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Item 5. Market for Registrant’s Common Equity

2021-02-26 compared with 2020-02-27 · 20 added, 996 removed, 12 unchanged (99% of the section changed)

1 unchanged sentence

Market Information

common stock has been listed on the Nasdaq Global Select Market under the symbol TXG since September 12, 2019.

Prior to that date, there was no public trading market for our Class A common stock.

Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “TXG”.

Holders of Common Stock

As of January 31,

2020, there were 91 holders of record of our Class A common stock and 62 holders of record of our Class B common stock.

The actual number of stockholders is greater than this number of record holders and includes stockholders who are

beneficial owners but whose shares are held in street name by brokers and other nominees.

As of January 31, 2021, there were 40 holders of record of our Class A common stock and 20 holders of record of our Class B common stock.

The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.

Dividend Policy

We have never declared or paid any cash dividends on our capital stock.

We currently intend to retain any future earnings and do not expect to pay any

dividends in the foreseeable future.

results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant.

In addition, the terms of our Loan and Security Agreement place certain limitations

on the amount of cash dividends we can pay, even if no amounts are currently outstanding.

We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.

Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant.

In addition, the terms of our Loan and Security Agreement place certain limitations on the amount of cash dividends we can pay, even if no amounts are currently outstanding.

Stock Performance Graph

This graph below is not soliciting material or deemed filed with the SEC for purposes of Section 18 of the

Exchange Act, or otherwise subject to liabilities under that section, and shall not be deemed incorporated by reference into this Annual Report or into any other filing of 10x Genomics, Inc.

under the Securities Act except to the extent that we

specifically incorporate this information by reference therein, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

The following graph compares the cumulative total return to stockholder return on our Class A common stock relative to the cumulative total returns of

the NASDAQ Composite Index and the NASDAQ Biotechnology Composite Index.

An investment of $100 is assumed to have been made in our Class A common stock and each index at market close on September 12, 2019 (the first day of trading of our

common stock) and its relative performance is tracked through December 31, 2019.

Pursuant to applicable Securities and Exchange Commission rules, all values assume reinvestment of the full amount of all dividends, however no dividends have been

declared on our Class A common stock to date.

This graph below is not “soliciting material” or deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to liabilities under that section, and shall not be deemed incorporated by reference into this Annual Report or into any other filing of 10x Genomics, Inc.

under the Securities Act except to the extent that we specifically incorporate this information by reference therein, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

The following graph compares the cumulative total return to stockholder return on our Class A common stock relative to the cumulative total returns of the NASDAQ Composite Index and the NASDAQ Biotechnology Composite Index.

An investment of $100 is assumed to have been made in our Class A common stock and each index at market close on September 12, 2019 (the first day of trading of our common stock) and its relative performance is tracked through December 31, 2020.

Pursuant to applicable Securities and Exchange Commission rules, all values assume reinvestment of the full amount of all dividends, however no dividends have been declared on our Class A common stock to date.

The offering price of our Class A common stock in our initial public offering (“IPO”), which had a closing stock price of $52.75 on September 12, 2019, was $39.00 per share.

stockholder returns shown on the graph below are based on historical results and are not indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.

The stockholder returns shown on the graph below are based on historical results and are not indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.

COMPARISON OF CUMULATIVE TOTAL RETURN

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and the NASDAQ Biotechnology Composite Index

Cumulative Total Return

September 12, 2019 December 31, 2019 December 31, 2020

10x Genomics, Inc.

$ 100 $ 144.55 $ 268.44

NASDAQ Composite Index 100 109.50 157.28

NASDAQ Biotechnology Composite Index $ 100 $ 115.79 $ 145.53

Sales of Unregistered Securities

None during the quarter ended December 31, 2019.

On September 11, 2019, our Registration Statement on Form S-1 (File No.

333-233361) relating to the IPO of our Class A common stock was declared effective by the SEC.

Pursuant to such Registration Statement, we sold an aggregate of 11,500,000 shares of our common stock,

including 1,500,000 shares sold pursuant to the underwriters full exercise of their option to purchase additional shares, at a price of $39.00 per share.

Including the underwriters option exercise, the aggregate gross proceeds from the

offering were $448.5 million, before deducting underwriting discounts and commissions and estimated offering expenses.

Morgan LLC, Goldman Sachs & Co.

LLC and BofA Merrill Lynch acted as lead joint book-running managers for the

Cowen acted as lead manager for the offering.

On September 16, 2019, we closed the sale of such shares, resulting in aggregate cash proceeds to us of approximately $410.8 million, net of underwriting discounts, commissions and

offering expenses paid or payable by us.

No offering expenses were paid or are payable, directly or indirectly, to our directors or officers, to persons owning 10% or more of any class of our equity securities or to any of our affiliates.

There has been no material change in the expected use of the net proceeds from our IPO, as described in our final prospectus filed with the SEC on

September 12, 2019 pursuant to Rule 424(b) under the Securities Act.

Use of Proceeds

There has been no material change in the expected use of the net proceeds from our IPO, as described in our Annual Report on Form 10-K filed with the SEC on February 27, 2020.

Issuer Purchases of Equity Securities

Selected Financial Data.

The selected consolidated statements of operations data for the years ended December 31, 2019, 2018 and 2017, and the selected consolidated balance sheet

data as of December 31, 2019, 2018 and 2017, have been derived from our audited consolidated financial statements and related notes.

You should read the following selected consolidated financial data in conjunction with our consolidated

financial statements and the accompanying notes and the information in Part II, Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations below.

Our historical results are not necessarily

indicative of the results that may be expected for any other period in the future.

Year Ended December 31,

(in thousands, except per share data)

Consolidated statements of operations data:

Cost of revenue(1)

Operating expenses:

Research and development(1)

In-process research and development

Selling, general and administrative(1)

Accrued contingent liabilities

Total operating expenses

Loss from operations

Other income (expense):

Interest income

Interest expense

Other income (expense), net

Total other expense

Loss before provision for income taxes

Provision for income taxes

Net loss per share, basic and diluted(2)

Weighted-average shares used to compute net loss per share, basic and diluted(2)

Includes stock-based compensation expense as follows:

Year Ended December 31,

(in thousands)

Cost of revenue

Research and development

Selling, general and administrative

Total stock-based compensation expense

See Note 2 and Note 11 to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this

Annual Report on Form 10-K for further details on the calculation of net loss per share, basic and diluted, the weighted-average shares used to compute net loss per share stockholders, basic and diluted.

Year Ended December 31,

(in thousands)

Consolidated balance sheet data:

Cash and cash equivalents

Working capital

Total current liabilities

Total liabilities

Total convertible preferred stock

Total stockholders equity (deficit)

Managements 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

audited consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report and our audited consolidated financial statements and notes thereto.

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 under Part I, Item 1A above.

We operate on a fiscal year that ends on

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 chemistry, biology, hardware and software to provide a comprehensive, dynamic and high-resolution view of complex biological systems.

We have launched multiple products that enable researchers to

understand and interrogate biological analytes in their full biological context.

Our commercial product portfolio leverages our Chromium instruments, which we refer to as instruments, and our proprietary microfluidic chips, slides,

reagents and other consumables for both our Visium and Chromium solutions, which we refer to as consumables. We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and

visualization.

Since launching our first product in mid-2015, and as of December 31, 2019, we have sold 1,666 instruments to customers around the world, including 97 of the top 100 global research

institutions as ranked by Nature in 2018 based on publications and 19 of the top 20 global biopharmaceutical companies by 2018 revenue.

Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolutions and on

massive scales, such as at the single cell level for millions of cells.

Our Chromium instruments and Chromium consumables are designed to work together exclusively.

After buying a Chromium instrument, customers purchase consumables from us for use

in their experiments.

Accordingly, as the installed base of our instruments grows, we expect recurring revenue from consumable sales to become an increasingly important driver of our operating results.

As such, our revenue growth is expected to

outpace growth in our instrument placements as our business develops.

In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our Chromium instruments.

