Alpha Teknova, Inc. 10-Q

Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed financial statements and related notes thereto included in Part I, Item I of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto for the year ended December 31, 2023, included in the 2023 Annual Report on Form 10-K (the 2023 Annual Report on Form 10-K) filed on March 27, 2024, with the Securities and Exchange Commission (SEC). For a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Quarterly Report on Form 10-Q, you should review the risk factors identified in Part I, Item 1A, Risk Factors, of our 2023 Annual Report on Form 10-K and in Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q. As in Item 1. of this Quarterly Report on Form 10-Q, in this Item 2, unless the context otherwise requires, the terms “Teknova,” the “Company,” “we,” “us,” and “our” refer to Alpha Teknova, Inc. Overview Since our founding in 1996, we have been producing critical reagents for the discovery, development, and commercialization of novel therapies, vaccines, and molecular diagnostics. Our more than 2,500 active customers span the entire continuum of the life sciences market, including leading pharmaceutical and biotechnology companies, contract development and manufacturing organizations, in vitro diagnostics franchises, and academic and government research institutions. Our Company is built around our knowledge, methods, and know-how in our proprietary manufacturing processes, which are highly adaptable and configurable. These proprietary processes enable us to manufacture and deliver high-quality, custom, made-to-order products with short turnaround times and at scale, across all stages of our customers’ product development, from early research through commercialization. We have two primary product categories: Lab Essentials and Clinical Solutions. We offer three primary product types: (i) pre-poured media plates for cell growth and cloning; (ii) liquid cell culture media and supplements for cellular expansion; and (iii) molecular biology reagents for sample manipulation, resuspension, and purification. Our liquid cell culture media and supplements and molecular biology reagents are available in both of our two product categories; pre-poured media plates are available in our Lab Essentials category only. We are ISO 13485:2016 certified, enabling us to manufacture products for use in diagnostic and therapeutic applications. Our certification allows us to offer solutions across the entire customer product development workflow, supporting our customers ’ need for materials in greater volume and that meet increasingly stringent quality requirements as they scale from research to commercialization. We manufacture our products at our Hollister, California, headquarters and stock inventory of raw materials, components, and finished goods at that campus. We rely on a limited number of suppliers for certain raw materials, and we have no long-term supply arrangements with our suppliers, as we order on a purchase order basis. We ship our products directly from our warehouse in Hollister, California, to our customers and distributors, generally pursuant to purchase orders. We typically recognize revenue when products are shipped. We generated revenue of $9 .3 million during the three months ended March 31, 2024, which represents an increase of $0 .2 million compared to revenue of $9 .1 million during the three months ended March 31, 2023. For the three months ended March 31, 2024 and 2023, only 4 .5 % and 4 .3 %, respectively, of our revenue was generated from customers located outside of the United States. Our sales outside of the United States are denominated in U.S. Dollars. We had an operating loss of $8 .0 million during the three months ended March 31, 2024, compared to an operating loss of $8 .9 million during the three months ended March 31, 2023. While our expenses may fluctuate over the short term, we expect our expenses will continue to increase in future periods, but at a slower rate, in connection with our ongoing activities as we: • attract, hire, and retain qualified personnel; • invest in processes and infrastructure to enable manufacturing automation and expand capacity, including the ramp up of our new, state-of-the-art manufacturing, warehouse, and distribution facilities; and • build our brand and market, and sell our products and services. Impact of Broader Economic Trends on Our Business We are closely monitoring economic uncertainty in the U.S. and abroad. General inflation in the U.S. has risen to levels not experienced in recent decades. General inflation, including rising prices for our raw materials and other inputs, as well as rising salaries and other expenses, negatively impact our business by increasing our cost of sales and operating expenses. In addition, the 19 U.S. Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation. Inflation, together with increased interest rates, may cause our customers to reduce, delay, or cancel orders for our goods and services, thereby causing a decrease in or change in timing of sales of our products and services. We cannot predict the impact of future inflation and interest rate increases on the results of our operations. For further information regarding the impact of these economic factors on the Company, please see the risk factors identified in Part I, Item 1A, Risk Factors, of our 2023 Annual Report on Form 10-K. Results of Operations Comparison of the Three Months Ended March 31, 2024, and Three Months Ended March 31, 2023 The following tables set forth our results of operations for the three months ended March 31, 2024 and 2023 (dollars in thousands): For the Three Months Ended March 31, 2024 2023 $ Change % Change Revenue $ 9,290 $ 9,121 $ 169 1.9 % Cost of sales 7,081 6,698 383 5.7 % Gross profit 2,209 2,423 (214 ) (8.8 )% Operating expenses: Research and development 860 1,395 (535 ) (38.4 )% Sales and marketing 1,667 2,343 (676 ) (28.9 )% General and administrative 7,381 7,345 36 0.5 % Amortization of intangible assets 287 286 1 0.3 % Total operating expenses 10,195 11,369 (1,174 ) (10.3 )% Loss from operations (7,986 ) (8,946 ) 960 (10.7 )% Other (expenses) income, net Interest (expense) income, net (145 ) 93 (238 ) (255.9 )% Other income, net — 18 (18 ) 100.0 % Total other (expenses) income, net (145 ) 111 (256 ) (230.6 )% Loss before income taxes (8,131 ) (8,835 ) 704 (8.0 )% Benefit from income taxes (34 ) (18 ) (16 ) 88.9 % Net loss $ (8,097 ) $ (8,817 ) $ 720 (8.2 )% Revenue Our revenue disaggregated by product category for the three months ended March 31, 2024 and 2023, was as follows (dollars in thousands): For the Three Months Ended March 31, 2024 2023 $ Change % Change Lab Essentials $ 7,266 $ 7,257 $ 9 0.1 % Clinical Solutions 1,718 1,609 109 6.8 % Other 306 255 51 20.0 % Total revenue $ 9,290 $ 9,121 $ 169 1.9 % Total revenue was $9.3 million for the three months ended March 31, 2024, and $9.1 million for the three months ended March 31, 2023. Lab Essentials revenue was $7 .3 million in each of the three months ended March 31, 2024 and 2023, respectively. Lab Essentials revenue was consistent as the slight increase in number of customers, was offset by a similar decline in average revenue per customer. Clinical Solutions revenue was $1 .7 million for the three months ended March 31, 2024, an increase of $0 .1 million, or 6 .8 %, compared to $1.6 million for the three months ended March 31, 2023. The increase in Clinical Solutions revenue was attributable to an increased number of customers, partially offset by lower average revenue per customer. 20 Our revenue disaggregated by geographic region, for the three months ended March 31, 2024 and 2023, was as follows (dollars in thousands): For the Three Months Ended March 31, 2024 2023 $ Change % Change United States $ 8,870 $ 8,726 $ 144 1.7 % International 420 395 25 6.3 % Total revenue $ 9,290 $ 9,121 $ 169 1.9 % Revenue from U.S. sales was $8 .9 million and $8 .7 million for the three months ended March 31, 2024 and 2023, respectively. Revenue from U.S. sales as a percentage of our total revenue was consistent period over period, representing 95.5% and 95 .7 % of our total revenue during the three months ended March 31, 2024 and 2023, respectively. Revenue from international sales was $0 .4 million in each of the three months ended March 31, 2024 and 2023. Revenue from international sales as a percentage of our total revenue was also consistent, representing 4 .5 % and 4 .3 % of our total revenue during the three months ended March 31, 2024 and 2023, respectively. Gross profit Our gross profit for the three months ended March 31, 2024 and 2023, was as follows (dollars in thousands): For the Three Months Ended March 31, 2024 2023 $ Change % Change Cost of sales $ 7,081 $ 6,698 $ 383 5.7 % Gross profit 2,209 2,423 (214 ) (8.8 )% Gross profit % 23.8 % 26.6 % Gross profit percentage was 23 .8 % and 26.6% for the three months ended March 31, 2024 and 2023, respectively. The decrease in gross profit percentage was primarily driven by increased overhead costs, largely depreciation expense following the completion of our new manufacturing facility in the prior year, partially offset by reduced headcount. Operating expenses Our operating expenses for the three months ended March 31, 2024 and 2023, were as follows (dollars in thousands): For the Three Months Ended March 31, 2024 2023 $ Change % Change Research and development $ 860 $ 1,395 $ (535 ) (38.4 )% Sales and marketing 1,667 2,343 (676 ) (28.9 )% General and administrative 7,381 7,345 36 0.5 % Amortization of intangible assets 287 286 1 0.3 % Total operating expenses $ 10,195 $ 11,369 $ (1,174 ) (10.3 )% Research and development expenses were $0 .9 million and $1 .4 million for the three months ended March 31, 2024 and 2023, respectively. The decrease was primarily driven by reduced headcount and supplies expense. Sales and marketing expenses were $1 .7 million and $2.3 million for the three months ended March 31, 2024 and 2023, respectively. The decrease was primarily driven by reduced headcount. General and administrative expenses were $7.4 million in each of the three months ended March 31, 2024 and 2023. Excluding the one-time, non-recurring charges related to the reduction in workforce of $1.3 million and $0.7 million for the three months ended March 31, 2024 and 2023, respectively, general and administrative expenses decreased $0.5 million. The decrease was driven by reduced headcount, partially offset by increased stock-based compensation expense related to the stock option repricing. See “Notes to Financial Statements—Note 12. Stock-Based Compensation” for a more detailed discussion of the stock option repricing. Amortization of intangible assets was consistent at $0.3 million for each of the three months ended March 31, 2024 and 2023. 