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Item 7. Management’s Discussion and Analysis

2024-02-15 compared with 2023-02-16 · 132 added, 127 removed, 243 unchanged (52% of the section changed)

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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 are a life science technology company focused on building innovative products to interrogate, understand and master biology.

Our integrated platform solutions include instruments, consumables and software for analyzing biological systems at a resolution and scale that matches the complexity of biology.

We are a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biology.

Our integrated solutions include instruments, consumables and software for analyzing biological systems at resolution and scale that matches the complexity of biology.

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 X Series and Chromium Connect, which we refer to as “Chromium instruments,” our Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of transcriptomic probes from standard glass slides to Visium slides, our Xenium Analyzer, an instrument designed for fully automated high-throughput analysis of cells in their tissue environment, and our proprietary microfluidic chips, slides, reagents and other consumables for our Chromium, Visium and Xenium 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 through December 31, 2022, cumulatively we have sold 4,630 instruments to researchers around the world, including all of the top 100 global research institutions as ranked by Nature in 2021 based on publications and all of the top 20 global biopharmaceutical companies by 2021 research and development spend.

Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolution and on massive scale, such as at the single cell level for millions of cells.

Our commercial product portfolio leverages our Chromium X Series and Chromium Connect instruments, which we refer to as “Chromium instruments,” our Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of transcriptomic probes from standard glass slides to Visium slides, and our Xenium Analyzer, an instrument designed for fully automated high-throughput analysis of cells in their tissue environment, which we refer to as “Spatial instruments,” and our proprietary microfluidic chips, slides, reagents and other consumables for our Chromium, Visium and Xenium 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 scale, such as at the single cell level for millions of cells.

Customers purchase instruments and consumables from us for use in their experiments.

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

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, improving and developing new capabilities for our Chromium, Visium and Xenium platforms, developing combined software and workflows across multiple solutions and investigating new technologies.

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

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

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

In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, net of offering costs, underwriting discounts and commissions.

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

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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:

We expect our expenses will increase in connection with our ongoing activities, as we:

• attract, hire and retain qualified personnel;

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• acquire businesses or technologies;

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

Operational Effectiveness in the COVID-19 Pandemic Environment

We continue to closely monitor developments surrounding the COVID-19 pandemic including, among other developments, the potential impacts of variants.

Many of our customers continue to navigate COVID-19 related challenges that we believe have affected our customers’ productivity.

Such challenges have included COVID-19 related protocols and restrictions, difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to procuring materials, equipment and components required for their experiments.

For example, we believe COVID-19 related lockdowns in China negatively impacted our revenues for the year ended December 31, 2022.

We, our suppliers and our other partners also have encountered COVID-19 related challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not experienced any material impacts as a result of such challenges.

There is considerable uncertainty about the duration of these disruptions.

We expect these disruptions to continue to impact our operating results, however, the extent of the financial impact and duration cannot be reasonably estimated at this time.

For further discussion of the risks relating to the impacts of the COVID-19 pandemic, see the section titled “ Risk Factors, ” generally, and “ Risk Factors—Risks related to our business and industry—We are subject to risks associated with COVID-19 ,” specifically, under Part I, Item 1A.

On January 8, 2021, we acquired 100% of the outstanding shares of Tetramer Shop ApS, a privately held company based in Copenhagen, Denmark, for $8.5 million in cash, net of cash acquired of $0.2 million.

Tetramer Shop ApS developed and provided reagents for precise monitoring of antigen-specific T cells in research and development, which we commercialized with our BEAM-T product in 2022.

On October 13, 2020, we purchased all of the outstanding shares of ReadCoor, a privately held company based in Cambridge, Massachusetts, for $407.4 million, inclusive of $1.6 million of transaction costs and net of cash acquired of $9.2 million.

The total purchase consideration comprised of $101.4 million in cash and $306.0 million in shares of the Company's common stock.

On August 21, 2020, we purchased all of the outstanding shares of CartaNA, a privately held company based in Stockholm, Sweden, for $41.8 million, inclusive of $0.6 million of transaction costs and net of cash acquired of $1.5 million.

ReadCoor and CartaNA were developing in situ technology which when combined with internal innovations formed the foundation of our Xenium platform.

See Note 4 to the consolidated financial statements for further details of the above acquisitions.