For the years ended December 31, 2019 and

2018, sales of our Chromium instruments accounted for 14% and 25% of our revenue, respectively, sales of our consumables accounted for 84% and 74% of our revenue, respectively, and sales of services accounted for 2% and 1% of our revenue,

respectively.

We currently serve thousands of researchers in more than 40 countries.

Our customers include a range of academic,

government, biopharmaceutical, biotechnology and other leading institutions around the globe.

In both the years ended December 31, 2019 and 2018, approximately 70% of our direct sales revenue came from sales to academic institutions.

As of December 31, 2019, we employed a commercial team of over 200 employees, including more than 75 commissioned sales representatives,

many with Ph.D.

degrees and many with significant industry experience.

We follow a direct sales model in North America and certain regions of Europe, representing the majority of our revenue.

We sell our products through third-party distributors in

Asia, certain regions of Europe, Oceania, South America, the Middle East and Africa.

We currently sell our products for research use only.

For the years ended December 31, 2019 and 2018, sales within North America accounted for approximately

57% and 58% of our revenue, respectively.

Revenue increased 68% to $245.9 million in the year ended December 31, 2019 as

compared to $146.3 million in the year ended December 31, 2018, primarily due to the adoption of our instruments by customers and the associated consumables on those instruments.

We focus a substantial portion of our resources on developing new products and solutions.

Our research and development efforts are centered

around improving the performance of our existing assays and software, developing new Chromium solutions such as multi-omics solutions, developing our Visium platform, improving and developing new capabilities for our Chromium platform, developing

combined software and workflows across multiple solutions and investigating new technologies.

We incurred research and development expenses of $83.1 million and $47.5 million for the years ended December 31, 2019 and 2018,

respectively.

We intend to make significant investments in this area for the foreseeable future.

In addition, in 2018, we made acquisitions for an aggregate purchase price of $62.4 million.

There were no similar acquisitions in the year ended

December 31, 2019.

Our instrument manufacturing is contracted out to a third-party contract manufacturer and we manufacture the

majority of our consumable products in-house, with a small amount of our components outsourced to key suppliers.

We have designed our operating model to be capital efficient and to scale efficiently as our

product volumes grow.

Historically, we have financed our operations primarily from the sale of our instruments and consumable products,

the issuance and sale of our convertible preferred stock and common stock and the issuances of debt.

On September 16, 2019, we completed an initial public offering (IPO), in which we sold 11,500,000 shares of Class A common

stock (which included 1,500,000 shares that were offered and sold pursuant to the full exercise of the IPO underwriters option to purchase additional shares) at a price to the public of $39.00 per share.

We received aggregate net proceeds of

$410.8 million after deducting, offering costs, underwriting discounts and commissions of $37.7 million.

Since our inception in

2012, we have incurred net losses in each year.

Our net losses were $31.3 million and $112.5 million for the years ended December 31, 2019 and 2018, respectively.

As of December 31, 2019, we had an accumulated deficit of

$262.4 million and cash and cash equivalents totaling $424.2 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;

invest in processes, tools and infrastructure to support the growth of our business.

In October 2019, we

completed the acquisition of a worldwide royalty-free, nonexclusive license to certain intellectual property as part of the 2019 Becton Dickinson Settlement and Patent Cross License Agreement.

Under the terms of this agreement, we are required to

make aggregate payments of $25 million in annual amounts of $6.25 million over four years beginning in January 2020.

November 2018, we completed the acquisition of Spatial Transcriptomics, a privately held company based in Stockholm, Sweden, for an all cash purchase price of $38.6 million.

With the acquisition of Spatial Transcriptomics, we obtained

intellectual property relating to the spatial interrogation of biological analytes, which we believe will open up the possibilities for discoveries in oncology, neuroscience and immunology, as

well as in the broader area of biology.

Pursuant to the Spatial Transcriptomics acquisition agreement, we are obligated to make contingent payments to the sellers through December 31, 2022.

Aside from this obligation, all of our obligations under the Spatial Transcriptomics acquisition agreement have been fully performed.

November 2018, we completed the acquisition of a worldwide exclusive license to foundational intellectual property relating to spatial analysis technologies from Prognosys Biosciences, Inc.

(Prognosys), for a combination of cash and

common stock for a purchase price of $3.3 million.

All of our obligations under the Prognosys license agreement have been fully performed.

In March 2018, we completed the acquisition of Epinomics, a privately held company based in California, for an all cash purchase price of

$22.2 million.

Epinomicss patent portfolio includes foundational intellectual property and a worldwide exclusive license relating to ATAC-seq, which supplements our existing patent portfolio and

enables us to provide ATAC-seq solutions for single cell and other epigenetic applications.

All of our obligations under the Epinomics acquisition agreement have been fully performed.

Key business metrics

We regularly review

a number of operating and financial metrics, including the instrument installed base and consumable pull-through, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make

strategic decisions.

We believe that these metrics are representative of our current business;

however, we anticipate these may change or may be substituted for additional or different metrics as our business grows and as we introduce new products.

Instrument installed base

As of December 31,

Instrument installed base

Our products are sold to academic, government, biopharmaceutical, biotechnology and other leading institutions

around the globe.

Our Chromium Controller instrument is user installable and does not require in-person training.

Our recently introduced Chromium Connect instrument requires installation and we offer in-person training for its use.

We believe the instrument installed base is one of the indicators of our ability to drive customer adoption of our products.

We define the instrument installed base as the cumulative

number of Chromium instruments sold since inception.

Our quarterly instrument unit volumes can fluctuate due to a number of factors,

including the procurement and budgeting cycles of many of our customers, especially government and academic institutions where unused funds may be forfeited or future budgets reduced if purchases are not made by their fiscal year end.

Similarly, our

biopharmaceutical customers typically have calendar year fiscal years which may result in a disproportionate amount of their purchasing activity occurring during our fourth quarter.

We also believe the timing of unit sales has been impacted and will

continue to be impacted by the timing of product introductions and transitions which can either accelerate or delay demand of existing and new products depending on the needs of individual researchers to conclude existing studies or to use new and

improved product capabilities.

Further, the growth of our market in certain geographic regions and our continued efforts to service these regions impact unit volumes quarter to quarter.

Finally, our recently introduced Chromium Connect instrument

could create variability in our installed base since Chromium Connect instruments require installation and in-person training prior to being added to our instrument installed base.

We therefore believe that an

annual representation of our instrument installed base is most appropriate for assessing trends in our business.

Chromium consumable pull-through per instrument

Year ended December 31,

(in thousands)

Chromium consumable pull-through per instrument

Our consumables portfolio includes proprietary microfluidic chips, slides, reagents and other consumables for

both our Visium and Chromium solutions.

Our Chromium instruments and Chromium consumables are designed to work together exclusively.

This Chromium closed-system model generates recurring revenue from each instrument we sell.

Our growth in the

instrument installed base has been the largest contributor to our growth in consumable sales.

In addition, we believe that annual consumable pull-through per instrument is an indicator of our ability to generate future consumable revenue and the

rate of customer adoption of our new applications.

We define consumable pull-through per instrument as the total consumables revenue in the given quarter divided by the average instrument installed base during that quarter.

We calculate the average

instrument installed base for a given quarter using the instrument installed base as of the last day of the prior quarter and the instrument installed base as of the last day of the given quarter.

We calculate the annual consumable pull-through per

instrument figure by summing the quarterly pull-through for the quarters in a given year.

The figures in the table above represent the annual consumable pull-through per instrument for the years ended December 31, 2019 and 2018.

We do not believe the consumable pull-through per instrument in an individual quarter is an effective indicator of the current state of our

business trends.

Our quarterly consumable pull-through can fluctuate due to a number of factors.

In addition to timing of product transitions such as the Next GEM consumable transition, other factors such as the budget and funding cycles of our

customers can cause our quarterly consumables pull-through fluctuate quarter to quarter.

For example, a significant portion of our current customers are reliant on government funding and research grants.

These funds and grants typically expire at

year end, resulting in a higher consumable pull-through per instrument in the fourth quarter relative to the first three quarters of the year.