21 Other (expenses) income, net Our other (expenses) income, net for the three months ended March 31, 2024 and 2023, were as follows (dollars in thousands): For the Three Months Ended March 31, 2024 2023 $ Change % Change Interest (expense) income, net $ (145 ) $ 93 $ (238 ) (255.9 )% Other income, net — 18 (18 ) 100.0 % Total other (expenses) income, net $ (145 ) $ 111 $ (256 ) (230.6 )% Total other expenses, net was $0.1 million for the three months ended March 31, 2024, compared to total other income, net of $0.1 million for the three months ended March 31, 2023. The increase in total other expenses, net was attributable to higher interest expense driven by higher interest rates despite a lower debt balance outstanding as well as lower amounts of interest capitalized, partially offset by higher interest income due to higher interest rates earned on short-term liquid investments. Capitalized interest costs were zero and $0.6 million for the three months ended March 31, 2024 and 2023, respectively. Benefit from income taxes Our benefit from income taxes for the three months ended March 31, 2024 and 2023, was as follows (dollars in thousands): For the Three Months Ended March 31, 2024 2023 $ Change % Change Benefit from income taxes $ (34 ) $ (18 ) $ (16 ) 88.9 % Effective tax rate 0.4 % 0.2 % Our benefit from income taxes was not significant in either of the three months ended March 31, 2024 and 2023, respectively. The effective tax rates for the three months ended March 31, 2024 and 2023 were 0.4% and 0.2%, respectively. The effective tax rates differ from the federal statutory rate primarily due to operating losses not expected to produce an income tax benefit. Liquidity and Capital Resources The primary sources of financing for our operations were our (i) initial public offering, which we completed in June 2021 (IPO) and resulted in net proceeds to us of $99.1 million, and (ii) registered direct offering and concurrent private placement (collectively, the Offerings), which we completed in September 2023 and which resulted in aggregate gross proceeds of $22.9 million before deducting offering expenses of $0.4 million and the prepayment of $10.0 million owed under the Term Loan as discussed below. To facilitate our expected growth, we have used our sources of liquidity to make investments to expand our operations and increase capacity, and may continue to do so in the future. In particular, we have completed the build out of our new manufacturing facility and have made improvements to our warehouse and distribution facilities, all located in Hollister, California. Our principal liquidity requirements are to fund our operations and capital expenditures. As of March 31, 2024, we have limited capital resources to fund ongoing operations. During the three months ended March 31, 2024, we incurred net losses of $8.1 million . In addition, as of March 31, 2024, we had an accumulated deficit of $99.9 million and borrowings outstanding under our Term Loan (defined below). As of March 31, 2024, we had $31.8 million of working capital, which included $21.6 million in cash and cash equivalents. Our available capital resources may not be sufficient for us to continue to meet our obligations as they become due over the next twelve months if we cannot improve our operating results or increase our operating cash inflows. If these capital resources are not sufficient, we may need to raise additional capital through the sale of equity or debt securities, enter into strategic business collaboration agreements with other companies, seek other funding sources, or sell assets. However, there can be no assurance that we will be able to accomplish any of the foregoing or do so on favorable terms. If we are unable to meet our obligations when they become due over the next twelve months through our available capital resources, or obtain new sources of capital when needed, we may have to delay expenditures, reduce the scope of our manufacturing operations, reduce or eliminate one or more of our development programs, make significant changes to our operating plan, or cease our operations. As of March 31, 2024, we had an outstanding principal amount of $12.1 million under a senior secured term loan (the Term Loan) pursuant to Amendment No. 5 to our Credit Agreement with MidCap Financial Trust (MidCap). On March 8, 2024, we entered into limited waivers and amendments (collectively Amendment No. 5, or, as amended, the Amended Credit Agreement ) which includes a waiver from MidCap of the revenue covenant violations for each of the periods ending November 30, 2023 and January 31, 2024. Amendment No. 5 also reduced the revenue covenants for future periods up to and including for the twelve months ending 22 December 31, 2024, from $42.0 million to $34.0 million. Amendment No. 5 also removed those requirements for the periods ending January 31, 2025 through December 31, 2025, instead requiring that for each applicable twelve-month period ending after December 31, 2024, the Company’s minimum net revenue requirement will be determined by MidCap in its reasonable discretion in consultation with the Company’s senior management and based on financial statements and projections delivered to MidCap in accordance with the financial reporting requirements in the Amended Credit Agreement, so long as the minimum net revenue requirements for those