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

Key business metrics

We regularly review a number of operating and financial metrics, including cumulative instruments sold and consumable pull-through, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

We regularly review a number of operating and financial metrics, including cumulative instruments sold and total consumables reactions, 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.

For example, as further described below, various factors make consumable pull-through per instrument less useful than in past periods and we do not intend to present this key metric in future filings.

Cumulative instruments sold

As of December 31,

2023 2022 2021

Chromium 5,180 4,411 3,511

Visium 531 211 —

Xenium 255 8 —

Cumulative instruments sold 5,966 4,630 3,511

Our products are sold to academic, government, biopharmaceutical, biotechnology and other leading institutions around the globe.

Our products are sold to academic and translational researchers and biopharmaceutical companies.

Our Chromium Controller, Chromium X Series and Visium CytAssist instruments are user installable and do not require in-person training.

Our Chromium Connect and Xenium instruments require installation and we offer in-person training for their use.

We believe cumulative instruments sold, a metric we previously referred to as our instrument installed base, is one of the indicators of our ability to drive customer adoption of our products.

We believe cumulative instruments sold is one of the indicators of our ability to drive customer adoption of our products.

We define cumulative instruments sold as the cumulative number of Chromium instruments, including the Chromium X Series, the Chromium Connect and the legacy Chromium Controller, Visium CytAssist instruments and Xenium instruments sold since inception.

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We therefore believe that an annual representation of cumulative instruments sold is most appropriate for assessing trends in our business.

Consumable pull-through per instrument

Total consumables reactions sold

Year ended December 31,

(in thousands) 2022 2021

Consumable pull-through per instrument $ 109 $ 142

Our consumables portfolio includes proprietary microfluidic chips, slides, reagents and other consumables across our platforms.

The figures in the table above represent the annual consumable pull-through per instrument for the years ended December 31, 2022 and 2021.

We define consumable pull-through per instrument as the total consumables revenue in the given quarter divided by the average number, during that quarter, of cumulative instruments sold since inception.

We calculate the average number of cumulative instruments sold since inception for a given quarter using the number of cumulative instruments sold since inception as of the last day of the prior quarter and the number of cumulative instruments sold since inception 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.

We do not believe the consumable pull-through per instrument in an individual quarter is an effective indicator of current business trends as quarterly consumable pull-through can fluctuate due to a number of factors, including the timing of product transitions, budget and funding cycles of our customers, expansion into new global markets and industries and the impact of the COVID-19 pandemic on our customers' operations.

With the increasing complexity of our product offerings and the expansion of our product portfolio, pull-through per instrument is becoming less representative of trends in our business for a number of reasons.

We have discontinued our legacy Chromium Controller which has been replaced by the Chromium X Series as well as Chromium Connect instruments, and many Chromium Controller users have upgraded to newer instruments.

In addition, some customers purchase and regularly utilize more than one Chromium instrument.

The utilization patterns of our customers vary.

Also, we have expanded our instrument portfolio and now sell several types of instruments across all three of our platforms, each with unique use cases and utilization patterns.

Certain of our solutions do not require an instrument, such as our Visium Spatial Gene Expression solution.

Each of these factors make average consumable pull-through per instrument less useful than in past periods.

As such, the year ending December 31, 2022 will be the last reporting period in which it is a key business metric.

Chromium 312,500 290,900

Visium 29,300 28,300

Xenium 5,200 100

Total consumable reactions 347,000 319,300

A consumable reaction is the reagent setup needed to perform an experiment using one of our solutions.

Reactions represent the unit volumes that we sell when a researcher purchases our consumables.

As such, consumable reactions sold is an appropriate metric for assessing trends in our business.

The figures in the table above (rounded to the nearest hundred) represent the total consumable reactions for the years ended December 31, 2023 and 2022.

Key factors affecting our performance

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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 9% from December 31, 2021 through December 31, 2022.

We regularly solicit feedback from our customers and focus our research and development efforts on enhancing the fleet of 10x instruments and enabling their ability to use additional applications that address their needs, which we believe in turn helps to drive additional sales of our instruments and consumables.

In 2020, we introduced our Chromium Connect instrument, which is an automated version of our legacy Chromium Controller instrument.

We believe the automated features of the Chromium Connect will increase our addressable market by increasing utilization by biopharmaceutical customers.

