Alpha Teknova, Inc.: Form 10-Q for the period ended Mar 31, 2023

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, 2022, included in the 2022 Annual Report on Form 10-K (the 2022 Annual Report on Form 10-K) filed on March 30, 2023, 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 2022 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 research, discovery, development, and commercialization of novel therapies, vaccines, and molecular diagnostics. Our more than 3,000 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 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.

In 2017, we achieved ISO 13485:2016 certification, 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 $9.1 million during the three months ended March 31, 2023, which represents a decrease of $2.0 million compared to revenue of $11.1 million during the three months ended March 31, 2022. For the three months ended March 31, 2023 and 2022, only 4.3% and 2.9%, 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 $8.9 million during the three months ended March 31, 2023, compared to an operating loss of $5.8 million during the three months ended March 31, 2022. 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;
• introduce new products and services and create and protect intellectual property;
• build our brand and market, and sell new and existing products and services; and
• potentially acquire businesses or technologies to accelerate the growth of our business.

Impact of Broader Economic Trends on Our Business

We are closely monitoring increased 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 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. The impact of future inflation and interest rate increases on the results of our operations cannot be accurately predicted. 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 2022 Annual Report on Form 10-K.

We continue to closely monitor the impact of the ongoing COVID-19 pandemic on all aspects of our business, including how it may impact customers, employees, suppliers, business partners, and distribution channels. We believe that we have successfully navigated the uncertain environment associated with the COVID-19 pandemic, but the situation surrounding the COVID-19 pandemic could again become fluid. For further information regarding the impact of the COVID-19 pandemic on the Company, please see the risk factors identified in Part I, Item 1A, Risk Factors, of our 2022 Annual Report on Form 10-K.

Results of Operations

The following tables set forth our results of operations for the three months ended March 31, 2023 and 2022 (dollars in thousands):

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Revenue

Our revenue disaggregated by product category for the three months ended March 31, 2023 and 2022 was as follows (dollars in thousands):

Total revenue was $9.1 million for the three months ended March 31, 2023, and $11.1 million for the three months ended March 31, 2022.

Lab Essentials revenue was $7.3 million for the three months ended March 31, 2023, an increase of $0.3 million, or 4.0%, compared to $7.0 million for the three months ended March 31, 2022. The growth in Lab Essentials revenue was attributable to higher average revenue per customer, partially offset by a decreased number of customers.

Clinical Solutions revenue was $1.6 million for the three months ended March 31, 2023, a decrease of $2.2 million, or 57.8%, compared to $3.8 million for the three months ended March 31, 2022. The decrease in Clinical Solutions revenue was attributable to lower average revenue per customer, partially offset by an increased number of customers.

Our revenue disaggregated by geographic region, for the three months ended March 31, 2023 and 2022 was as follows (dollars in thousands):

Revenue from sales to customers in the U.S. was $8.7 million and $10.8 million for the three months ended March 31, 2023 and 2022, respectively. Revenue from U.S. sales was consistent period over period, representing 95.7% and 97.1% of our total revenue during the three months ended March 31, 2023 and 2022, respectively.

Revenue from sales to customers in markets outside of the U.S. was $0.4 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. Revenue from international sales was also consistent, representing 4.3% and 2.9% of our total revenue during the three months ended March 31, 2023 and 2022, respectively.

Gross profit

Our gross profit for the three months ended March 31, 2023 and 2022 was as follows (dollars in thousands):

Gross profit percentage was 26.6% and 48.0% for the three months ended March 31, 2023 and 2022, respectively. The decrease in gross profit percentage was primarily driven by the decrease in revenue and the associated lower absorption of fixed manufacturing labor and overhead costs.

Operating expenses

Our operating expenses for the three months ended March 31, 2023 and 2022 were as follows (dollars in thousands):

Research and development expenses were $1.4 million and $2.0 million for the three months ended March 31, 2023 and 2022, respectively. The decrease was primarily driven by reduced headcount and professional fees.

Sales and marketing expenses were $2.3 million and $1.6 million for the three months ended March 31, 2023 and 2022, respectively. The increase was primarily driven by additional headcount to develop our commercial presence and improve customer support, as well as higher marketing expenses.

General and administrative expenses were $7.3 million for each of the three months ended March 31, 2023 and 2022. Excluding the one-time, non-recurring charge related to the reduction in workforce of $0.7 million incurred during the three months ended March 31, 2023, general and administrative expenses decreased compared to the three months ended March 31, 2022. The decrease was driven by reduced spending, primarily in professional fees and occupancy costs, partially offset by higher wages and stock-based compensation expense.

Amortization of intangible assets was consistent at $0.3 million for each of the three months ended March 31, 2023 and 2022.