Finally, as we continue to expand into new markets globally as well as into new industries, our average

pull-through could be adversely impacted in a particular period.

We therefore believe that an annual, rather than quarterly, representation of our consumable pull-through is most appropriate for assessing trends in our business.

Our current customer base includes customers who purchase consumables for use on a shared or centralized instrument.

We refer to customers who

purchase consumables but do not own an instrument as halo users. For the year ended December 31, 2019, halo users represented close to half of our revenue from sales of consumables.

Halo users, as well as the future introduction of

consumables that may not use instruments, such as our recently introduced Visium solution, or Chromium instruments that are expected to use a greater amount of consumables, such as our Chromium Connect instrument, could reduce the utility of this

metric and make it difficult to compare consumable pull-through per instrument metrics over time.

Key factors affecting our performance

We believe that our financial performance has been and in the foreseeable future will continue to be primarily driven by the following factors.

While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations.

Our ability to successfully

address the factors below is subject to various risks and uncertainties, including those described under the heading Risk Factors .

Instrument sales

Our financial performance has largely been driven by, and in the future will continue to be impacted by, the rate of sales of our Chromium

Management focuses on instrument sales as an indicator of current business success and a leading indicator of likely future sales of consumables.

We expect our instrument sales to continue to grow as we increase penetration in our

existing markets and expand into, or offer new features and solutions that appeal to new markets.

We plan to grow our instrument sales in the coming years through multiple strategies

including expanding our sales efforts globally and continuing to enhance the underlying technology and applications for life sciences research.

As part of this strategy and in an effort to increase the rate of sales of our instruments, we increased

our sales force by 54% from December 31, 2018 through December 31, 2019, with more than 75 commissionable sales representatives as of December 31, 2019.

We regularly solicit feedback from our customers and focus our research and

development efforts on enhancing the Chromium Controller instrument and enabling its ability to use additional applications that address their needs, which we believe in turn helps to drive additional sales of our instruments and consumables.

have developed and recently introduced our Chromium Connect instrument, which is an automated version of our current Chromium Controller instrument.

We believe the automated features of the Chromium Connect will increase our addressable market by

increasing utilization by biopharmaceutical customers.

Our sales process varies considerably depending upon the type of customer to whom

we are selling.

Our sales process with small laboratories and individual researchers is often short, and in some cases, we receive purchase orders from these customers in under a month.

Our sales process with other institutions can be longer with

most customers submitting purchase orders within six months.

Given the variability of our sales cycle, we have in the past experienced, and likely will in the future experience, fluctuations in our instrument sales on a period-to-period basis.

Recurring consumable revenue

We regularly assess trends relating to recurring consumable revenue based on our product offerings, our customer base and our

understanding of how our customers use our products.

As our instrument installed base expands, consumables revenue on an absolute basis is expected to increase and over time should be an increasingly important contributor to our revenue.

We expect our annual consumable pull-through per instrument to be relatively stable as the instrument installed base increases.

Our expansion

into new markets with less experienced users could adversely impact average pull-through, but we expect the sales of our recently introduced Visium Spatial Gene Expression solution as well as the release of new products and applications for our

Chromium instruments and Visium platform to increase consumable pull-through per instrument and offset these declines.

We have reported our Visium product revenue as part of consumable revenue and included it in the average pull-through per

instrument calculation.

Even though Visium is not processed through a Chromium instrument, we will sell the product primarily to Chromium instrument users and view it as pull-through from a business perspective.

Revenue mix and gross margin

Our revenue is derived from sales of our instruments, consumables and services.

There have been fluctuations in the mix between instruments and

consumables and amongst our consumables.

Our consumable revenue as a percentage of total revenue has continued to grow.

Each of our consumables solutions is designed to allow researchers to study a different aspect of biology, such as DNA, RNA,

protein or epigenetics, at a resolution and scale that may be impractical or impossible using existing tools.

As each of our solutions has been introduced, they have been initially purchased by a small number of early adopters.

As these early

adopters successfully perform experiments and publish scientific articles using our solutions, the utility of these solutions is more broadly understood and the solutions are then subsequently adopted by the larger research community.

contribution from these and other consumable products has varied and is expected to vary on a quarterly basis due to several factors, including the publication of scientific papers demonstrating the value of the consumables, the availability of

grants to fund research, budgetary timing and our introduction of new product features and new consumables offerings.

For each of the

years ended December 31, 2019 and 2018, our Single Cell Gene Expression consumables, which were introduced in 2016, accounted for the majority of our consumables revenue.

For the year ended December 31, 2018, the remaining consumables

revenue was substantially comprised of sales of our Single Cell

Immune Profiling consumables, which we introduced in 2017.

For the year ended December 31, 2019, the remaining consumables revenue was substantially comprised of sales of our Single Cell

Immune Profiling consumables and our Single Cell ATAC consumables.

The mix in variance between these periods was attributable to the introduction of our Single Cell ATAC consumables in the fourth quarter of 2018 which was met with significant

initial demand.

Revenue from each of our Single Cell Gene Expression, Single Cell Immune Profiling and Single Cell ATAC consumables increased in absolute dollars period over period.

Revenue contribution from our Single Cell Gene Expression

consumables decreased as a percentage of overall consumables revenue while revenue contribution from our Single Cell Immune Profiling and to a greater extent our Single Cell ATAC consumables increased as a percentage of overall consumables revenue

for the year ended December 31, 2019.

In the fourth quarter of 2019, we introduced our new Visium product, which exhibited high initial demand.

Over time, as our instrument installed base grows and sales of our Visium products increase, we expect consumables revenue to constitute a

larger percentage of revenue.

In addition, our margins are higher for those instruments and consumables that we sell directly to customers as compared to those that we sell through distributors.

While we expect the mix of direct sales as compared to

sales through distributors to remain relatively constant in the near term, we are currently evaluating increasing our direct sales capabilities in certain geographies.

From the fourth quarter of 2016 to the first quarter of 2019, we offered two versions of the Chromium Controller, one at a $125,000 list price

with firmware that enabled the use of all our Chromium consumables and another at a $75,000 list price with firmware that enabled the use of only our Single Cell Chromium consumables.

Beginning in the first quarter of 2019, we standardized our

instrument offering on the fully enabled Chromium Controller with a list price of $75,000.

In addition to this list price reduction, we offered various discount incentives to drive increased product adoption resulting in our Chromium Controller

average selling price decreasing in the year ended 2019 from those realized in 2017 and 2018.

The list prices of our consumables vary by solution.

Future instrument and consumable selling prices and gross margins may fluctuate due to a variety of

factors, including the introduction by others of competing products and solutions or the attempted integration by third parties of capabilities similar to ours into their existing products, such as sequencers.

We aim to mitigate downward pressure on

our average selling prices by increasing the value proposition offered by our instruments and consumables, primarily by, for example, expanding the applications for our instruments and increasing the quantity and quality of data that can be obtained

using our consumables.

In the near term, we expect the reduced accrued royalties related to the

Bio-Rad litigation as described below under Part I, Item 3Legal Proceedings, product mix changes between established products and lower margin new products, and investment in the expansion of

manufacturing, warehousing and product distribution facilities to have the greatest impact on our margins.

In addition to the impact of competing products entering the market, the future margin profiles of our instruments and consumables will depend

upon the outcome of such litigation, any royalties we are required to pay and the royalty rates and products to which such royalties apply.

Continued investment in growth

Our significant revenue growth has been driven by rapid innovation towards novel solutions that command price premiums and quick adoption of

our solutions by our customer base.

In 2019, we introduced four new products or updates to existing products.

We intend to continue to make focused investments to increase revenue and scale operations to support the growth of our business and

therefore expect expenses in this area to increase.

We have invested, and will continue to invest, significantly in our manufacturing capabilities and commercial infrastructure.

The transition to our new Pleasanton global headquarters and research

and development center, which we completed in 2019, will help us achieve these goals in the near term by providing additional manufacturing, research and development and general office space.