In 2021, we introduced our Chromium X Series which consists of the Chromium X, a high-throughput instrument to deliver routine million cell experiments, and the Chromium iX, an instrument capable of running experiments for tens of thousands of cells seamlessly upgradable to the Chromium X as scientists expand their research projects.

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There have been fluctuations in the mix between instruments and consumables and amongst our consumables.

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.

The revenue contribution from these and other consumable products has varied and is expected to vary on a quarterly basis due to several factors, including the publication of scientific papers demonstrating the value of the consumables, the availability of grants to fund research, budgetary timing and our introduction of new product features and new consumables offerings.

The revenue contribution from these and other consumable products has varied and is expected to vary on a quarterly basis due to several factors, including the publication of scientific papers demonstrating the value of the consumables, the availability of grants to fund research, budgetary timing, our introduction of new product features and new consumables offerings and our own manufacturing capacity or the capacity of our partners.

For each of the years ended December 31, 2023, 2022 and 2021, our Single Cell Gene Expression consumables, which were introduced in 2016, were our highest selling consumables product.

For the year ended December 31, 2022, the remaining consumables revenue was substantially comprised of sales of our Single Cell Immune Profiling consumables, Single Cell Multiome ATAC+Gene Expression solution and Visium.

Revenue contribution from our Single Cell Gene Expression and Single Cell ATAC consumables decreased as a percentage of overall consumables revenue while revenue contribution from our Single Cell Immune Profiling, Single Cell Multiome ATAC+Gene Expression solution and Visium consumables increased as a percentage of overall consumables revenue for the year ended December 31, 2022.

For the year ended December 31, 2023, the remaining consumables revenue was comprised of sales of our Single Cell Immune Profiling, Single Cell Multiome ATAC+Gene Expression, Single Cell Gene Expression Flex, Single Cell ATAC, and Visium and Xenium consumables.

Revenue contribution from our Single Cell Gene Expression, Single Cell Multiome ATAC+Gene Expression and Single Cell Immune Profiling consumables decreased as a percentage of overall consumables revenue while revenue contribution from our Single Cell Gene Expression Flex, Single Cell ATAC and Visium and Xenium consumables increased as a percentage of overall consumables revenue for the year ended December 31, 2023.

Our margins are generally 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.

Overall, we expect our gross margin will trend lower in the near-term due in part to change in product mix with newly introduced products and the impacts of inflation and increased supply chain costs.

While we expect the mix of direct sales as compared to sales through distributors to remain relatively constant in the near term, we are evaluating increasing our direct sales capabilities in certain geographies.

We expect our gross margin will continue to trend lower due in part to change in product mix with newly introduced products, the impacts of inflation including, among other impacts, employee compensation and benefits, increased supply chain costs and increased costs due to expanding our operations infrastructure.

In particular, the Xenium instrument currently carries a significantly lower margin than our other instruments.

We believe that potential increases for average selling price, as well as potential opportunities for cost reductions due to economies of scale will improve instrument margin over the long term.

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 2022 and 2021, we introduced five and four new consumables products for each of these years, respectively.

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, in our manufacturing capabilities and commercial infrastructure.

We expect to complete the expansion of our research and development center and manufacturing facility adjacent to our Pleasanton global headquarters in the near future.

We expect our operating expenditures to continue to increase in 2023 and beyond as we increase our investment to support new and existing research and development projects and incentivize and retain key talent, which we expect to result in increased stock-based compensation expense in future periods.

We completed the expansion of our research and development center and manufacturing facility adjacent to our Pleasanton global headquarters in 2023.

Excluding acquisitions, we expect our operating expenditures to continue to increase in 2024 and beyond as we increase our investment in new and existing research and development projects, increase commercial efforts to support revenue growth and incentives to retain key talent.

In addition, we expect increased legal costs in 2024 to support the protection of our intellectual property portfolio.

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.

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

For example, our 2021 acquisition of Tetramer Shop, which specialized in the development and provision of reagents for precise monitoring of antigen-specific T cells in research and development was accounted for as a business acquisition resulting in capitalization of intangible assets such as developed technology and goodwill.

Additionally, our 2020 acquisitions of CartaNA and ReadCoor 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.

Our 2023 acquisition of certain intangible and other assets from Centrillion Technologies, Inc.

and Centrillion Technology Holdings Corp.

and 2020 acquisitions of CartaNA and ReadCoor 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 or when certain technology development milestones were met.