Other income (expenses), net

Our other income (expenses), net for the three months ended March 31, 2023 and 2022 were as follows (dollars in thousands):

Total other income (expenses), net was $0.1 million for the three months ended March 31, 2023 and not significant for the three months ended March 31, 2022. The increase in total other income, net is attributable to interest income resulting from short-term liquid investments. We continue to capitalize a portion of the interest on funds borrowed to finance our capital expenditures. Capitalized interest costs were $0.6 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively.

Benefit from income taxes

Our benefit from income taxes for the three months ended March 31, 2023 and 2022 was as follows (dollars in thousands):

Our benefit from income taxes was not significant for the three months ended March 31, 2023, compared to $0.4 million for the three months ended March 31, 2022. The decrease in our benefit from income taxes was attributable to operating losses not expected to be benefitted.

Liquidity and Capital Resources

The primary source of financing for our operations is our initial public offering, which we completed in June 2021 (IPO) and resulted in net proceeds to us of $99.1 million, after deducting underwriting discounts and commissions of $7.7 million and offering expenses of $3.6 million.

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 nearly completed the build out of our new manufacturing, warehouse, and distribution facilities in Hollister, California.

Our principal liquidity requirements are to fund our operations and capital expenditures. As of March 31, 2023, we had $41.0 million in working capital, which included $30.2 million in cash and cash equivalents. In addition to our existing cash and cash equivalents balance, our Amended Credit Facility and our ATM Facility are other sources of liquidity.

Our Amended Credit Facility provides for loan commitments in an aggregate amount of up to $57.135 million, consisting of a $52.135 million senior secured term loan (the Amended Term Loan) and a $5.0 million working capital facility (the Amended Revolver). As of March 31, 2023, we had an outstanding principal amount of $22.1 million under the Amended Term Loan, with all future borrowings under this facility at our lenders discretion. There were no borrowings under our Amended Revolver as of March 31, 2023. The maximum loan amount under our Amended Revolver is $5.0 million, however, we are permitted to request the lenders to increase such amount up to $15.0 million. See “Notes to Financial Statements—Note 10—Long-term Debt, Net,” for a more detailed discussion of the material terms of our Amended Credit Facility.

Under our ATM Facility we may offer and sell, from time to time, shares of our common stock having aggregate gross proceeds of up to $50.0 million, however, our prospectus supplement filed with the SEC on March 30, 2023 is only offering shares having an aggregate offering price of $14.5 million. We will be required to file another prospectus supplement in the event we decide to offer more than $14.5 million of shares in accordance with the terms of the ATM Facility, to the extent then permitted under applicable SEC regulations. We will pay a commission of up to 3.0% of gross sales proceeds of any common stock sold under our ATM Facility. See “Notes to Financial Statements—Note 2—Basis of Presentation and Summary of Significant Accounting Policies,” for a more detailed discussion of the material terms of our ATM Facility.

As of March 31, 2023, 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.

We believe these sources of liquidity will be sufficient to fund our liquidity requirements for at least the next 12 months. We may, however, require or elect to secure additional financing as we continue to execute our business strategy. If we require or elect to raise additional funds, we may do so through equity or debt financing, which may or may not be available on favorable terms and could require us to agree to covenants that limit our operating flexibility. Furthermore, while we have implemented a plan to control our expenses and to satisfy our obligations under the Amended Credit Agreement throughout the one-year period from the date of issuance of these interim financial statements, we cannot guarantee that we will be able to maintain compliance with our loan agreements, raise additional capital, contain expenses, or increase revenue.

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):

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 $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, $0.5 million increase in accounts receivable, $0.4 million decrease in accounts payable, partially offset by a $0.3 million decrease in prepaid expenses and other current assets, $0.2 million decrease in inventories, and a $0.1 million decrease in other non-current assets.

Net cash used in operating activities was $5.2 million for the three months ended March 31, 2022, which primarily consisted of net loss of $5.5 million plus net adjustments for non-cash charges of $1.3 million, offset by net changes in operating assets and liabilities of $1.0 million. The primary non-cash adjustments to net loss included $0.8 million of depreciation and amortization, $0.8 million of stock-based compensation, partially offset by $0.4 million in deferred taxes. The main drivers of the changes in operating assets and liabilities were a $1.3 million increase in accounts receivable and $1.0 million increase in inventories, partially offset by a $0.5 million decrease in prepaid expenses and other current assets, $0.2 million increase in accounts payable and a $0.8 million increase in accrued liabilities.

Investing Activities

Net cash used in investing activities relates to purchases of property, plant, and equipment. Net cash used in investing activities was $4.3 million and $5.9 million for the three months ended March 31, 2023 and 2022, respectively.

Financing Activities

Net cash (used in) provided by financing activities was not significant for either of the three months ended March 31, 2023 and 2022.

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 2022 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 2022 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.

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 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.

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.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the evaluation of our disclosure controls and procedures as of March 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of a material weakness in our internal control over financial reporting as previously disclosed in the 2022 Annual Report on Form 10-K, our disclosure controls and procedures were not effective as of March 31, 2023.