We plan to further invest in research and development as

we hire employees with the necessary scientific and technical backgrounds to enhance our existing products and help us bring new products to market, and we expect to incur additional research and

development expenses and higher stock-based compensation expenses as a result.

We also plan to invest in sales and marketing activities, and we expect to incur additional general and

administrative expenses and to have higher stock-based compensation expenses as we support our growth and status as a publicly traded company.

As cost of revenue, operating expenses and capital expenditures fluctuate over time, we may experience

short-term, negative impacts to our results of operations and cash flows, but we are undertaking such investments in the belief that they will contribute to long-term growth.

Acquisitions of key technologies

We have made, and intend to continue to make, investments that meet managements criteria to expand or add key technologies that we

believe will facilitate the commercialization of new products in the future.

Such investments could take the form of an asset acquisition, the acquisition of a business or the exclusive or non-exclusive

license of patented technology.

Any such acquisitions we make may affect our future financial results.

For example, our 2018 acquisitions of Spatial Transcriptomics and Epinomics were largely comprised of purchases of intellectual property which

were expensed as in-process research and development in the quarter during which such acquisitions occurred.

While we have not previously entered into material joint-development, partnership or joint- venture

agreements, we may in the future decide to do so and any such arrangements may limit our rights and the commercial opportunities of any jointly developed technology.

Components of Results of Operations

generate virtually all of our revenue through the sale of our instruments and consumables to customers.

We also generate a small portion of our revenue from instrument service agreements which relate to extended warranties.

Our revenue is subject to

fluctuation based on the foreign currency in which our products are sold, principally for sales denominated in the euro.

consumables is largely driven by the size of our instrument installed base and the volume of consumables sold per instrument.

Beginning in the fourth quarter of 2019, revenue from consumables also includes sales of our Visium products, which do not

require the use of an instrument.

Our instruments and consumables are generally sold without the right of return.

Revenue is recognized as instruments and consumables are shipped.

Revenue is recognized net of any sales incentive, distributor rebates

and commissions and any taxes collected from customers.

Some of our recently announced products, such as our Chromium Connect instrument, may result in our recognizing revenue with respect to such products upon installation rather than upon

Instrument service agreements are typically entered into for a one-year term, with the coverage period beginning after the expiration of the standard one-year

warranty period.

Revenue from the sale of instrument service agreements are recognized ratably over the coverage period.

Since its introduction in May 2019, the revenue attributable to our Next GEM microfluidics chips and associated consumables has

continued to increase.

We expect the transition to Next GEM to have a minimal impact on our revenue since we intend to sell those products at prices similar to the GEM products they are replacing.

Cost of revenue, gross profit and gross margin

Cost of revenue.

Cost of revenue primarily consists of manufacturing costs incurred in the production process

including personnel and related costs, costs of component materials, manufacturing overhead, packaging and delivery costs and allocated costs including facilities and information technology.

We plan to hire additional employees as well as expand our

manufacturing, warehousing and product distribution facilities, including increasing manufacturing automation to support our growth.

In addition, cost of revenue includes royalty costs for licensed technologies included in our products, warranty

costs, provisions for slow-moving and obsolete inventory and personnel and related costs and component costs incurred in connection with our obligations under our instrument service agreements.

Beginning with the three months ended December 31,

2018, we began recording royalty accruals relating to sales of our GEM microfluidic chips and associated consumables, which are the subject of the Bio-Rad litigation discussed in Item I, Part 3 above, as cost

Gross profit/gross margin.

Gross profit is calculated as

revenue less cost of revenue.

Gross margin is gross profit expressed as a percentage of revenue.

Our gross profit and gross margins in future periods are expected to fluctuate from quarter to quarter and will depend on a variety of factors,

market conditions that may impact our pricing;

sales mix changes among consumables, instruments and services;

product mix changes between established products and new products;

excess and obsolete inventories;

structure for manufacturing operations relative to volume;

and product warranty obligations.

We currently anticipate that we will experience an increase in absolute dollars of both revenue and cost of revenue as we grow our business.

Additionally,

we expect gross margins to be positively impacted through the end of 2020 by reduced accrued royalties related to the Bio-Rad litigation.

We expect this positive impact to be reduced, at least partially, by

expenses related to our planned increases in manufacturing and distribution capacity in our Pleasanton, California headquarters as well as in certain locations outside the United States.

As noted above, since Next GEMs introduction in May 2019, we experienced improved gross profit for the year ended December 31,

2019, as we sold more Next GEM microfluidic chips and associated consumables because these products are not subject to the royalty payments to Bio-Rad.

However, consumables subject to the 15% royalty accrual

related to the Bio-Rad litigation still comprised a large percentage of our consumable sales for year ended December 31, 2019.

We expect our gross margins for 2020 will be positively impacted by the

continued transition of our customers to our Next GEM microfluidic chips and associated consumables since these microfluidic chips and associated consumables are not subject to the 15% royalty accrual (See Part I, Item 3 Legal

Proceedings) and have similar selling prices to the GEM products that they are replacing.

Further developments in our litigation with Bio-Rad could have a material impact on our gross margins,

both in the near term and beyond.

Beginning on August 28, 2019, our cost of revenue no longer includes a 15% royalty accrual related

to the Bio-Rad litigation on our instruments, since all Chromium instruments that have been sold since that date operate exclusively with our Next GEM solutions.

As a result, we expect that this will continue

to positively impact gross margins for those instrument sales in the near term.

Because the Next GEM product selling prices and product manufacturing costs are similar to the GEM products they are replacing, we do not anticipate that Next GEM

selling prices and product manufacturing costs will have a significant effect on our gross margins.

Operating expenses

Research and development.

Research and development expense primarily consists of personnel and related costs,

independent contractor costs, laboratory supplies, equipment maintenance prototype and materials expenses, amortization of developed technology and intangibles and allocated costs including facilities and information technology.

We plan to continue to invest significantly in our research and development efforts, including hiring additional employees, to enhance

existing products and develop new products.

We also expect allocated facilities and information technology costs to increase in future periods as a result of higher costs associated with the transition to our global headquarters and research and

development center in Pleasanton, California.

As a result of these and other initiatives, we expect research and development expense will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue.

In-process research and

In-process research and development consists of costs incurred to acquire intellectual property for research and development.

We expect these costs to be recognized

only in periods during which we complete an acquisition of assets comprised in whole or part of intellectual property for research and development.

While we periodically evaluate acquisitions of this nature from time to time, we have no definitive

agreements currently in place to acquire additional intellectual property for research and development.

Selling, general and

administrative.

Selling, general and administrative expense primarily consists of costs related to the selling and marketing of our products, including sales incentives and advertising expenses and costs

associated with our finance, accounting, legal (excluding accrued contingent liabilities), human resources and administrative personnel.

Related costs associated with these functions, such as

attorney and accounting fees, recruiting services, administrative services, insurance, public relations and communication activities, marketing programs and trade show appearances, travel, customer service costs and allocated costs including

facilities and information technology, are also included in selling, general and administrative expenses.

We expect to incur additional

selling, general and administrative expenses due to continued investment in our sales, marketing and customer service efforts to support the anticipated growth of our business.

We also expect increased infrastructure costs, as well as increased

costs for accounting, human resources, legal including litigation-related fees and contingency payments, insurance, investor relations and other costs associated with being a public company.

We expect to continue our hiring, in the United States as

well as internationally, in all these areas in line with the continued growth of our business.

We also expect allocated facilities costs to increase in future periods as a result of higher costs associated with the transition to our global

headquarters and research and development center in Pleasanton, California.

We also expect allocated information technology costs to increase following the expected implementation of a new enterprise resource planning system in 2020.

As a result of

these and other initiatives, we expect selling, general and administrative expenses to vary from period to period as a percentage of revenue and increase in absolute dollars in future periods.

We expect our stock-based compensation expense allocated

to cost of revenue, research and development expenses and selling, general and administrative expenses to increase in absolute dollars.

