high profile of operating as a public company, third parties 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.
Nanostring
On May 6, 2021, we filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring'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 infringement of U.S. Patent No. 10,662,467. Nanostring filed its answer to the 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, we filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring'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, we filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 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 20, 2022, Nanostring filed a separate suit against us in the U.S. District Court for the District of Delaware alleging that our Visium products also infringe U.S. Patent No. 11,473,142, a continuation of U.S. Patent No. 11,377,689 (the "Nanostring Action"). We have not yet responded. Discovery has not yet commenced and no case schedule has been set. We believe Nanostring's claim in the Nanostring Action is meritless and we intend to vigorously defend ourselves.
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 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 Vizgen, 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
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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 our claims for 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 our forthcoming Xenium product infringes U.S. Patent No. 11,098,303. Vizgen also filed counterclaims alleging that we tortiously interfered with Vizgen's contractual and business relationship with Harvard and that we engaged in unfair practices under Massachusetts state law. We have not yet responded. We believe these claims are meritless and intend to vigorously defend ourselves.
Parse
On August 24, 2022, we filed suit against Parse Biosciences, Inc. ("Parse") in the U.S. District Court for the District of Delaware alleging that Parse’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 a motion to dismiss alleging that the asserted claims are directed to patent ineligible subject matter. We have not yet filed our response. Discovery has not yet commenced and 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—Risks related to litigation and our intellectual property” under Part I, Item 1A of our Annual Report, which is incorporated by reference into this Quarterly Report.
Item 1A. Risk Factors.
There have been no material changes to our risk factors that we believe are material to our business, results of operations and financial condition from the risk factors previously disclosed in our Annual Report, and any documents incorporated by reference therein, which is accessible on the SEC's website at www.sec.gov.
Item 5. Other Information
On October 28, 2022, the Company adopted Amended and Restated Bylaws (the “Bylaws”), effective as of that date. Amendments contained in the Bylaws include the addition of language to address the adoption by the Securities and Exchange Commission of universal proxy rules requiring any stockholder submitting notice of nomination to use a proxy card color other than white and updates to provisions relating to adjournment procedures and lists of stockholders entitled to vote at stockholder meetings, each to align with recent amendments to the Delaware General Corporation Law, as amended, or to address certain administrative and other nonmaterial matters. The foregoing summary and description of the provisions of the Bylaws does not purport to be complete and is qualified in its entirety by reference to the full text of the Bylaws, a copy of which is filed as Exhibit 3.2 with this Quarterly Report on Form 10-Q and is incorporated herein by reference.
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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 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.
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Signatures
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 2, 2022 | By: | /s/ Serge Saxonov | ||||||
Serge Saxonov Chief Executive Officer and Director (Principal Executive Officer) | ||||||||
| Date: November 2, 2022 | By: | /s/ Justin J. McAnear | ||||||
| Justin J. McAnear Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
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