Material Weakness in Internal Control Over Financial Reporting

Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. During the audit of our financial statements, for the fiscal year ended December 31, 2022, we and our independent registered public accounting firm identified a material weakness in our accounting for income taxes. Specifically, the Company did not have the appropriate complement of tax resources commensurate with the nature and complexity associated with the Company’s income tax accounting process. Our audited financial statements present income taxes in accordance with GAAP, however, such adjustments amounted to a material weakness. The material weakness remained un-remediated as of March 31, 2023.

Management’s Plan to Remediate the Material Weakness

We have begun taking measures, and plan to continue to take measures, to remediate the material weakness related to our accounting for income taxes. These measures include engaging accounting personnel and/or consultants with specific income tax accounting experience necessary to assist with our accounting for income taxes as well as implementing and adopting additional controls and procedures. These remediation measures may be time consuming, costly, and might place significant demands on our financial and operational resources. We believe that the remediation plan’s design and implementation will effectively remediate the material weakness; however, until the remediation activities are fully implemented, and the operational effectiveness of related internal controls is validated through testing, the material weakness described above will continue to exist.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A—“Risk Factors” in the 2022 Annual report on Form 10-K describes some of the risks and uncertainties associated with our business, which we strongly encourage you to review. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects. Except as set forth below, there have been no material changes in our risk factors from those disclosed in the 2022 Annual Report on Form 10-K.

We have incurred operating losses in the past and may incur losses in the future.

We have incurred operating losses in the past, may incur operating losses in the future, and may never achieve or maintain profitability. For the years ending December 31, 2022 and 2021, we incurred net losses of $47.5 million and $9.8 million, respectively. Although we had net income of approximately $3.6 million for the year ended December 31, 2020, we also incurred net losses both prior and subsequent to such time. In addition, during the three months ended March 31, 2023 and 2022, we incurred net losses of $8.8 million and $5.5 million, respectively. We expect that our operating expenses will continue to increase as we grow our business and we have incurred additional costs in connection with legal, accounting, and other administrative expenses related to operating as a public company. Since our inception, we have financed our operations primarily through revenue from our products, the sale of our equity securities, including through our IPO, and credit agreements. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate sufficient to offset increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. We may never be able to generate sufficient revenue to achieve or maintain profitability, and our recent growth and historical profitability should not be considered indicative of our future performance.

A significant portion of our total outstanding shares of common stock are available for immediate resale and may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. All shares sold in our IPO were freely tradable upon such sale without restriction or further registration under the Securities Act, except for any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act (Rule 144), including our directors, executive officers, and other affiliates (including Telegraph Hill Partners Management Company LLC, which, through its affiliates Telegraph Hill Partners IV, L.P. and THP IV Affiliates Fund, LLC, controls approximately 62.1% of the voting power of our outstanding common stock), which may be sold only in compliance with certain limitations.

As of March 31, 2023, we have 28,190,192 shares of common stock outstanding, substantially all of which are held by directors, executive officers, and other affiliates and will be subject to volume, manner of sale, and other limitations under Rule 144. Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement.

The market price of our stock could decline if the holders of currently restricted shares of common stock sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities. In addition, shares of our common stock that are issued pursuant to our equity incentive plans and our Employee Stock Purchase Plan (ESPP) will become eligible for sale in the public market, subject to provisions relating to various vesting agreements, lock-up agreements, and Rule 144, as applicable.

As of March 31, 2023, there were 312,174, 1,668,301 and 2,424,620 shares of common stock reserved for issuance pursuant to outstanding stock option awards under the 2016 Stock Plan, as amended (2016 Plan), the 2020 Equity Incentive Plan, as amended (2020 Plan) and the 2021 Equity Incentive Plan (2021 Plan), respectively. In addition, the 2021 Plan and the ESPP provide for annual automatic increases in the number of shares reserved thereunder. As of January 1, 2023, a total of 3,596,340 and 804,236 shares of common stock were available and have been reserved for future issuance under the 2021 Plan and our ESPP, respectively. In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

Our cash and cash equivalents could be adversely affected if the financial institutions in which we hold our cash and cash equivalents fail.

On March 10, 2023, the Federal Deposit Insurance Corporation (FDIC) announced that Silicon Valley Bank had been closed by the California Department of Financial Protection and Innovation and on March 12, 2023, Signature Bank was closed by the New York State Department of Financial Services and the FDIC was named receiver. Although we do not maintain any bank accounts with Silicon Valley Bank or Signature Bank, we do maintain cash balances at First Republic Bank, acquired by JPMorgan Chase on May 1, 2023. Any failure of a depository institution to return any of our deposits, or any other adverse conditions in the financial or credit markets affecting depository institutions, could impact access to our invested cash or cash equivalents and could adversely impact our operating liquidity and financial performance.