Accrued contingent liabilities

Accrued contingent liabilities is comprised of changes in our litigation reserve, primarily relating to our litigation with Bio-Rad discussed above under Part I, Item 3Legal Proceedings. The litigation reserve currently consists of accruals we make for our estimated losses in these pending legal

We record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination of which requires significant judgment.

Changes in the reserve are made as we change our estimates or make

payments in damages or settlement.

In the year ended December 31, 2018, we recorded a $30.6 million charge to reflect our best estimate of loss in resolving our ongoing disputes.

In the year ended December 31, 2019, we recorded an

additional $1.5 million charge related to additional pre- and post- judgment interest.

Beginning in the fourth quarter of 2018, we began recording an accrual for estimated royalties as cost of revenue.

For the years ended December 31, 2019 and 2018, we accrued royalties of $29.2 million and $7.4 million, respectively.

As of December 31, 2019 and 2018, the total amount accrued was $68.7 million and $38.0 million,

respectively, comprising of the original charge, the estimated royalties and the interest charges.

Should we ultimately obtain a more favorable outcome in this litigation any reversal of the accrual related to the litigation would be reflected as a

change to this item in the period in which it occurs.

Any reversal for amounts recorded as estimated royalty accruals would be credited to our cost of revenue in such period.

Interest income

Interest income consists of interest earned on our cash and cash equivalents which are invested in bank deposit and in money market funds.

Interest expense

Interest expense consists primarily of interest on our outstanding debt.

Other income (expense), net

Other income (expense), net primarily consists of realized and unrealized gains and losses related to foreign exchange rate remeasurements

recorded from consolidating our foreign subsidiaries each period-end.

Provision for income taxes

Our provision for income taxes consists primarily of foreign taxes and state taxes in the United States.

As we expand the scale and scope of

our international business activities, any changes in the United States and foreign taxation of such activities may increase our overall provision for income taxes in the future.

As of December 31, 2019, we had federal net operating loss carryforwards (NOLs) of approximately $110.7 million and

federal tax credit carryforwards of approximately $12.3 million.

Our federal NOLs generated after January 1, 2018, which total $6.5 million, are carried forward indefinitely, while all of our other federal NOLs and tax credit

carryforwards expire beginning in 2032.

As of December 31, 2019, we had state NOLs of approximately $87 million, which expire beginning in 2032.

In addition, we had state tax credit carryforwards of approximately $11 million, which do

Our ability to utilize such carryforwards for income tax savings is subject to certain conditions and may be subject to certain limitations in the future due to ownership changes.

As such, there can be no assurance that we will be able

to utilize such carryforwards.

We have experienced a history of losses and a lack of future taxable income would adversely affect our ability to utilize these NOLs and research and development credit carryforwards.

We currently maintain a full

valuation allowance against these tax assets.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the

Code), if a corporation undergoes an ownership change, the corporations ability to use its pre-change net operating loss carryforwards and other

pre-change attributes, such as research tax credits, to offset its post-change income may be limited.

In general, an ownership change will occur if there is a cumulative change in our ownership by

5% shareholders that exceeds 50 percentage points over a rolling three-year period.

Similar rules may apply under state tax laws.

We completed a study through the date of our IPO to determine whether an ownership change had occurred

under Section 382 or 383 of the Code, and we determined at that time that an ownership change occurred in 2013.

As a result, our net operating losses generated through November 1, 2013 may be subject to limitation under Section 382 of

The amount of pre-change loss carryforwards which may be subject to this limitation is $4.8 million.

Our ability to use net operating loss carryforwards, research and development credit

carryforwards and other tax attributes to reduce future taxable income and liabilities may be further limited as a result of future changes in stock ownership.

As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards or other pre-change tax attributes to offset United States federal and state taxable income may still be subject to limitations,

which could potentially result in increased future tax liability to us.

Results of Operations

Year Ended December 31,

(in thousands)

Cost of revenue(1)

Operating expenses:

Research and development(1)

In-process research and development

Selling, general and administrative(1)

Accrued contingent liabilities

Total operating expenses

Loss from operations

Other income (expense):

Interest income

Interest expense

Other income (expense), net

Total other expense

Loss before provision for income taxes

Provision for income taxes

Includes stock-based compensation expense as follows:

Year Ended December 31,

(in thousands)

Cost of revenue

Research and development

Selling, general and administrative

Total stock-based compensation expense

The following table sets forth our consolidated results of operations data as a percentage

of revenue for the periods presented.

Year Ended December 31,

Cost of revenue(1)

Operating expenses:

Research and development(1)

In-process research and development

Selling, general and administrative(1)

Accrued contingent liabilities

Total operating expenses

Loss from operations

Other income (expense):

Interest income

Interest expense

Other income (expense), net

Total other expense

Loss before provision for income taxes

Provision for income taxes

Includes stock-based compensation expense as follows:

Year Ended December 31,

(in thousands)

Cost of revenue

Research and development

Selling, general and administrative

Total stock-based compensation expense

Comparison of the Year Ended December 31, 2019 and 2018

Year Ended December 31,

(dollars in thousands)

Revenue increased $99.6 million, or 68%, for the year ended December 31, 2019 as compared to year

ended December 31, 2018.

The increase was driven primarily by an increase in consumables revenue partially offset by lower instrument revenue.

Consumables revenue increased $99.3 million, or 92%, to $206.9 million for the year ended

December 31, 2019 as compared to the year ended December 31, 2018.

The growth in consumables revenue was substantially driven by the growth in the instrument installed base.

We experienced continued increases in revenue from our Single

Cell Gene Expression, Single Cell Immune Profiling and Single Cell ATAC consumables.

In addition, in the fourth quarter of 2019 we began selling our Visium Spatial Gene Expression solution which experienced high initial demand.

Instrument revenue decreased $1.6 million, or 4%, to $34.9 million for the year

ended December 31, 2019 as compared to the year ended December 31, 2018.

Lower average selling prices were partially offset by higher volumes.

The Chromium Controller average selling price decreased by 21% for the year ended

December 31, 2019.

Lower average selling prices for the year ended 2019 as compared to 2018 were the result of our 2019 first quarter list price reduction for our fully enabled Chromium Controller which brought down the list price for these

instruments to $75,000 from $125,000.

In addition, we offered various pricing discounts to drive product adoption.

The number of instruments sold during the year ended December 31, 2019 was 645 units, an increase of 22% as compared to the prior

year, resulting in an ending installed base of 1,666 instruments.

Cost of revenue, gross profit and gross margin

Year Ended December 31,

(dollars in thousands)

Cost of revenue

Cost of revenue increased $32.4 million, or 113%, in the year ended December 31, 2019 as compared to

the year ended December 31, 2018.

In addition to higher cost of sales in line with revenue growth, the increase was also due to additional accrued royalties of $21.7 million related to the judgment in the

Bio-Rad litigation and higher inventory reserves.

Gross profit increased $67.2 million, or

57%, and gross margin percentage decreased by 5 points for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

These changes were primarily due to increased revenue partially offset by higher accrued royalties

related to the judgment in the Bio-Rad litigation in the year ended December 31, 2019.

Operating expenses

Year Ended December 31,

(dollars in thousands)

Research and development

In-process research and development

Selling, general and administrative

Accrued contingent liabilities

Total operating expenses

result not meaningful.

Research and development expense increased $35.6 million, or 75%, for the year ended December 31, 2019 as compared to the year ended

December 31, 2018.

The increase was primarily driven by an increase in personnel expenses of $19.3 million and laboratory materials, supplies and expensed equipment of $10.9 million, which were attributable to an increase in headcount

and expenses supporting our continued research and development efforts to enhance our existing products and develop new products.

In addition, we incurred additional allocated costs of $5.0 million for facilities to support the expansion of our

In-process research and development expense for the year ended December 31, 2018

relates to intellectual property we purchased in connection with our acquisitions of Spatial Transcriptomics and Epinomics and our acquisition of an exclusive license to certain intellectual property from Prognosys.

There were no similar purchases

in the year ended December 31, 2019.

Selling, general and administrative expenses increased $42.9 million, or 49%, for the

year ended December 31, 2019 as compared to the year ended December 31, 2018.