periods shall not be less than the greater of (x) the applicable minimum net revenue requirement for the twelve-month period ending on the last day of the immediately preceding month and (y) $34.0 million. In addition, Amendment No. 5 also removed the advance rate for finished goods inventory in the determination of the borrowing base for the Revolving Loan and increased the minimum cash requirement from $9.0 million to $10.0 million. Finally, Amendment No. 5 conditions the next borrowing under the Revolving Loan on the Company achieving net revenue for the preceding twelve-month period of at least $38.0 million down from $45.0 million. We were in compliance with our financial covenants under the terms of the Amended Credit Agreement as of March 31, 2024. However, we continue to experience unfavorable market conditions, like other companies in our industry. As a result, we believe we may be unable to comply with the trailing twelve months revenue covenant for the twelve-month period following the date on which the financial statements are available for issuance. If we violate one or more of our covenants under the Amended Credit Agreement, including the monthly revenue covenant, and are not able to obtain a waiver from or agree to an accommodation with the lender with respect to any such violation, we could be required to pay all or a portion of the outstanding amount under the Term Loan. In that event, we may need to seek other sources of capital and there can be no assurances that we would be able to do so on acceptable terms. S ee “Notes to Financial Statements—Note 10—Debt, Net,” for a more detailed discussion of the material terms of our Amended Credit Agreement. We also have an ATM Facility under which we may offer and sell, from time to time, shares of our common stock having aggregate gross proceeds of up to $50.0 million. We will pay a commission of up to 3.0% of gross sales proceeds of any common stock sold under the ATM Facility. The aggregate market value of shares eligible for sale under the ATM Facility will be subject to the limitations of General Instruction I.B.6 of Form S-3, to the extent required under such instruction. See “Notes to Financial Statements—Note 11—Stockholder’s Equity,” for a more detailed discussion of the material terms of our ATM Facility. As of March 31, 2024, our material cash requirements from known contractual obligations and commitments relate primarily to operating leases for our office, manufacturing, warehouse, and distribution facilities. See “Notes to Financial Statements—Note 7—Leases,” for a discussion of our lease obligations reflected on our balance sheet. Accounting Standards Codification (ASC) 205-40, Presentation of Financial Statements—Going Concern , requires us to evaluate our ability to continue as a going concern for the twelve-month period following the date on which the financial statements are available for issuance. We performed an assessment to determine whether there were conditions or events that, considered individually and in the aggregate, raised substantial doubt about our ability to continue as a going concern for the twelve-month period following the date on which our financial statements are being issued. This assessment indicated certain negative conditions and events, described further above related to our availability of capital resources and ability to meet the monthly revenue covenant under our Amended Credit Agreement, that raise substantial doubt about our ability to continue as a going concern. The accompanying unaudited financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q, have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets, and the satisfaction of liabilities in the normal course of business for one year following the issuance of these unaudited financial statements. As such, the accompanying unaudited financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern. The following table sets forth, for the periods indicated, net cash flows used in operating activities, used in investing activities, and (used in) provided by financing activities (in thousands): For the Three Months Ended March 31, 2024 2023 Net cash used in operating activities $ (6,558 ) $ (7,684 ) Net cash provided by (used in) investing activities 13 (4,312 ) Net cash used in financing activities (343 ) (25 ) Net decrease in cash and cash equivalents $ (6,888 ) $ (12,021 ) 23 Operating Activities Net cash used in operating activities consists primarily of net loss adjusted for certain non-cash items (including depreciation and amortization, bad debt expense, deferred taxes, loss on disposal of property, plant, and equipment, inventory reserve, amortization of debt issuance costs, and stock-based compensation expense), and the effect of changes in working capital and other activities. Net cash used in operating activities was $6.6 million for the three months ended March 31, 2024, which primarily consisted of net loss of $8.1 million plus net adjustments for non-cash charges of $3.0 million, offset by net changes in operating assets and liabilities of $1.5 million. The primary non-cash adjustments to net loss included $1.6 million of depreciation and amortization and $1.3 million of stock-based compensation. The main drivers of the changes in operating assets and liabilities were a $1.7 million decrease in accrued liabilities, a $0.6 million increase in accounts