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.

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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.

Our revenue is subject to fluctuation based on the foreign currency in which our products are sold, principally for sales denominated in the euro, Great British pound and Japanese yen.

Our revenue from consumables includes sales of our Chromium, Visium and Xenium consumable products.

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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.

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market conditions that may impact our pricing;

sales mix changes among

consumables, instruments and services;

sales mix changes among consumables, instruments and services;

product mix changes between established products and new products;

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Research and development expense primarily consists of personnel and related costs, independent contractor costs, laboratory supplies, equipment maintenance prototype and materials expenses, amortization of developed technology and intangibles and allocated costs including facilities and information technology.

We plan to continue to invest in our research and development efforts, including hiring additional employees, to enhance existing products and develop new products.

In addition to making investments in next generation products for single cell and spatial analysis, our ReadCoor and CartaNA acquisitions which when combined with internal innovations formed the basis of our Xenium platform.

We also expect allocated facilities and information technology costs to increase in future periods as a result of higher costs associated with the expansion to our global headquarters and research and development center in Pleasanton, California.

We plan to continue to invest in our research and development efforts to enhance existing products and develop new products.

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.

Having completed the expansion of our global headquarters in Pleasanton in 2023, we expect allocated facilities and information technology costs to remain relatively flat in 2024.

In-process research and development.

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.

We expect these costs to be recognized, in most cases, only in periods during which we complete an acquisition of assets comprised in whole or part of intellectual property for research and development.

We periodically evaluate acquisitions of this nature.

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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, safety equipment purchases and cleaning and allocated costs including facilities and information technology, are also included in selling, general and administrative expenses.

We also expect increased infrastructure costs, as well as increased costs for accounting, human resources, legal including litigation-related fees and contingency payments, insurance and investor relations.

We also expect allocated facilities costs to increase in future periods as a result of higher costs associated with the expansion to our global headquarters and research and development center in Pleasanton, California.

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 and increased legal costs to support the protection of our intellectual property portfolio.

We expect infrastructure costs including allocated facilities and information technology costs to remain flat in absolute dollars.

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.

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Accrued contingent liabilities

In 2021 and 2020, accrued contingent liabilities were comprised of the original charge, estimated royalties and interest charges primarily related to our litigation with Bio-Rad Laboratories, Inc.

We did not incur any accrued contingent liabilities in 2022.

In 2021, accrued contingent liabilities were comprised of the original charge, estimated royalties and interest charges primarily related to our litigation with Bio-Rad Laboratories, Inc.

We did not incur any accrued contingent liabilities in 2023 and 2022.

Interest income

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

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

Other income (expense), net

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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, 2022, we had federal net operating loss carryforwards (“NOLs”) of $717.0 million and federal tax credit carryforwards of $59.0 million.

Our federal NOLs generated after January 1, 2018, which total $708.5 million, are carried forward indefinitely, while all of our other federal NOLs and tax credit carryforwards expire beginning in 2033.

As of December 31, 2022, we had state NOLs of $375.7 million, which expire beginning in 2033.

Our provision for income taxes consists primarily of foreign taxes.

As we expand the scale and scope of our international business activities, any changes in the U.S.

and foreign taxation of such activities may increase our overall provision for income taxes in the future.

As of December 31, 2023, we had federal net operating loss (“NOL”) carryforwards of $672.3 million and federal tax credit carryforwards of $77.3 million.

Our federal NOLs generated after December 31, 2017, which total $665.9 million, are carried forward indefinitely, while all of our other federal NOL and tax credit carryforwards expire beginning in 2033.

As of December 31, 2023, we had state NOL carryforwards of $412.2 million, which expire beginning in 2033.

In addition, we had state tax credit carryforwards of $58.5 million, which carry forward indefinitely.

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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 have experienced a history of losses and a lack of future taxable income would adversely affect our ability to utilize these NOL and tax 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 corporation’s 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.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOL carryforwards and other pre-change attributes, such as 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.

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Such limitations may result in expiration of a portion of the NOL carryforwards before utilization.

We completed a study through October 31, 2022 to determine whether an ownership change had occurred under Section 382 or 383 of the Code, and we determined that an ownership change occurred in 2013.

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

In addition, certain attributes attributable to ReadCoor are subject to annual limitations as a result of our acquisition of ReadCoor, which constituted an ownership change of ReadCoor.