The increase in expenses was primarily driven by an increase in personnel expenses of $27.8 million, increased allocated costs of $7.3 million for

facilities, and an increase of $3.6 million of marketing expenses to support our future sales growth and the overall expansion of our operations.

In addition, expenses for the year ended December 31, 2019 included $3.6 million of

increased professional services and insurance costs associated with our status as a publicly traded company compared to the year ended December 31, 2018.

Accrued contingent liabilities decreased by $29.1 million, or 95%, for the year ended December 31, 2019 as compared to the year

ended December 31, 2018.

The change is due to the decrease in expenses relating to the litigation with Bio-Rad, for which we established an accrual of $30.6 million in November 2018.

Other income (expense), net

Year Ended December 31,

(dollars in thousands)

Interest income

Interest expense

Other income (expense)

Total other expense, net

Interest income increased by $1.8 million to $2.8 million for the year ended December 31, 2019

from $1.0 million for the year ended December 31, 2018.

The increase was primarily due to interest income earned from the investment of the net proceeds from the IPO completed in September 2019.

Interest expense increased by $0.7 million to $3.1 million for the year ended December 31, 2019 from the year ended

December 31, 2018.

The slight increase was driven primarily by higher interest rates on our then-outstanding term loan borrowings and the interest paid on the revolving credit facility.

Other income (expense) is comprised of realized and unrealized losses from foreign currency rate measurement fluctuations for the years ended

December 31, 2019 and December 31, 2018.

Comparison of the Year Ended December 31, 2018 and 2017

Year Ended December 31,

(dollars in thousands)

Revenue increased $75.2 million, or 106%, for the year ended December 31, 2018 as compared to the

The increase was driven primarily by an increase in consumables revenue.

Consumables revenue increased $61.3 million, or 133%, to $107.5 million for the year ended December 31, 2018 as compared to the prior year.

$54.9 million of the increase in consumables revenue was due to growth in the instrument installed base and $6.4 million of the increase was due to increased pull-through per instrument driven by new product introductions and updates to

existing products.

Instrument revenue increased $12.1 million, or 49%, for the year ended December 31, 2018 as compared to the

prior year due to higher volumes of instruments sold, partially offset by lower average selling prices.

The number of instruments sold during the year ended December 31, 2018 was 530 units, an increase of 74% as compared to the prior year,

resulting in an ending installed base of 1,021 instruments.

The Chromium Controller

average selling price decreased by 14% from the prior year, contributing to the $6.0 million decrease in instruments revenue.

The incremental discounts offered to drive product adoption and

increase our instrument installed base resulted in $4.4 million of this decrease in instrument revenue and the shift towards the version of the Chromium Controller with firmware that enabled the use of only our Single Cell Chromium Consumables,

which was offered at a lower price than the fully enabled version, resulted in $1.6 million of this decrease in instrument revenue.

Cost of revenue, gross profit and gross margin

Year Ended December 31,

(dollars in thousands)

Cost of revenue

Cost of revenue increased $18.1 million, or 171%, for the year ended December 31, 2018 as compared

to the prior year.

In addition to higher cost of sales in line with revenue growth, the increase was primarily due to additional royalties of $7.4 million related to the Bio-Rad litigation which we began

accruing in the fourth quarter of 2018, higher inventory reserves of $1.2 million as we transitioned to newer versions of our products and higher warranty-related expenses of $1.2 million.

Gross profit increased $57.1 million, or 94%, for the year ended December 31, 2018 as compared to the prior year, primarily due to

increased revenue partially offset by additional accrued royalties.

Gross margin percentage decreased by 5 points for the year ended December 31, 2018 as compared to the prior year, driven primarily by accrued royalties in the fourth quarter of

Operating expenses

Year Ended December 31,

(dollars in thousands)

Research and development

In-process research and development

Selling, general and administrative

Accrued contingent liabilities

Total operating expenses

Research and development expense increased $15.4 million, or 48%, for the year ended December 31,

2018 as compared to the prior year.

The increase was primarily driven by an increase in personnel expenses of $7.8 million and laboratory materials and supplies expenses of $4.4 million, which were attributable to an increase in headcount

and expenses supporting our continued research and development efforts to enhance our existing products and develop new products.

In-process research and development expense relates to intellectual property we purchased in 2018 in connection with our acquisitions of Spatial Transcriptomics and Epinomics and our acquisition of an exclusive

license to certain intellectual property from Prognosys, in each case to be used as part of our research and development efforts to enhance our existing products and develop new products.

There were no similar purchases in 2017.

See the section

above titled Acquisitions .

Selling, general and administrative expenses increased $41.2 million, or 88%,

for the year ended December 31, 2018 as compared to the prior year.

The increase in expenses was primarily driven by an increase in personnel expenses of $15.0 million to support our sales growth and the overall expansion of our operations

and increased outside legal fees of $16.5 million.

Accrued contingent liabilities consisted of $30.6 million of expenses relating to the

litigation with Bio-Rad, for which we established an accrual in November 2018.

There was no similar accrual in 2017.

Other income (expense), net

Year Ended December 31,

(dollars in thousands)

Interest income

Interest expense

Other income (expense)

Total other expense, net

result not meaningful.

Interest income increased $0.7 million for the year ended December 31, 2018 as compared to the prior year.

The increase was driven

primarily by higher cash and cash-equivalent balances in interest bearing accounts along with increased yields on such balances.

expense increased $1.6 million for the year ended December 31, 2018 as compared to the prior year.

The increase was driven primarily by higher outstanding term loan borrowings in 2018 following the refinancing of our previous loan and

security agreement in February 2018 and increased interest rates.

The change in other income (expense), net during the year ended

December 31, 2018 was driven by realized and unrealized losses from foreign currency rate measurement fluctuations.

Foreign currency losses increased compared to the prior year as a result of the overall strengthening of the U.S.

compared to the foreign currencies in which we operate.

Liquidity and Capital Resources

As of December 31, 2019, we had approximately $424.2 million in unrestricted cash and cash equivalents which were primarily held in

bank deposit accounts and money market funds, $33.4 million in accounts receivable and an accumulated deficit of $262.4 million.

Approximately $5.0 million of cash, which serves as collateral for an outstanding letter of credit,

$45.2 million of cash on deposit with a financial institution in connection with the issuance of a bond related to the Bio-Rad litigation, and $2.1 million of cash, which is held in escrow related to royalties on certain sales in

connection with the Bio-Rad litigation, were classified as noncurrent restricted cash as of December 31, 2019.

While we generated positive cash flows from operations of $34.6 million for the year ended December 31, 2019, we have

generated negative cash flows from operations since inception through the year ended December 31, 2019 and we have generated losses from operations since inception as reflected in our accumulated deficit of $262.4 million.

continue to incur operating losses for the foreseeable future due to the investments we intend to make and as a result we may require additional capital resources to execute strategic initiatives to grow our business.

In August 2019, the U.S.

District Court for the District of Delaware entered final judgment in the amount of approximately $35 million

and subsequently ordered that we may post a bond in the amount of $52 million in lieu of payment of the final judgment.

On September 13, 2019, we posted a $52 million bond in lieu of payment of the final judgment pending our ongoing

In connection with the bond, we deposited $45 million as collateral in a segregated cash account, where it will be held until the conclusion of the appeal.

On October 10, 2019, the Court denied our motion to decrease the bond

amount and stayed any execution or enforcement of the judgment until the completion of appeal, and for thirty days thereafter.

to the judgment, we place into escrow each quarter an amount equal to 15% of net sales of our GEM microfluidic chips and associated consumables subsequent to the effective date of the injunction, which was August 28, 2019.

The amounts have and

will be held until conclusion of the appeal and are classified as noncurrent restricted cash.

As of December 31, 2019, the amount placed into escrow was $2.1 million.

In October 2019, we entered into an agreement to make an aggregate payment of

$25.0 million in annual amounts of $6.25 million over four years beginning in January 2020 in connection with the 2019 Becton Dickinson Settlement and Patent Cross License Agreement.