receivable, partially offset by a $0.5 million decrease in inventories, a $0.2 million decrease in prepaid expenses and other current assets, a $0.1 million increase in accounts payable, and a $0.1 million decrease other non-current assets. Net cash used in operating activities was $7.7 million for the three months ended March 31, 2023, which primarily consisted of net loss of $8.8 million plus net adjustments for non-cash charges of $2.1 million, offset by net changes in operating assets and liabilities of $1.0 million. The primary non-cash adjustments to net loss included $1.1 million of depreciation and amortization and $1.0 million of stock-based compensation. The main drivers of the changes in operating assets and liabilities were a $0.7 million decrease in accrued liabilities, a $0.5 million increase in accounts receivable, a $0.4 million decrease in accounts payable, partially offset by a $0.3 million decrease in prepaid expenses and other current assets, a $0.2 million decrease in inventories, and a $0.1 million decrease in other non-current assets. Investing Activities Net cash provided by investing activities was not significant for the three months ended March 31, 2024, as proceeds from the sale of certain long-lived assets of $0.1 million were partially offset by purchases of property, plant, and equipment of $0.1 million. Net cash used in investing activities was $4.3 million for the three months ended March 31, 2023, which consisted of purchases of property, plant, and equipment. Financing Activities Net cash used in financing activities was $0.3 million for the three months ended March 31, 2024, which primarily consisted of repayments of financed insurance premiums. Net cash used in financing activities was not significant for the three months ended March 31, 2023. Critical Accounting Policies and Estimates For a discussion of our critical accounting estimates, refer to "Management's Discussion and Analysis of Results of Operations and Financial Condition" in Part II, Item 7 and the notes to our financial statements in Part II, Item 8 of our 2023 Annual Report on Form 10-K. See also Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no material changes to our critical accounting estimates since our 2023 Annual Report on Form 10-K. Emerging Growth Company and Smaller Reporting Company We qualify as an “emerging growth company” as defined in the JOBS Act. As long as we qualify as an emerging growth company, we may take advantage of certain exemptions from various reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include, but are not limited to: • reduced obligations with respect to financial data, including presenting only two years of audited financial statements; • an exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; • reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements, and registration statements; and • exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements. 24 In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from adopting new or revised accounting standards, and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies or that have opted out of using such extended transition period, which may make comparison of our financial statements with those of other public companies more difficult. We may take advantage of these reporting exemptions until we no longer qualify as an emerging growth company, or, with respect to adoption of certain new or revised accounting standards, until we irrevocably elect to opt out of using the extended transition period. Under the JOBS Act, we will remain an emerging growth company until the earliest to occur of: • the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; • the last day of our fiscal year following the fifth anniversary of the date of the closing of our IPO; • the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; and • the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the Exchange Act) (i.e., the first day of the fiscal year after we have (i) more than $700.0 million in outstanding common equity held by our non-affiliates, measured each year on the last business day of our most recently completed second fiscal quarter, and (ii) been public for at least 12 months). We are also a “smaller reporting company” as defined in Rule 12b-2 under the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies until the fiscal year following the determination that (i) the market value of our voting and non-voting common stock held by non-affiliates equals or exceeds $250.0 million measured on the last business day of our most recently completed second fiscal quarter, and our annual revenues are more than $100.0 million during the most recently completed fiscal year or (ii) the market value of our voting and non-voting common stock held by non-affiliates equals or exceeds $700.0 million measured on the last business day of our most recently completed second fiscal quarter. Recent Accounting Pronouncements A description of recent accounting pronouncements that may potentially impact our financial position, results of operations, or cash flows is disclosed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Item 3 . Quantitative and Qualitative Disclosures About Market Risk. We are a smaller reporting company, as defined in Rule 12b-2 under the Exchange Act for this reporting period and are not required to provide the information required under this item.