What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-07 · 111 added, 98 removed, 150 unchanged (58% of the section changed)

6 unchanged sentences

These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

We operate on a fiscal year that ends on December 31.

We are a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology.

1 unchanged sentence

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 and Chromium Connect instruments, which we refer to as “Chromium instruments” or “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.

Our commercial product portfolio leverages our Chromium Controller, Chromium Connect and Chromium X Series, which we refer to as “Chromium instruments” or “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.

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.

2 unchanged sentences

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.

As such, our long-term 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.

The following table represents revenue by source for the periods indicated (in thousands):

Three Months Ended March 31, 2021 Three Months Ended March 31, 2020

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Instruments $ 16,877 15 % $ 7,291 17 % $ 28,002 13 % $ 16,432 14 %

3 unchanged sentences

Since our inception in 2012, we have incurred net losses in each year.

Our net losses were $11.6 million and $21.1 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

As of March 31, 2021, we had an accumulated deficit of $816.6 million and cash and cash equivalents totaling $617.2 million.

Our net losses were $11.1 million and $22.6 million for the three and six months ended June 30, 2021 and $40.2 million and $61.3 million for the three and six months ended June 30, 2020, respectively.

As of June 30, 2021, we had an accumulated deficit of $827.7 million and cash and cash equivalents totaling $622.0 million.

We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term.

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Operational Effectiveness in the COVID-19 Environment

In March 2020, the World Health Organization declared the global outbreak of COVID-19 to be a pandemic and we have now operated in this uncertain and disruptive pandemic environment for more than a year.

We continue to closely monitor the recent developments surrounding this pandemic and potential resurgence.

At the same time, we have successfully maintained our operational effectiveness and continue to provide researchers with our solutions as described below:

• Since the commencement of the pandemic, we have quickly placed and continue to place instruments and provide reagents to clinicians and researchers around the world working to understand COVID-19 and develop treatments for the disease.

We were designated an essential business because our products are a critical tool for infectious disease research as they allow for a detailed understanding of how the virus causing COVID-19 impacts infected people, how the immune system is mobilized, which immune cells react to pathogens and many other aspects of the disease and potential therapies.

Many of our customers have moved our Chromium Controller instruments into Biosafety Level 2 Plus (BSL2+) and 3 (BSL3) facilities, where they can be as close as possible to the front lines of this battle against COVID-19;

• We continue to closely monitor the recent developments and progress surrounding the implementation of COVID-19 vaccination programs by various government agencies in the United States and in other countries.

Though we currently require the majority of our personnel to work remotely using our designated measures which we implemented in 2020 subsequent to the commencement of the pandemic in order to maintain a safe workplace, we are expecting our employees to return to our offices over the next several months.

Given the importance of maintaining continuity of our business and continued access to instruments and consumables by our customers, including researchers engaged in the fight against COVID-19, we continue to adhere to protocols and safety measures at our facilities including social distancing, symptom screening and 10x-provided personal protective equipment to support and safeguard the health and safety of our workforce who remain onsite to support essential operations.

Among other efforts, we have also continued with our testing site for SARS-CoV-2 (the virus which causes COVID-19) at our Pleasanton headquarters as we work to regain our pre-COVID-19 levels of manufacturing and research and development activities by bringing additional personnel back onsite.

On a weekly basis, we test all employees who access our facilities, and no employee is allowed to access our facilities without a negative test.

After having completed thousands of tests to date, our testing program has uncovered only a few, isolated test results indicating the presence of SARS-CoV-2.

We believe we were able to successfully isolate these individuals and prevent the spread of the virus within our workforce, but we will continue to monitor and track these developments.

As an additional safeguard against SARS-CoV-2 transmission among our onsite employee base, we also use Controlled Air Purifying Respiratory Systems (“CAPRS”) for certain of our onsite employees who need to work in close proximity to each other.

CAPRS work to protect 10x personnel by filtering out potentially harmful or infectious materials including SARS-CoV-2 particles.

These and other safety measures have facilitated the safe return to work of most of our research and development, manufacturing and other operations personnel;

• Our sales and marketing teams have leveraged increased digital marketing and sales activities since the broad emergence of social distancing measures globally, including virtual sales seminars, virtual market development activities, online product training utilizing our library of on-demand tools and literature and an increase in one-on-one communications via emails, phone and video conferencing;

Since the World Health Organization ("WHO") declared the global outbreak of COVID-19 to be a pandemic in March 2020, we have operated in an uncertain and disruptive pandemic environment but to date we have successfully maintained our operational effectiveness and COVID-19 has not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting and disclosure controls and procedures.

We continue to closely monitor the recent developments surrounding this pandemic and resurgences including, among other developments, local, state, national and global vaccination efforts and the potential impacts of variants, including the Delta variant.

In response to the pandemic, we have placed and continue to place instruments and provide reagents to clinicians and researchers around the world working to understand COVID-19 and develop treatments for the disease.

Our products are a critical tool for infectious disease research as they allow for a detailed understanding of how the virus causing COVID-19 impacts infected people, how the immune system is mobilized, which immune cells react to pathogens and many other aspects of the disease and potential therapies.

While many of our customers' laboratory operations returned to near-normal levels during the second quarter, we have observed subsequent to quarter-end the reinstatement of COVID-19 related protocols and restrictions which could affect some of our customers' operations.

The situation is increasingly uncertain and to the extent that reinstated protocols or increased restrictions impact our customers' ability to progress through their experiments, our business could be negatively impacted in the third quarter of 2021 and beyond.

Given the importance of maintaining continuity of our business and continued access to instruments and consumables by our customers, including researchers engaged in the fight against COVID-19, we initiated and continue to adhere to protocols and safety measures at our facilities which have facilitated the safe return to work of many of our personnel.

While in person commercial and support activities have begun to resume and the majority of our customers' sites were open to in-person meetings with our sales and support teams by the end of the second quarter, some of our customers subsequent to quarter-end have reinstated pandemic-related protocols due to rising COVID-19 case counts and in some cases have begun closing access to outside visitors, which may negatively affect the operations of our sales and support teams in the third quarter of 2021 and beyond.

In light of such developments, our sales and marketing teams continue to leverage digital marketing and sales activities in response to the broad emergence of social distancing measures globally.

Additionally, our customer service teams around the world continue to operate remotely and remain available to assist our customers and partners as needed.

With the implementation of our protocols and safety measures, our production, shipping and customer service functions have been operational and we have been able to maintain a continuous supply of products to our customers.

We are communicating regularly with our suppliers, our supply chain remains intact and we have not yet experienced significant supply issues.

With respect to equipment and raw material supply, we continue to work to secure sufficient critical equipment and raw materials to meet anticipated future demand and we are carrying higher levels of inventory and monitoring closely whether there will be a material negative impact due to potential future shortages or price increases from suppliers.

Our customer service teams around the world are operating remotely and remain available to assist our customers and partners as needed;

• Despite the impacts of the COVID-19 pandemic, including that the majority of 10x personnel worldwide continue to work remotely, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting and disclosure controls

and procedures.

In addition, we completed the acquisition of Tetramer Shop in January 2021.

See Note 3 to the condensed consolidated financial statements for further details.

With respect to equipment and raw material supply, we continue to work to secure sufficient critical equipment and raw materials to meet anticipated future demand and we continue to carry higher levels of inventory and are monitoring closely whether there will be a material negative impact due to potential future shortages or price increases from suppliers.

While the disruption is currently expected to be temporary, there is considerable uncertainty around its duration.

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2021 2020 2021 2020

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Interest expense (209) (306) (430) (968)

Other expense, net (729) (96)

Other income (expense), net 521 (144) (208) (240)

Loss on extinguishment of debt — — — (1,521)

Total other expense (900) (961)

Total other income (expense) 370 (325) (530) (1,286)

Loss before provision for income taxes (9,958) (39,745) (21,074) (60,590)

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Revenue 100.0% 100.0% 100.0 % 100.0 %

10 unchanged sentences

Interest expense (0.2) (0.7) (0.2) (0.8)

Other expense, net (0.7) (0.1)

Other income (expense), net 0.4 (0.3) (0.1) (0.2)

Loss on extinguishment of debt — — — (1.3)

Total other expense (0.9) (1.4)

Total other income (expense) 0.3 (0.8) (0.2) (1.1)

Loss before provision for income taxes (8.6) (92.6) (9.5) (52.8)

1 unchanged sentence

Net loss (9.5)% (93.6)% (10.2) % (53.4) %

Comparison of the Three Months Ended March 31, 2021 and 2020

Comparison of the Three and Six Months Ended June 30, 2021 and 2020

Three Months Ended

March 31, Change

June 30, Change Six Months Ended

June 30, Change

(dollars in thousands) 2021 2020 $ % 2021 2020 $ %

Revenue $ 115,842 $ 42,905 $ 72,937 170 % $ 221,663 $ 114,810 $ 106,853 93.1 %

Revenue increased $33.9 million, or 47%, to $105.8 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, driven primarily by an increase in consumables revenue.

Consumables revenue increased $31.7 million, or 52%, to $93.1 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

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

Instrument revenue increased $2.0 million, or 22%, to $11.1 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 due to an increase in number of units sold.

Revenue increased $72.9 million, or 170%, to $115.8 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, driven primarily by an increase in instrument and consumables revenue.

Consumables revenue increased $63.0 million, or 184%, to $97.1 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

The increase in consumables revenue was primarily driven by growth in the instrument installed base and higher demand for our products.

Instrument revenue increased $9.6 million, or 131%, to $16.9 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 due to an increase in number of units sold.

Consumables and instrument revenues for the three months ended June 30, 2020 were adversely impacted by customer lab closures due to the impact of the COVID-19 pandemic.

Revenue increased $106.9 million, or 93%, to $221.7 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, driven primarily by an increase in instrument and consumables revenue.

Consumables revenue increased $94.6 million, or 99%, to $190.2 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

The increase in consumables revenue was primarily driven by growth in the instrument installed base and higher demand for our products.

Instrument revenue increased $11.6 million, or 70%, to $28.0 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 due to an increase in number of units sold.

Consumables and instrument revenues for the six months ended June 30, 2020 were adversely impacted by customer lab closures due to the impact of the COVID-19 pandemic.

We largely rely on research activities in both academic institutions and government laboratories for our revenue.

1 unchanged sentence

By the end of the first quarter of 2020, the vast majority of academic and government labs around the world had suspended or severely reduced operations in compliance with stay-at-home, shelter-in-place and similar orders.

These closures and reduced operations significantly impacted our business towards the latter part of the first quarter of 2020.

However, beginning in June 2020, we observed a modest re-opening of labs for general research which continued throughout the remainder of 2020 and into the first quarter of 2021 resulting in an uptick in our sales activity for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

Not all labs are able to operate at full capacity and we may encounter delays before labs are able to fully resume their research and we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our overall demand in the second quarter of 2021 and beyond.

Once labs fully re-open and are able to resume normal levels of research activities, we expect to continue to see increased demand for our products.

These closures and reduced operations significantly impacted our business towards the latter part of the first quarter of 2020 and throughout a majority of the second quarter of 2020.

However, beginning in June 2020, we observed a modest re-opening of labs for general research which continued throughout the remainder of 2020 and into the first half of 2021 resulting in an uptick in our sales activity for the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020.

While we have observed that many of our customers' labs are now open for general research, some labs in certain geographic locations have paused plans to reopen, closed again after periods of reopening, or are unable to operate at full capacity due to the impact of COVID-19 including resurgences in some localities.

We may experience continued delays before all labs are able to fully resume their research on a continuous basis, if at all, and because of this we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our overall demand in the third quarter of 2021 and beyond.

Once all labs fully re-open and are able to resume normal levels of research activities on a continuous basis, we expect to see increased demand for our products.

Cost of revenue, gross profit and gross margin

Three Months Ended

March 31, Change

June 30, Change Six Months Ended

June 30, Change

(dollars in thousands)

3 unchanged sentences

$ 110,927 $ 32,853 $ 78,074 238 % $ 199,688 $ 89,650 $ 110,038 122.7 %

Cost of revenue increased $2.0 million, or 13%, to $17.1 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The increase was primarily due to an increase of $3.4 million from higher sales including newly introduced products, $0.6 million of costs related to our development of a second manufacturing facility, $0.5 million of inventory scrap and excess and obsolete inventory charges, $0.5 million of warranty costs and $0.1 million of amortization of developed technology resulting from the acquisition of Tetramer Shop (see Note 3 to condensed consolidated financial statements for details of the acquisition), partially offset by lower accrued royalties of $3.5 million primarily related to the 2015 Delaware Action.

Gross profit increased $32.0 million, or 56%, to $88.8 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily due to higher revenue and lower accrued royalties related to the 2015 Delaware Action.

Gross margin increased by 5%, to 84% for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily due to lower accrued royalties related to the 2015 Delaware Action.

Towards the end of the first quarter of 2020, the vast majority of academic and government labs around the world suspended or severely reduced operations in compliance with stay-at-home, shelter-in-place and similar orders which resulted in a decrease in overall demand during this period.

The decrease in demand resulted in our production facilities running at less than normal capacity which negatively impacted our gross margins.

While we experienced higher demand for our products during the second half of 2020 and into the first quarter of 2021 due to partial reopening of our customer's businesses, until and unless demand for our solutions normalizes, our gross profits and gross margins will be negatively impacted.

While we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our overall gross profit and gross margins in the second quarter of 2021 and beyond, we plan to continue to invest in our manufacturing facilities and production efforts and manage our supply chain to ensure the delivery of products to our customers.

96 % 77 % 90 % 78 %

Cost of revenue decreased $5.1 million, or 51%, to $4.9 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

The decrease was primarily due to lower accrued royalties of $16.2 million related to the Bio-Rad Actions including a one-time reversal of $14.7 million of accrued royalties arising from the settlement of this litigation (see Note 6 to condensed consolidated financial statements, Commitments and Contingencies, The 2021 Bio-Rad Settlement And Patent Cross License Agreement, for further details) and $0.8 million of idle manufacturing capacity charges, partially offset by an increase of $10.0 million from higher sales including newly introduced products, $1.1 million of inventory scrap and excess and obsolete inventory charges and $0.5 million of warranty costs.

Cost of revenue decreased $3.2 million, or 13%, to $22.0 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

The decrease was primarily due to lower accrued royalties of $20.0 million related to the Bio-Rad Actions including a one-time reversal of $14.7 million of accrued royalties arising from the settlement of this litigation (see Note 6 to condensed consolidated financial statements, Commitments and Contingencies, The 2021 Bio-Rad Settlement And Patent Cross License Agreement, for further details) and $0.8 million of idle manufacturing capacity charges, partially offset by an increase of $13.8 million from higher sales including newly introduced products, $1.7 million of inventory scrap and excess and obsolete inventory charges, $1.0 million of warranty costs, $0.3 million of amortization of developed technology resulting from the acquisition of Tetramer Shop (see Note 3 to condensed consolidated financial statements for details of the acquisition) and $0.2 million of costs related to our development of a second manufacturing facility.

Gross profit increased $78.1 million, or 238%, to $110.9 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, primarily due to higher revenue, lower accrued royalties related to the Bio-Rad Actions including a one-time reversal of $14.7 million of accrued royalties and no idle manufacturing capacity charges incurred during the three months ended June 30, 2021 as compared to $0.8 million incurred during the three months ended June 30, 2020.

Gross margin increased by 19 percentage points, to 96% for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, primarily due to lower accrued royalties related to the Bio-Rad Actions and no idle manufacturing capacity charges incurred during the three months ended June 30, 2021 as compared to $0.8 million incurred during the three months ended June 30, 2020, partially offset by less favorable product mix with newly introduced products.

Gross profit increased $110.0 million, or 123%, to $199.7 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, primarily due to higher revenue and lower accrued royalties related to the Bio-Rad Actions including a one-time reversal of $14.7 million of accrued royalties.

Gross margin increased by 12 percentage points, to 90% for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, primarily due to lower accrued royalties related to the Bio-Rad Actions.

Towards the latter part of the first quarter of 2020 and throughout a majority of second quarter of 2020, the vast majority of academic and government labs around the world suspended or severely reduced operations in compliance with stay-at-home, shelter-in-place and similar orders which resulted in a decrease in overall demand during this period.

The decrease in demand resulted in our production facilities running at less than normal capacity which negatively impacted our gross margins in the second quarter of 2020.

During the second half of 2020 and into the first half of 2021, we experienced increasing demand for our products due to partial reopening of our customer's businesses.

While we cannot reliably estimate the extent to which the COVID-19 pandemic, including impacts from any resurgences, will impact our overall gross profit and gross margins in the third quarter of 2021 and beyond, we plan to continue to invest in our manufacturing facilities and production efforts and manage our supply chain to ensure the delivery of products to our customers.

Operating expenses

Three Months Ended

March 31, Change

June 30, Change Six Months Ended

June 30, Change

(dollars in thousands)

4 unchanged sentences

Total operating expenses $ 121,255 $ 72,273 $ 48,982 68 % $ 220,232 $ 148,954 $ 71,278 48 %

Research and development expenses increased $15.9 million, or 61%, to $41.9 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The increase was primarily driven by increased personnel expenses of $10.3 million including $3.9 million in stock-based compensation expense, $2.2 million of higher allocated costs for facilities and information technology to support operational expansion, laboratory materials, supplies and expensed equipment of $1.8 million used to support our research and development efforts, $0.7 million of higher consulting and professional services for product development and $0.4 million of higher depreciation.

During March 2020, the COVID-19 pandemic resulted in a decrease in certain research laboratory activities, and as a result we incurred lower materials spending.

While our research and development activities have increased in the second half of 2020 and into the first quarter of 2021, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our overall research activities or expenditures in the second quarter of 2021 and beyond.

Selling, general and administrative expenses increased $6.5 million, or 13%, to $56.9 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The increase was primarily driven by increased personnel expenses of $9.9 million, including $5.3 million in stock-based compensation expense, $2.1 million of higher allocated costs for facilities and information technology to support the general expansion of our operations and $1.2 million of costs related

to COVID-19 screening, safety equipment purchases and cleaning, partially offset by the decrease in legal expenses of $6.0 million and marketing expenses related to conferences and seminars of $0.9 million.

While certain costs will decline as the underlying activities are restricted by the COVID-19 pandemic, including travel and related expenses, conferences and events, we are taking certain measures to manage our spending while continuing to incur expenses that we believe will further our strategic initiatives.

Research and development expenses increased $25.9 million, or 94%, to $53.4 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

The increase was primarily driven by increased personnel expenses of $14.0 million including $6.1 million in stock-based compensation expense, laboratory materials, supplies and expensed equipment of $8.0 million used to support our research and development efforts, $2.2 million of higher allocated costs for facilities and information technology to support operational expansion, $0.8 million of higher depreciation and $0.7 million of higher consulting and professional services for product development.

Research and development expenses increased $41.8 million, or 78%, to $95.3 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

The increase was primarily driven by increased personnel expenses of $24.8 million including $10.0 million in stock-based compensation expense, laboratory materials, supplies and expensed equipment of $9.8 million used to support our research and development efforts, $4.4 million of higher allocated costs for

facilities and information technology to support operational expansion, $1.4 million of higher consulting and professional services for product development and $1.1 million of higher depreciation.

During the first half of 2020, the COVID-19 pandemic resulted in a decrease in certain research laboratory activities, and as a result we incurred lower materials spending.

While our research and development activities have increased in the second half of 2020 and into the first half of 2021, we cannot reliably estimate the extent to which the COVID-19 pandemic, including any resurgences, will impact our overall research activities or expenditures in the third quarter of 2021 and beyond.

Selling, general and administrative expenses increased $24.3 million, or 55%, to $68.7 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

The increase was primarily driven by increased personnel expenses of $15.9 million, including $6.6 million in stock-based compensation expense, $3.3 million of outside legal expenses,$2.7 million of higher allocated costs for facilities and information technology to support the general expansion of our operations, $1.7 million of marketing expenses related to conferences and seminars and $0.2 million of costs related to COVID-19 screening, safety equipment purchases and cleaning.

Selling, general and administrative expenses increased $30.8 million, or 32%, to $125.6 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

The increase was primarily driven by increased personnel expenses of $25.8 million, including $11.9 million in stock-based compensation expense, $4.8 million of higher allocated costs for facilities and information technology to support the general expansion of our operations, $1.2 million of costs related to COVID-19 screening, safety equipment purchases and cleaning and $0.8 million of marketing expenses related to conferences and seminars, partially offset by the decrease in outside legal expenses of $2.7 million.

Accrued contingent liabilities decreased $1.2 million or 364% for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 and decreased $1.3 million or 206% for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 primarily due to a one-time reversal of accrued interest arising from the settlement of the Bio-Rad Actions (see Note 6 to condensed consolidated financial statements, Commitments and Contingencies, The 2021 Bio-Rad Settlement And Patent Cross License Agreement, for further details).

Other income (expense), net

Three Months Ended

March 31, Change

June 30, Change Six Months Ended

June 30, Change

(dollars in thousands)

11 unchanged sentences

result not meaningful.

Interest income decreased by $1.3 million to $50 thousand for the three months ended March 31, 2021 from $1.3 million for the three months ended March 31, 2020 primarily due to lower interest rates in the first quarter of 2021.

Interest income decreased by $67 thousand to $58 thousand for the three months ended June 30, 2021 from $0.1 million for the three months ended June 30, 2020.

Interest income decreased by $1.3 million to $0.1 million for the six months ended June 30, 2021 from $1.4 million for the six months ended June 30, 2020.

The decreases for the three and six months ended June 30, 2021 as compared to the corresponding prior year periods were primarily due to lower interest rates in the first half of 2021.

While we earned interest on the net proceeds from the IPO completed in September 2019 and the follow-on public offering completed in September 2020, interest income was lower primarily due to lower interest rates.

Interest expense decreased for the three months ended March 31, 2021 from the three months ended March 31, 2020.

The decrease was driven primarily by the voluntary prepayment of our term loan on February 20, 2020.

The change in other expense for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 was driven by realized and unrealized losses from foreign currency rate measurement fluctuations.

Loss on extinguishment of debt was $1.5 million for the three months ended March 31, 2020.

Interest expense decreased for the three and six months ended June 30, 2021 from the three and six months ended June 30, 2020.

The decrease was driven primarily by the voluntary prepayment of our term loan on February 20, 2020 and lower interest rates partially offset by additional interest expense recognized on accrued license fees.

The change in other expense for the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020 was driven by gains or losses from foreign currency rate measurement fluctuations.

Loss on extinguishment of debt was $1.5 million for the six months ended June 30, 2020.

In February 2020, we prepaid the remaining balance on our term loan, an end-of-term payment and prepayment fees.

Provision for Income Taxes

The Company’s provision for income taxes was $0.4 million and $0.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

The provision for income taxes for the three months ended March 31, 2021 consists primarily of foreign taxes.

The Company’s provision for income taxes was $1.1 million and $1.5 million, respectively, for the three and six months ended June 30, 2021 and $0.4 million and $0.7 million, respectively, for the three and six months ended June 30, 2020.

The provision for income taxes for the three and six months ended June 30, 2021 consists primarily of foreign taxes.

Deferred tax assets generated from the Company’s domestic net operating losses are fully offset by a valuation allowance as the Company believes it is more likely than not that the benefit will not be realized.

Liquidity and Capital Resources

As of March 31, 2021, we had $617.2 million in cash and cash equivalents which were primarily held in U.S.

As of June 30, 2021, we had $622.0 million in cash and cash equivalents which were primarily held in U.S.

bank deposit accounts and money market funds, $59.7 million in accounts receivable and an accumulated deficit of $827.7 million.

Restricted cash of $17.6 million, classified within current assets in our condensed consolidated balance sheets serves as collateral for a bond and royalties in connection with the Bio-Rad litigation.

Restricted cash of $17.6 million, classified within current assets in our condensed consolidated balance sheets serves as collateral for a bond and royalties in connection with the Bio-Rad Actions.

Restricted cash of $8.6 million, classified within noncurrent assets in our condensed consolidated balance sheets serves as collateral for outstanding letters of credit for facilities.

We have generated negative cumulative cash flows from operations since inception through the three months ended March 31, 2021, and we have generated losses from operations since inception as reflected in our accumulated deficit of $816.6 million.

We have generated negative cumulative cash flows from operations since inception through the six months ended June 30, 2021, and we have generated losses from operations since inception as reflected in our accumulated deficit of $827.7 million.

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

1 unchanged sentence

See Note 3 to the condensed consolidated financial statements for further details.

In August 2020, the Federal Circuit issued its opinion in our appeal of the 2015 Delaware Action.

The Federal Circuit (1) affirmed the judgment of the lower Court with respect to infringement of the '083 patent by our legacy GEM products and (2) vacated the judgment with respect to infringement of the '193 and '407 patents, which are remanded to the lower Court for a new trial on infringement.

The Federal Circuit affirmed the damage award including the 15% royalty with respect to our legacy GEM

The Federal Circuit vacated the injunction with respect to our Single Cell CNV and Linked-Read products but affirmed the injunction with respect to our other legacy GEM products.

In October 2020, we filed a petition for en banc rehearing with the Federal Circuit.

The Federal Circuit denied our petition for en banc rehearing on November 4, 2020.

We paid the $34.5 million judgment, plus approximately $0.8 million in post-judgment interest, to Bio-Rad in December 2020.

The case was remanded to the Delaware Court for a determination of post-judgment royalties or other amounts, which we expect in the second half of 2021.

We have accrued $44.8 million as of March 31, 2021 related to this matter which is classified within current liabilities in our condensed consolidated balance sheets as of this date.

The restricted cash of $17.6 million would be used to partially satisfy this payment.

On July 26, 2021, the Company entered into the Agreement with Bio-Rad resolving all outstanding litigation and other proceedings between the two companies across all jurisdictions around the world and dismissing all infringement claims with prejudice.

Under the Agreement, each company shall pay to the other royalties from licensed products and licensed services through 2030.

The Company previously accrued $44.8 million in royalties and interest between November 14, 2018 and March 31, 2021 related to sales of the Company’s GEM products as a result of the litigation with Bio-Rad.

Pursuant to the Agreement, the Company shall pay Bio-Rad $29.4 million in royalties and interest related to the sales of such GEM products between November 14, 2018 and March 31, 2021.

As a result, in connection with the Agreement the Company reversed $15.4 million in accrued royalties and interest to the Company's financial statements in the second quarter of 2021.

Restricted cash of $17.6 million related to the Bio-Rad litigation, classified within current assets in our condensed consolidated balance sheets as of June 30, 2021, will be used to pay the settlement payment of $29.4 million.

We currently anticipate making aggregate capital expenditures of between approximately $150 million and $170 million during the next 12 months, which includes the construction costs of facilities on our recently purchased land located in Pleasanton, California as well as other global facilities and equipment to be used for manufacturing and research and development.

Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, the impacts of the COVID-19 pandemic, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities, and the introduction of new products.

Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, the impacts of the COVID-19 pandemic including any resurgences, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities, and the introduction of new products.

We take a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs.

We are continuing to review opportunities that meet our long-term growth objectives.

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, and this assessment of our liquidity position is informed by our evaluation of a wide range of COVID-19 pandemic recovery scenarios.

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.

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The COVID-19 pandemic has negatively impacted the global economy, resulted in the closure of many of our customers’ facilities, disrupted global supply chains and created significant volatility and disruption of financial markets.

While certain of our customers' labs began to re-open in June 2020 and continued to re-open during the second half of 2020 and into the first quarter of 2021, many of those labs are not yet fully operational and an extended period of economic disruption and closure, on-going limitations on operations at customer facilities or re-closure of our customers’ labs could materially affect our business, results of operations, financial condition and access to sources of liquidity.

We will continue to monitor the development and control of the COVID-19 pandemic and we believe there will be an increase in business activity upon the loosening of pandemic-related restrictions arising from the success of the vaccination programs by various government agencies in the United States and in other countries, including a resurgence in activity levels at laboratories which were temporarily closed, barring a renewed increase in COVID-19 cases which may lead to further business closures.

Although we are currently uncertain as to when this resurgence will occur, we intend to invest in research and development activities and other initiatives while the COVID-19 pandemic is brought under control including accelerated investments in product development and intellectual property to launch new products and continue improving existing 10x solutions.

While certain of our customers' labs began to re-open in June 2020 and continued to re-open during the second half of 2020 and into the first half of 2021, some of those labs are still not yet fully operational and some labs in certain geographic locations have paused plans to reopen, closed again after periods of reopening, or are unable to operate at full capacity due to the COVID-19 pandemic including resurgences in some localities, and an extended period of economic disruption and closure, on-going limitations on operations at

customer facilities or closures of our customers’ labs could materially affect our business, results of operations, financial condition and access to sources of liquidity.

We will continue to monitor the development and control of the COVID-19 pandemic and while the situation remains uncertain, we intend to continue to invest in research and development activities and other initiatives while the COVID-19 pandemic is brought under control including accelerated investments in product development and intellectual property to launch new products and continue improving existing 10x solutions.

Additionally, we plan to continue to build our commercial organization across key geographies around the world and invest in capabilities to address the interest we are seeing from the pharmaceutical and translational markets.

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.

Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness.

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

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

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands)

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Operating activities

The net cash used in operating activities of $4.1 million for the three months ended March 31, 2021 was due primarily to a net loss of $11.6 million, net cash outflow from changes in operating assets and liabilities of $15.2 million, partially offset by adjustments for stock-based compensation expense of $16.2 million, depreciation and amortization of $4.8 million and amortization of leased right-of-use assets of $1.7 million.

The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory of $8.6 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand, a decrease in accrued expenses and other current liabilities of $7.2 million, due to the timing of payments including license fees, an increase in accounts receivable of $6.2 million due to timing of collections, a decrease in other noncurrent liabilities of $3.5 million, an increase in prepaid expenses and other current assets of $1.6 million and a decrease of $1.4 million due to payment of operating lease liabilities.

The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $10.9 million due to timing of vendor payments, an increase in accrued compensation and other related benefits of $1.3 million and an increase in accrued contingent liabilities of $0.7 million.

The net cash used in operating activities of $2.6 million for the three months ended March 31, 2020 was due primarily to a net loss of $21.1 million, partially offset by net cash inflow from changes in operating assets and liabilities of $6.1 million, and adjustments for stock-based compensation expense of $6.7 million, depreciation and amortization of $3.2 million, loss on extinguishment of debt of $1.5 million and amortization of leased right-of-use assets of $1.1 million.

The net cash inflow from operating assets and liabilities was primarily due to an increase in accrued compensation and other related benefits of $6.2 million as we increased our headcount to support our expanding operations, an increase in accrued expenses and other current liabilities of $4.6 million consistent with the growth of our business, an increase in accrued contingent liabilities of $4.7 million, and a decrease in accounts receivable of $2.5 million due to timing of collections, partially offset by a decrease in other noncurrent liabilities of $5.7 million, an increase in inventory of $4.1 million due to the timing of inventory purchases including advance purchases of inventory in anticipation of supply chain disruptions associated with the COVID-19 pandemic and a decrease of $1.3 million in payment of operating lease expenses.

The net cash used in operating activities of $1.0 million for the six months ended June 30, 2021 was due primarily to a net loss of $22.6 million, net cash outflow from changes in operating assets and liabilities of $35.2 million, partially offset by adjustments for stock-based compensation expense of $43.1 million, depreciation and amortization of $9.6 million and amortization of leased right-of-use assets of $4.0 million.

The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued contingent liabilities of $14.7 million arising from the settlement of the Bio-Rad Actions litigation (see Note 6 to condensed consolidated financial statements, Commitments and Contingencies, The 2021 Bio-Rad Settlement And Patent Cross License Agreement, for further details), an increase in inventory of $14.2 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand, an increase in accounts receivable of $7.8 million due to timing of collections, a decrease in accrued expenses and other current liabilities of $6.5 million due to the timing of payments including license fees, a decrease in other noncurrent liabilities of $4.3 million, an increase in prepaid expenses and other current assets of $1.1 million and a decrease of $3.2 million due to payment of operating lease liabilities.

The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $9.7 million due to timing of vendor payments and an increase in accrued compensation and other related benefits of $5.7 million.

The net cash used in operating activities of $32.1 million for the six months ended June 30, 2020 was due primarily to a net loss of $61.3 million, net cash outflow from changes in operating assets and liabilities of $1.6 million, partially offset by adjustments for stock-based compensation expense of $20.6 million, depreciation and amortization of $6.5 million, loss on extinguishment of debt of $1.5 million and amortization of leased right-of-use assets of $2.2 million.

The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory of $6.5 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand, a decrease in other noncurrent liabilities of $4.3 million, a decrease in other assets of $3.0 million, a decrease in accounts payable of $2.8 million due to timing of vendor payments, a decrease of $2.0 million in payment of operating lease expenses, a decrease in accrued compensation and other related benefits of $2.1 million and a decrease in prepaid expenses and other current assets of $1.7 million.

The net cash outflow from operating assets and liabilities was partially offset by an decrease in accounts receivable of $10.6 million due to timing of

collections, an increase in accrued contingent liabilities of $6.5 million and an increase in accrued expenses and other current liabilities of $3.1 million consistent with the growth of our business.

Investing activities

The net cash used in investing activities of $44.3 million in the three months ended March 31, 2021 was due to purchases of property and equipment of $38.9 million including the purchase of land for $28.1 million and cash paid for the acquisition of Tetramer Shop of $5.5 million.

The net cash used in investing activities of $8.1 million in the three months ended March 31, 2020 was due to purchases of property and equipment.

The net cash used in investing activities of $58.9 million in the six months ended June 30, 2021 was due to purchases of property and equipment of $53.4 million including the purchase of land for $28.1 million and cash paid for the acquisition of Tetramer Shop of $5.5 million.

The net cash used in investing activities of $14.8 million in the six months ended June 30, 2020 was due to purchases of property and equipment.

Financing activities

The net cash provided by financing activities of $3.5 million in the three months ended March 31, 2021 was primarily from proceeds of $8.5 million from the issuance of common stock from the exercise of stock options partially offset by payments on financing arrangements of $5.0 million.

The net cash used in financing activities of $33.8 million in the three months ended March 31, 2020 was primarily due to the use of $31.3 million in connection with loan principal payments including the early repayment of the term loan under the Loan and Security Agreement (including fees in connection with the early repayment of the term loan), payments on financing arrangements of $5.9 million and proceeds of $3.3 million from the issuance of common stock from the exercise of stock options.

The net cash provided by financing activities of $19.7 million in the six months ended June 30, 2021 was primarily from proceeds of $24.7 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.0 million.

The net cash used in financing activities of $25.8 million in the six months ended June 30, 2020 was primarily due to the use of $31.3 million in connection with loan principal payments including the early repayment of the term loan under the Loan and Security Agreement (including fees in connection with the early repayment of the term loan) and payments on financing arrangements of $5.8 million, partially offset by proceeds of $11.3 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases.

Critical Accounting Policies

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What changed 10-Q

Item 2. Management’s Discussion and Analysis