See Note 7 to the Notes to Consolidated Financial

Statements included in Part II, Item 8 of this Annual Report.

We currently anticipate making aggregate capital expenditures of between

approximately $55 million and $70 million during the next 18 months, which includes the construction costs of our global expansion and for equipment to be used for manufacturing and research and development.

Our future capital requirements

will depend on many factors including our revenue growth rate, research and development efforts, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and

international activities, the timing of capital expenditures relating to our planned implementation of a new enterprise resource planning system and the introduction of new products.

We have and may in the future enter into arrangements to acquire

or invest in businesses, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs.

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.

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 and issuances of debt.

In September 2019, we completed our IPO for proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions of $37.7 million.

Silicon Valley Bank Loan and Security Agreement

We are party to a Second Amended and Restated Loan and Security Agreement, dated February 9, 2018, with Silicon Valley Bank (as amended,

restated or supplemented from time to time, the Loan and Security Agreement), under which (i) $30.0 million of term loan borrowings were outstanding and (ii) no borrowings were outstanding under the $25.0 million revolving

line of credit, in each case as of December 31, 2019.

The term loan borrowings were prepaid in full on February 20, 2020.

were in compliance with all covenants under the Loan and Security Agreement as of December 31, 2019, remained in compliance with such covenants at the time the term loan borrowings were prepaid in full on February 20, 2020 and currently

remain in compliance with such covenants.

Borrowings under the term loan were to mature on December 1, 2022 and accrued interest at

a floating rate equal to the greater of The Wall Street Journal prime rate plus 2.0% or 6.25% per annum.

Monthly payments of interest were due on the term loan through December 31, 2019, after which equal monthly installments of principal and

interest were to be due.

The revolving line of credit matures on December 1, 2022 and the amount available under the revolving line

of credit is based on 80% of eligible receivables and is subject to a borrowing base calculation.

Borrowings under the revolving line of credit accrue interest which is payable monthly at a floating rate equal to the greater of The Wall Street

Journal prime rate plus 0.25% or 4.5% per annum.

Cash flow summary

The following table summarizes our cash flows for the periods indicated:

Year Ended December 31,

(in thousands)

Net cash provided by (used in):

Operating activities

Investing activities

Financing activities

Effect of exchange rates on cash, cash equivalents and restricted cash

Net (decrease) increase in cash, cash

equivalents and restricted cash

Operating activities

The net cash provided by operating activities of $34.6 million in the year ended December 31, 2019 was due primarily to a net loss of

$31.3 million with adjustments for stock-based compensation expense of $13.3 million and depreciation and amortization of $7.1 million and an increase from the net change in operating assets and liabilities of $44.8 million.

inflow from operating assets and liabilities was primarily due to an increase in accrued contingent liabilities of $30.7 million, an increase in noncurrent deferred rent of $12.7 million, an increase in accrued expenses and other current

liabilities of $5.8 million, an increase in accrued compensation and other related benefits of $5.3 million, and an increase in accounts payable of $4.9 million, partially offset by an increase in inventory of $6.7 million, an

increase in accounts receivable of $5.3 million, an increase in prepaid expenses and other current assets of $3.5 million.

net cash used in operating activities of $76.4 million in the year ended December 31, 2018 was due primarily to a net loss of $112.5 million with adjustments for depreciation and amortization of $3.9 million and stock-based

compensation expense of $2.7 million and an increase from the net change in operating assets and liabilities of $28.0 million.

The inflow from operating assets and liabilities was primarily due to the establishment of an accrual for

contingent liabilities of $38.0 million, an increase in noncurrent deferred rent of $3.3 million, an increase in accounts payable of $2.6 million, an increase in accrued compensation and other related benefits of $2.6 million, an

increase in accrued expenses and other current liabilities of $1.7 million and an increase in deferred revenue of $1.7 million, partially offset by an increase in accounts receivable of $14.7 million, an increase in inventory of

$3.7 million and an increase in prepaid expenses and other current assets of $2.4 million.

The net cash used in operating

activities of $10.7 million in the year ended December 31, 2017 was due primarily to a net loss of $18.8 million with adjustments for depreciation and amortization of $4.3 million and stock-based compensation expense of

$1.7 million.

The inflow from operating assets and liabilities was primarily due to an increase in accrued compensation and other related benefits of $3.5 million, an increase in accounts payable of $3.0 million, an increase in

accrued expenses and other current liabilities of $1.8 million, and an increase in deferred revenue of $1.3 million, partially offset by an increase in accounts receivable of $5.1 million, an increase in inventory of $2.0 million

and an increase in prepaid expenses and other current assets of $0.7 million.

Investing activities

The net cash used in investing activities of $42.8 million in the year ended December 31, 2019 was due to purchases of property and

equipment of $42.7 million.

The net cash used in investing activities of $6.7 million in the year ended

December 31, 2018 was due to purchases of property and equipment of $6.3 million and the purchase of intangible assets of $0.4 million.

The net cash used in investing activities of $3.8 million in the year ended December 31, 2017 was due to purchases of property and

equipment of $3.8 million.

Financing activities

The net cash provided by financing activities of $414.6 million in the year ended December 31, 2019 was primarily from proceeds of

$410.8 million from issuance of Class A common stock in our IPO, net of issuance costs and proceeds of $3.8 from the issuance of common stock from the exercise of stock options.

The net cash provided by financing activities of $105.4 million in the year ended December 31, 2018 was primarily from proceeds from

the issuance of convertible preferred stock, net of issuance costs, of $84.8 million, net proceeds from additional borrowings of $19.5 million, and proceeds of $1.8 million from the issuance of common stock from the exercise of stock

options, partially offset by payments on debt obligations of $0.7 million.

The net cash provided by financing activities of

$20.6 million in the year ended December 31, 2017 was primarily from proceeds from the issuance of convertible preferred stock, net of issuance costs, of $20.0 million and proceeds of $1.1 million from the issuance of common

stock from the exercise of stock options, partially offset by payments of capital lease obligation of $0.4 million.

Concentrations of credit

As of December 31, 2019 and 2018, no single customer represented 10% or more of our accounts receivable balance.

was no single customer, including distributors, that individually exceeded 10% of our revenue during the years ended December 31, 2019, 2018 and 2017.

Contractual Obligations and Commitments

The following table summarizes our commitments to settle contractual obligations as of December 31, 2019:

Payments due by period

(in thousands)

Debt obligations, including interest(1)

Lease commitments(2)

Accrued license fee(3)

Other obligations(4)

As of December 31, 2019, the outstanding principal balance of our term loan under our Loan and Security

Agreement was $30.0 million.

Monthly payments of interest were due under the term loan through December 31, 2019, with equal monthly installments of principal and interest due for thirty-six months

An end of term payment of $1.8 million due to the lender upon maturity, prepayment or acceleration of the term loan is reflected as additional interest expense over the term of the loan.

On February 20, 2020 we prepaid the

outstanding principal balance in full.

See Note 5 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for more information regarding the terms of the Loan and Security Agreement.

We have entered into various non-cancelable leases for certain offices

with contractual lease periods expiring between 2019 and 2029.

As of December 31, 2019, we had an unused letter of credit in the amount of $5.0 million outstanding associated with the lease of our new Pleasanton headquarters and research

and development center.

We are required to make an aggregate payment of $25.0 million in four annual installments related to the

purchase of certain licenses.

The present value of these payments of $22.4 million is recognized as a liability in our audited consolidated financial statements as of December 31, 2019.

Other obligations include purchase obligations, prepaid services and royalties.

Purchase obligations relate to

our contract manufacturer which manufacturers our instruments and makes advance purchases of components based on our sales forecasts and the placement of purchase orders by us.

To the extent components are purchased by the contract manufacturer on

our behalf and cannot be used by the contract manufacturers other customers, we are obligated to purchase such components.

In addition, certain supplier agreements require us to make minimum annual purchases under the agreements.

have met the minimum purchase commitments.

Prepaid services include subscription software services for which we have entered into non-cancelable arrangements.