Such limitations may result in expiration of a portion of our net operating loss carryforwards or other tax attributes before utilization.

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.

We completed a study through September 30, 2023 to determine whether an ownership change had occurred under Section 382 or 383 of the Code, and we determined that an ownership change occurred in 2013.

As a result, our NOLs generated through November 1, 2013 may be subject to limitation under Section 382 of the Code.

In addition, certain ReadCoor tax attributes are subject to annual limitations as a result of our acquisition of ReadCoor, which constituted an ownership change of ReadCoor.

Such limitations may result in expiration of a portion of our NOL or tax credit carryforwards before utilization.

Our ability to use NOL or tax credit carryforwards 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 generate taxable income, our ability to use our pre-change NOL or tax credit carryforwards to offset U.S.

federal and state taxable income may still be subject to limitations, which could potentially result in increased future tax liability.

Results of Operations

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Interest expense (33) (476) (866)

Other (expense) income, net (198) (802) 1,337

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

Other expense, net (307) (198) (802)

Total other income (expense) 16,566 5,973 (1,462)

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Year Ended December 31, Change

(dollars in thousands) 2022 2021 $

Instruments $ 72,396 $ 64,474 $ 7,922 12 %

Consumables 435,588 418,740 16,848 4 %

Chromium $ 47,866 $ 58,552 $ (10,686) (18) %

Spatial 75,605 13,844 61,761 446 %

Total instruments revenue 123,471 72,396 51,075 71 %

Chromium 420,316 400,433 19,883 5 %

Spatial 59,237 35,155 24,082 69 %

Total consumables revenue 479,553 435,588 43,965 10 %

Services 15,703 8,425 7,278 86 %

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Revenue increased $102.3 million, or 20%, for the year ended December 31, 2023 as compared to year ended December 31, 2022.

Instrument revenue increased $7.9 million, or 12%, to $72.4 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to higher volume of instruments sold including our newly introduced Visium CytAssist and Xenium instruments.

The number of instruments sold during the year ended December 31, 2022 was 1,119 units and the cumulative instruments sold since inception was 4,630 units.

Consumables revenue increased $16.8 million, or 4%, to $435.6 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily driven by higher volume of instruments sold, partially offset by decreased demand due to limited laboratory productivity arising from the continued impact of the global COVID-19 pandemic, including lockdowns in China.

Instruments revenue increased $51.1 million, or 71%, to $123.5 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to higher volume of Spatial instruments sold.

The revenues for the years ended December 31, 2023 and 2022 included twelve and three months of sales of Xenium instruments, respectively.

Chromium instruments revenue decreased $10.7 million, or 18%, to $47.9 million primarily due to lower volume of Chromium instruments sold and changes in product mix.

Consumables revenue increased $44.0 million, or 10%, to $479.6 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily driven by growth in both Chromium and Spatial consumables sales.

Cost of revenue, Gross Profit and Gross Margin

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Cost of revenue increased $89.0 million, or 74%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

The increase was primarily driven by a one-time reversal of $14.7 million of accrued royalties resulting from

the Settlement and Patent Cross License Agreement with Bio-Rad Laboratories, Inc.

(the "Bio-Rad Agreement") during the year ended December 31, 2021, $19.7 million from higher manufacturing costs due to increased sales and higher costs of newly introduced products, $5.1 million of higher inventory scrap and excess and obsolete inventory charges, $3.7 million of higher warranty costs and $3.1 million of higher royalty expenses.

The increase was primarily driven by higher manufacturing costs of $79.0 million due to increased sales and higher costs of newly introduced products, $4.4 million of higher inventory write-downs and $4.4 million of higher warranty charges.

Operating Expenses

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Research and development $ 270,332 $ 265,667 $ 4,665 2 %

In-process research and development 60,980 — 60,980 N/A

Selling, general and administrative 343,330 298,300 45,030 15 %

Accrued contingent liabilities — (660) 660 (100) %

Total operating expenses $ 674,642 $ 563,967 $ 110,675 20 %

Research and development expense increased $4.7 million, or 2%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

The increase was primarily driven by an increase in personnel expenses of $34.8 million, including $17.2 million in stock-based compensation expense and $1.4 million in restructuring expense, higher costs of laboratory materials and supplies of $4.6 million used to support our research and development efforts, $11.2 million of higher costs for facilities and information technology to support operational expansion, higher consulting and professional services of $1.1 million for product development and $0.9 million of higher depreciation.

The increase was primarily driven by an increase in personnel expenses of $15.0 million, including $13.6 million in stock-based compensation expense and higher costs for facilities and information technology of $4.6 million including a lease impairment charge of $2.1 million.

The increase was partially offset by lower costs of laboratory materials, supplies and expensed equipment of $13.7 million used to support our research and development efforts and $2.0 million in consulting and professional services.

In-process research and development expense recorded during the year ended December 31, 2023 related to the January 2023 agreement to acquire certain intangible and other assets from Centrillion Technologies, Inc.

and Centrillion Technology Holdings Corp.

which was accounted for as an asset acquisition.

In connection with the acquisition, we recognized an in-process research and development intangible asset of $61.0 million which did not have alternative future use and therefore was recognized as an expense during the period.

See Note 4 to the consolidated financial statements for further details.

There were no similar purchases in year ended December 31, 2022.

Selling, general and administrative expenses increased $45.0 million, or 15%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

The increase was primarily driven by increased personnel expenses of $50.3 million, including $21.6 million in stock-based compensation expense and $2.5 million in restructuring expense, $3.1 million of higher costs for facilities and information technology to support operational expansion, partially offset by decreased outside legal expenses of $7.7 million, $3.8 million of consulting and professional services and $2.5 million of lower marketing expenses related to conferences and seminars.

The increase was primarily driven by increases in outside legal expenses of $18.1 million, personnel expenses of $14.4 million, including $14.7 million in stock-based compensation expense, $6.4 million for facilities and information technology including lease impairment charges of $2.8 million, $4.5 million of impairment charges relating to the discontinuance of a product line, and higher consulting and professional services of $1.8 million.

The increase in personnel expenses was partially offset by $2.5 million in restructuring expenses for the year ended December 31, 2022.

Excluding acquisitions, we expect our operating expenditures to continue to increase in 2024 and beyond as we increase our investment in new and existing research and development projects, commercial efforts to support revenue growth and incentives to retain key talent.

In addition, we expect increased legal costs in 2024 to support the protection of our intellectual property portfolio.

Other Income (Expense), Net

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Interest expense (33) (476) 443 (93) %

Other (expense) income, net (198) (802) 604 (75) %

Other expense, net (307) (198) (109) 55 %

Total other income (expense) $ 16,566 $ 5,973 $ 10,593 177 %

Interest income increased by $10.3 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

The increase was primarily due to interest income generated from our cash equivalents and marketable securities during the year ended December 31, 2022 and an increase in interest rates.

Interest expense decreased by $0.4 million, or 45%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021 driven primarily by lower interest expense recognized on accrued license fees.

The change in other income (expense), net for the year December 31, 2022 as compared to the year ended December 31, 2021 was driven by realized and unrealized losses from foreign currency rate measurement fluctuations.

The increase was primarily due to interest income generated from our cash equivalents and marketable securities during the year ended December 31, 2023 reflecting an increase in interest rates.

Other expense, net increased by $0.1 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 and was driven by realized and unrealized losses from foreign currency rate measurement fluctuations.

Provision for Income Taxes

The Company’s provision for income taxes was $4.0 million and $4.5 million, respectively, for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

The provision for income taxes for the years ended December 31, 2022 and 2021 consists primarily of foreign taxes.

Deferred tax assets related to our domestic operations are fully offset by a valuation allowance.

The Company’s provision for income taxes was $6.3 million and $4.0 million, respectively, for the year ended December 31, 2023 and 2022.

The provision for income taxes increased by $2.3 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

The increase was primarily due to higher foreign income.

On January 28, 2023, we signed an agreement to acquire certain intangible and other assets from Centrillion Technologies, Inc.

and Centrillion Technology Holdings Corp.

for an upfront cash payment of $10.0 million relating to an intellectual property license.

Upon the close of the transaction on July 14, 2023, we paid additional cash consideration of $10.0 million upon acquiring the assets.

Under the agreement, we are obligated to provide additional cash consideration if certain technology development milestones are met.

As of December 31, 2023, we had paid $21.3 million relating to the completion of development milestones.

We paid an additional $20.0 million in January 2024 in relation to a development milestone which was accrued in the Company's consolidated financial statements as of December 31, 2023.

Up to $15.0 million of cash consideration is due if an additional technology development milestone is met.

Furthermore, the Company expects to pay cash consideration tied to future sales milestones if such milestones are met.

See Note 4 to the consolidated financial statements for further details.

Liquidity and Capital Resources

As of December 31, 2023, we had approximately $388.7 million in cash and cash equivalents, and marketable securities which were primarily held in U.S.

Short-term restricted cash of $2.6 million and long-term restricted cash of $5.0 million primarily serves as collateral for outstanding letters of credit for facilities.

We have generated negative cumulative cash flows from operations since inception through the year ended December 31, 2023, and we have generated losses from operations since inception as reflected in our accumulated deficit of $1.3 billion.

We currently anticipate making aggregate capital expenditures of between approximately $60 million and $70 million during the next 12 months, the majority of which we expect to incur for construction costs of the facilities on our property in Pleasanton, California in the first half of 2023, as well as other global facilities and equipment to be used for manufacturing and research and development.

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

We currently anticipate making aggregate capital expenditures of between approximately $20 million and $25 million during the next 12 months, which we expect to include, among other expenditures, equipment to be used for manufacturing and research and development.

Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities, legal costs associated with defending and enforcing intellectual property rights and the introduction of new products.

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

We regularly review opportunities that meet our long-term growth objectives.

While we expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make, we believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our anticipated cash needs for at least the next 12 months.

In January 2023, we signed an agreement to acquire certain intangible and other assets from Centrillion Technologies, Inc.

and Centrillion Technology Holdings Corp.

for an upfront cash payment of $10.0 million relating to an intellectual property license.

Upon the close of the transaction on July 14, 2023, we paid additional cash consideration of $10.0 million upon acquiring the assets.

Under the agreement, we are obligated to provide additional cash consideration if certain technology development milestones are met.

As of December 31, 2023, we have paid $21.3 million relating to the completion of development milestones.

We paid an additional $20.0 million in January 2024 in relation to a development milestone which was accrued in our consolidated financial statements as of December 31, 2023.

Up to $15.0 million of cash consideration is due if an additional technology development milestone is met.

Furthermore, we expect to pay cash consideration tied to future sales milestones if such milestones are met.

We expect to continue to incur operating losses for the foreseeable future.

We believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our anticipated cash needs for at least the next 12 months.

However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect.

We maintain the majority of our cash and cash equivalents in accounts with major U.S.

and multi-national financial institutions, and our deposits at these institutions exceed insured limits.

Market conditions can impact the viability of these institutions.

In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all.

Any inability to access or delay in accessing these funds could adversely affect our business and financial position.

We intend to continue to evaluate market conditions and may in the future pursue additional sources of funding, such as mortgage or other financing, to further enhance our financial position and to execute our business strategy.

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Effect of exchange rates changes on cash, cash equivalents, and restricted cash (33) (44)

Net decrease in cash, cash equivalents, and restricted cash $ (368,720) $ (92,571)

Net increase (decrease) in cash, cash equivalents, and restricted cash

$ 131,931 $ (368,720)

Operating activities

The net cash used in operating activities of $15.2 million for the year ended December 31, 2023 was due primarily to a net loss of $255.1 million, partially offset by stock-based compensation expense of $167.0 million, depreciation and amortization of $35.5 million, net cash inflow from changes in operating assets and liabilities of $17.3 million, asset impairment charges of $9.8 million, amortization of leased right-of-use assets of $8.1 million, realized losses on sale of marketable securities of $1.7 million and other non-cash expenses of $0.4 million.

The net cash inflow from operating assets and liabilities was primarily due to an increase in accrued expenses and other current liabilities of $28.3 million primarily driven by $20.0 million of accrued purchase consideration, an increase in deferred revenue of $10.9 million, a decrease in inventory of $7.9 million and an increase in other noncurrent liabilities of $1.3 million.

The net cash inflow from operating assets and liabilities was partially offset by an increase in accounts receivable of $10.6 million primarily due to an increase in revenue and timing of collections, a decrease of $8.7 million due to payment of operating lease liabilities, a decrease in accounts payable of $6.0 million due to timing of vendor payments, a decrease in accrued compensation and other related benefits of $2.6 million and an increase in prepaid expenses and other current assets of $2.4 million.

The net cash used in operating activities of $33.6 million for the year ended December 31, 2022 was due primarily to a net loss of $166.0 million, net cash outflow from changes in operating assets and liabilities of $39.4 million, partially offset by stock-based compensation expense of $136.8 million, depreciation and amortization of $25.4 million, amortization of leased right-of-use assets of $7.6 million, loss on disposal of property and equipment of $1.1 million and amortization of premium and accretion of discount on marketable securities, net of $0.9 million.

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The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $5.9 million due to timing of vendor payments, an increase in deferred revenue of $3.4 million, an increase in accrued expenses and other current liabilities of $3.3 million, an increase in accrued compensation and other related benefits of $1.1 million and a decrease in other noncurrent assets of $0.9 million.

The net cash used in operating activities of $21.4 million for the year ended December 31, 2021 was due primarily to a net loss of $58.2 million, net cash outflow from changes in operating assets and liabilities of $87.4 million, partially offset by stock-based compensation expense of $96.0 million, depreciation and amortization of $21.1 million and amortization of leased right-of-use assets of $7.1 million.

The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued contingent liabilities of $44.2 million, of which $29.4 million was paid as cash settlement arising from the Bio-Rad Agreement, an increase in accounts receivable of $34.0 million due to an increase in sales, an increase in inventory of $30.1 million due to build of inventory to meet anticipated demand, a decrease in other noncurrent liabilities of $4.7 million, an increase in prepaid expenses and other current assets of $1.1 million, a decrease of $2.5 million in payment of operating lease expenses and a decrease in accrued expenses and other current liabilities of $0.9 million due to the timing of payments including license fees.

The net cash outflow from operating assets and liabilities was partially offset by an increase in accrued compensation and other related benefits of $16.3 million, an increase in accounts payable of $11.1 million due to higher operational spending and timing of vendor payments, a decrease in deferred revenue of $1.5 million and a decrease in other noncurrent assets of $1.0 million.

Investing activities

The net cash provided by investing activities of $133.5 million in the year ended December 31, 2023 was due to the proceeds from sales and maturities of marketable securities of $100.2 million and $82.8 million, respectively, partially offset by purchases of property and equipment and intangible assets of $48.6 million and $0.9 million, respectively.

The net cash used in investing activities of $350.9 million in the year ended December 31, 2022 was due to purchases of marketable securities of $282.9 million, purchases of property and equipment of $131.7 million and payment of acquisition-related holdback cash and contingent consideration of $4.0 million, partially offset by proceeds from sales and maturities of marketable securities of $49.1 million and $18.5 million, respectively.

The net cash used in investing activities of $106.7 million in the year ended December 31, 2021 was due to purchases of property and equipment of $101.3 million including the purchase of land for $28.1 million and cash paid for the acquisition of Tetramer Shop of $5.5 million.

Financing activities

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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 our 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.

We use judgment to analyze and determine if the composition of our inventory is obsolete, slow-moving, unsalable or otherwise carried above the net realizable value and frequently review such determinations.

We write down specifically identified unusable, obsolete, slow-moving or known unsalable inventory and inventory otherwise carried above the net realizable value 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 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.

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Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.

During the year ended December 31, 2022, we issued market-based performance stock awards ("PSAs") comprising of performance stock options and performance restricted stock units.

The PSAs consist of three separate tranches and the vesting of each tranche is subject to the Class A common stock closing price being maintained at or above the predetermined share price goals of $60, $80 and $105 for each tranche, respectively, for a period of 20 consecutive trading days.

The share price goals can

be met any time prior to the fourth anniversary of the date of grant.

We estimated the value of the PSA awards granted in the year ended December 31, 2022 to be approximately $16.0 million using a Monte Carlo simulation model, using assumptions including volatility, risk-free interest rate, cost of equity and dividends.

During the years ended December 31, 2023 and 2022, we issued market-based performance stock awards ("PSAs") comprising of performance stock options and performance restricted stock units.

The PSAs consist of three separate tranches and the vesting of each tranche is subject to the Class A common stock closing price being maintained at or above certain

predetermined share price goals for each tranche.

We estimated the value of the PSA awards granted using a Monte Carlo simulation model, using assumptions including volatility, risk-free interest rate, cost of equity and dividends.

We will recognize the compensation expense over the derived service period using the accelerated attribution method commencing on the grant date.

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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 7. Management’s Discussion and Analysis