Royalties include minimum commitments for license

arrangements.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet

financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and

Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report are prepared in

accordance with GAAP.

The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures.

estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

Actual results could differ significantly from our estimates.

To the extent that there are differences between our

estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that the accounting policies described below involve a significant degree of judgment and complexity.

Accordingly, we believe these

are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

For further information, see Note 2 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of

this Annual Report.

Revenue recognition

We generate revenue from sales of our products and services.

Our products consist of instruments and consumables, including proprietary

microfluidic chips, slides, reagents and other consumables for both our Visium and Chromium solutions.

We also generate a small portion of our revenue from instrument service agreements which relate to extended warranties.

Effective January 1, 2019, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with

Customers, using the modified retrospective transition method.

The cumulative effect of initially adopting ASC Topic 606 was immaterial.

The revenue recognition accounting policy described below relates to revenue transactions from

January 1, 2019 and onward, which are accounted for in accordance with ASC Topic 606Revenue from Contracts with Customers.

We recognize revenue when control of the products and services is transferred to our customers in an amount that reflects the consideration we

expect to receive from our customers in exchange for those products and services.

This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the

contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied.

A performance obligation is considered distinct from other obligations in a contract when it

provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract.

We consider a performance obligation satisfied once we have transferred

control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service.

Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer.

instances where right of payment or transfer of title is contingent upon the customers acceptance of the product, revenue is deferred until all acceptance criteria have been met.

Instrument service agreements, which relate to extended

warranties, are typically entered into 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.

Our contracts with our

customer generally do not include rights of return or a significant financing component.

We regularly enter 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.

determine 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, we rely upon prices set by management,

adjusted for applicable discounts.

The revenue recognition accounting policy described below relates to revenue transactions prior to January 1,

2019, which are accounted for in accordance with ASC Topic 605Revenue Recognition.

We recognize revenue when persuasive

evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable and collectability is reasonably assured.

We assess collectability based on factors such as the

customers creditworthiness and past collection history, if applicable.

If collection is not reasonably assured, revenue recognition is deferred until receipt of payment.

We also assess whether a price is fixed or determinable by, among other

things, reviewing contractual terms and conditions related to payment.

Delivery occurs when there is a transfer of title and risk of loss passes to the customer.

Certain of our sales arrangements involve the delivery of multiple products and services within contractually binding arrangements.

Multiple-deliverable sales transactions typically consist of the sale and delivery of one or more instruments and consumables together and may include an instrument service agreement.

For sales arrangements that include multiple deliverables, we use the stated contractual price for the instrument service agreements, if and

when sold, and allocate the remaining contract consideration at the inception of the contract to the other units of accounting based upon their relative selling price.

We may use our

best estimate of selling price for individual deliverables when vendor specific objective evidence or third-party evidence is unavailable.

A delivered item is considered to be a separate unit of

accounting when it has value to the customer on a stand-alone basis.

Our products, other than instrument service agreements, are

typically delivered together or within a short time frame, generally within one to three months of the contract date.

Instrument service agreements are typically entered into for a one-year term,

following the expiration of the standard one-year warranty period.

Our products are generally sold without the right of return.

Amounts received before revenue recognition criteria are met are

classified in the balance sheets as deferred revenue.

Inventory is recorded at the lower of cost, determined on

a first-in, first-out basis, or net realizable value.

We use judgment to analyze and determine if the composition of its inventory is obsolete,

slow-moving or unsalable and frequently review such determinations.

We write down specifically identified unusable, obsolete, slow-moving or known unsalable inventory in the period that it is first recognized by using a number of factors including

product expiration dates, open and unfulfilled orders and sales forecasts.

Any write-down of its inventory to net realizable value establishes a new cost basis and will be maintained even if certain circumstances suggest that the inventory is

recoverable in subsequent periods.

Costs associated with the write-down of inventory are recorded to cost of revenue on our consolidated statements of operations.

We make assumptions about future demand, market conditions and the release of new

products that may supersede old ones.

However, if actual market conditions are less favorable than anticipated, additional inventory write-downs could be required.

Stock-based compensation

We estimate the fair value of share-based payment awards granted to employees and directors on the grant date using the Black-Scholes

option-pricing model.

The fair value of share-based payment awards is recognized as compensation expense on a straight-line basis over the requisite service period in which the awards are expected to vest, which is generally four years, and

forfeitures are recognized as they occur.

Share-based payment awards that include both a service condition and a performance condition are considered expected to vest when the performance condition is probable of being met.

The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards.

These variables

include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield and expected stock price volatility over the expected term.

For all stock options granted, we

calculated the expected term using the simplified method for plain vanilla stock option awards.

We had no publicly available stock price information prior to our IPO and limited available stock price information subsequent to our IPO;

therefore, we have used the historical volatility of the stock price 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.

Equity instruments granted to nonemployees are valued using the Black-Scholes option pricing model.

Nonemployee stock-based compensation is

recognized over the related performance period, which is generally the vesting term of the awards.

Common stock valuation

Prior to our IPO, there was no public market for our common stock.

As such, the estimated fair value of our common stock and

underlying stock options has been determined at each grant date by our board of directors, with input from management, based on the information known to us on the grant date and upon a review of any

recent events and their potential impact on the estimated per share fair value of our common stock.

As part of these fair value determinations, our board of directors obtained and considered

valuation reports prepared by a third-party valuation firm in accordance with the guidance outlined in the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities

Issued as Compensation .

For valuations after the completion of our initial public offering, the fair value of each share of

underlying common stock is based on the closing price of our Class A common stock as reported on the date of grant.

contingent liabilities

We have been and are currently involved in various legal proceedings which arise in the ordinary course of

The outcomes of these legal proceedings are not within our complete control or may not be known for prolonged periods of time.

Management is required to assess the probability of loss and amount of such loss, if any, in preparing our

consolidated financial statements.

We evaluate the likelihood of a potential loss from legal proceedings to which we are a party.

We record a liability for such claims when a loss is deemed probable and the amount can be reasonably estimated.

Significant judgment may be required in the determination of both probability and whether an exposure is reasonably estimable.

Our judgments are subjective based on the status of the legal proceedings, the merits of our defenses and consultation with in-house and outside legal counsel.

As additional information becomes available, we reassess the potential liability related to pending claims and may revise our estimates.

Due to the inherent

uncertainties of the legal processes in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes, which could have material adverse effects on our business, financial conditions and results

of operations.

Acquisitions of intellectual property

We evaluate acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a

business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.

screen is met, the transaction is accounted for as an asset acquisition.

If the screen is not met, further determination is required as to whether or not we have acquired inputs and processes that have the ability to create outputs, which would meet

the requirements of a business.

We account for an asset acquisition under Accounting Standards Codification, Business

Combinations Topic 805, Subtopic 50 , which requires the acquiring entity in an asset acquisition to recognize net assets based on the cost to the acquiring entity on a relative fair value basis, which includes transaction costs in addition to

consideration given.

Goodwill is not recognized in an asset acquisition and any excess consideration transferred over the fair value of the net assets acquired is allocated to

the non-monetary identifiable assets based on relative fair values.

In-process research and development expenses are expensed as incurred provided there is no

alternative future use.

Contingent consideration payments in asset acquisitions are recognized when the contingency is resolved and the

consideration is paid or becomes payable (unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the basis in the asset acquired).

Upon recognition of the contingent consideration payment,

the amount is included in the cost of the acquired asset or group of assets.

JOBS Act accounting election

We are an emerging growth company, as defined in the JOBS Act.

Under the JOBS Act, emerging growth companies can delay adopting new or revised

accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We have elected to use this extended transition period for complying with new or revised accounting standards that

have different effective dates for

public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition

period provided in the JOBS Act.

As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Recent Accounting Pronouncements

Note 2, Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for a discussion of recent accounting pronouncements.

Emerging Growth Company Status

emerging growth company, as defined in the JOBS Act.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to

private companies.

We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no

longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, our financial statements may not be comparable to companies that comply with new or revised

accounting pronouncements as of public company effective dates.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity