Alpha Teknova, Inc.: Form 10-Q for the period ended Sep 30, 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 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 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 $8.2 million during the three months ended September 30, 2023, which represents a decrease of $2.5 million compared to revenue of $10.7 million during the three months ended September 30, 2022. For the three months ended September 30, 2023 and 2022, only 4.2% and 2.9%, respectively, of our revenue was generated from customers located outside of the United States. We generated revenue of $28.8 million during the nine months ended September 30, 2023, which represents a decrease of $4.7 million compared to revenue of $33.5 million during the nine months ended September 30, 2022. For the nine months ended September 30, 2023 and 2022, only 4.1% and 3.1%, 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 $8.8 million during the three months ended September 30, 2023, compared to an operating loss excluding goodwill impairment of $6.3 million during the three months ended September 30, 2022. We had an operating loss excluding long-lived asset impairment of $22.5 million during the nine months ended September 30, 2023, compared to an operating loss excluding goodwill impairment of $18.8 million during the nine months ended September 30, 2022. 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;
• 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 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. 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 2022 Annual Report on Form 10-K.

Results of Operations

Comparison of the Three Months Ended September 30, 2023, and Three Months Ended September 30, 2022

The following tables set forth our results of operations for the three months ended September 30, 2023 and 2022 (dollars in thousands):

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Revenue

Our revenue disaggregated by product category for the three months ended September 30, 2023 and 2022, was as follows (dollars in thousands):

Total revenue was $8.2 million for the three months ended September 30, 2023, and $10.7 million for the three months ended September 30, 2022.

Lab Essentials revenue was $7.3 million for the three months ended September 30, 2023, a decrease of $2.2 million, or 23.2%, compared to $9.5 million for the three months ended September 30, 2022. The decrease in Lab Essentials revenue was primarily attributable to a decreased number of customers, and to a lesser extent lower average revenue per customer.

Clinical Solutions revenue was $0.6 million for the three months ended September 30, 2023, a decrease of $0.3 million, or 35.0%, compared to $0.9 million for the three months ended September 30, 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 September 30, 2023 and 2022, was as follows (dollars in thousands):

Revenue from U.S. sales was $7.8 million and $10.4 million for the three months ended September 30, 2023 and 2022, respectively. Revenue from U.S. sales as a percentage of our total revenue was consistent period over period, representing 95.8% and 97.1% of our total revenue during the three months ended September 30, 2023 and 2022, respectively.

Revenue from international sales was $0.3 million for each of the three months ended September 30, 2023 and 2022, respectively. Revenue from international sales as a percentage of our total revenue was also consistent, representing 4.2% and 2.9% of our total revenue during the three months ended September 30, 2023 and 2022, respectively.

Gross profit

Our gross profit for the three months ended September 30, 2023 and 2022, was as follows (dollars in thousands):

Gross profit percentage was 18.0% and 44.6% for the three months ended September 30, 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 costs, and to a lesser extent increased overhead costs that were partially offset by reduced headcount.

Operating expenses

Our operating expenses for the three months ended September 30, 2023 and 2022, were as follows (dollars in thousands):

Research and development expenses were $1.4 million and $1.9 million for the three months ended September 30, 2023 and 2022, respectively. The decrease was primarily driven by reduced headcount and professional fees.

Sales and marketing expenses were consistent at $2.4 million for each of the three months ended September 30, 2023 and 2022, respectively.

General and administrative expenses were $6.1 million and $6.5 million for the three months ended September 30, 2023 and 2022, respectively. Excluding the one-time, non-recurring charge of $0.4 million related to the write-off of ATM Facility costs during the three months ended September 30, 2023, general and administrative expenses decreased $0.8 million compared to the three months ended September 30, 2022. The decrease was driven by reduced headcount and spending, primarily in professional fees.

Amortization of intangible assets was consistent at $0.3 million for each of the three months ended September 30, 2023 and 2022.

We incurred a $16.6 million goodwill impairment charge for the three months ended September 30, 2022, with no comparable charges in the same period of the prior year. Refer to the “Notes to Financial Statements — Note 8. Goodwill and Intangible Assets, Net” in our 2022 Annual Report on Form 10-K for details regarding the goodwill impairment.

Other (expenses) income, net

Our other (expenses) income, net for the three months ended September 30, 2023 and 2022, were as follows (dollars in thousands):

Total other expenses, net was $1.4 million for the three months ended September 30, 2023, compared to total other income, net of $0.1 million for the three months ended September 30, 2022. The increase in total other expenses, net was attributable to a $0.8 million loss on extinguishment of debt related to the partial repayment on the Term Loan coupled with higher interest expense incurred driven by both higher interest rates as well as lower amounts of interest capitalized. We continue to capitalize a portion of the interest on funds borrowed to finance certain of our capital expenditures. Capitalized interest costs were not significant and $0.4 million for the three months ended September 30, 2023 and 2022, respectively. Offsetting these other expenses is other income, which increased due to higher interest rates and thus income earned on short-term liquid investments.

Provision for (benefit from) income taxes

Our provision for (benefit from) income taxes for the three months ended September 30, 2023 and 2022, was as follows (dollars in thousands):

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Our provision for income taxes was not significant for the three months ended September 30, 2023, compared to a $0.4 million benefit for the three months ended September 30, 2022. The increase in our provision for income taxes was attributable to operating losses not expected to produce a benefit.

Comparison of the Nine Months Ended September 30, 2023, and Nine Months Ended September 30, 2022

The following tables set forth our results of operations for the nine months ended September 30, 2023 and 2022 (dollars in thousands):

Revenue

Our revenue disaggregated by product category for the nine months ended September 30, 2023 and 2022, was as follows (dollars in thousands):

Total revenue was $28.8 million for the nine months ended September 30, 2023, and $33.5 million for the nine months ended September 30, 2022.

Lab Essentials revenue was $22.1 million for the nine months ended September 30, 2023, a decrease of $2.7 million, or 11.0%, compared to $24.8 million for the nine months ended September 30, 2022. The decrease in Lab Essentials revenue was attributable to a decreased number of customers, partially offset by higher average revenue per customer.

Clinical Solutions revenue was $5.9 million for the nine months ended September 30, 2023, a decrease of $1.8 million, or 23.6%, compared to $7.7 million for the nine months ended September 30, 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 nine months ended September 30, 2023 and 2022, was as follows (dollars in thousands):

Revenue from U.S. sales was $27.6 million and $32.5 million for the nine months ended September 30, 2023 and 2022, respectively. Revenue from U.S. sales as a percentage of our total revenue was consistent period over period, representing 95.9% and 96.9% of our total revenue during the nine months ended September 30, 2023 and 2022, respectively.

Revenue from international sales was $1.2 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively. Revenue from international sales as a percentage of our total revenue was also consistent, representing 4.1% and 3.1% of our total revenue during the nine months ended September 30, 2023 and 2022, respectively.

Gross profit

Our gross profit for the nine months ended September 30, 2023 and 2022, was as follows (dollars in thousands):

Gross profit percentage was 31.1% and 45.8% for the nine months ended September 30, 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 costs, and to a lesser extent increased overhead costs that were partially offset by reduced headcount.

Operating expenses

Our operating expenses for the nine months ended September 30, 2023 and 2022, were as follows (dollars in thousands):

Research and development expenses were $4.3 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease was primarily driven by reduced headcount and professional fees.

Sales and marketing expenses were $6.9 million and $6.6 million for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily driven by higher labor and benefit costs as well as stock-based compensation, partially offset by lower marketing expenses.

General and administrative expenses were $19.4 million and $20.9 million for the nine months ended September 30, 2023 and 2022, respectively. Excluding the one-time, non-recurring charges related to the reduction in workforce of $0.7 million and the $0.4 million write off related to ATM Facility costs during the nine months ended September 30, 2023, general and administrative expenses decreased $2.6 million compared to the nine months ended September 30, 2022. The decrease was driven by reduced spending, primarily in professional fees and occupancy costs, partially offset by higher stock-based compensation expense.

Amortization of intangible assets was consistent at $0.9 million for each of the nine months ended September 30, 2023 and 2022.

We incurred a $2.2 million impairment charge related to long-lived assets for the nine months ended September 30, 2023, with no comparable charges for the nine months ended September 30, 2022. Refer to “Notes to Financial Statements—Note 6—Property, Plant, and Equipment, Net,” in our financial statements for details regarding the impairment.

We incurred a $16.6 million goodwill impairment charge for the three months ended September 30, 2022, with no comparable charges in the same period of the prior year. Refer to the “Notes to Financial Statements — Note 8. Goodwill and Intangible Assets, Net” in our 2022 Annual Report on Form 10-K for details regarding the goodwill impairment.

Other (expenses) income, net

Our other (expenses) income, net for the nine months ended September 30, 2023 and 2022, were as follows (dollars in thousands):

Total other expenses, net was $1.4 million for the nine months ended September 30, 2023, compared to total other income, net of $0.1 million for the nine months ended September 30, 2022. The increase in total other expenses, net was attributable to higher interest expense primarily driven by an increase in debt coupled with higher interest rates, as well as by a $0.8 million loss on extinguishment of debt related to the partial repayment on the Term Loan. We continue to capitalize a portion of the interest on funds borrowed to finance certain of our capital expenditures. Capitalized interest costs were $0.9 million and $1.1 million for the nine months ended September 30, 2023 and 2022, respectively. Offsetting these other expenses is other income, which increased due to higher interest rates and thus income earned on short-term liquid investments.

Provision for (benefit from) income taxes

Our provision for (benefit from) income taxes for the nine months ended September 30, 2023 and 2022, was as follows (dollars in thousands):

Our provision for income taxes was not significant for the nine months ended September 30, 2023, compared to a $1.1 million benefit for the nine months ended September 30, 2022. The decrease in our benefit from income taxes was attributable to operating losses not expected to produce a benefit.

Liquidity and Capital Resources

The primary sources of financing for our operations are our (i) 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, 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 $22.915 million before deducting offering expenses of $0.4 million payable by the Company and the prepayment of $10 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 September 30, 2023, we have limited capital resources to fund ongoing operations. During the three and nine months ended September 30, 2023, we incurred net losses of $10.2 million and $26.1 million, respectively. In addition, as of September 30, 2023, we had an accumulated deficit of $81.1 million and borrowings outstanding under our Term Loan (defined below). As of September 30, 2023, we had $42.7 million of working capital, which included $32.1 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. In the event 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 September 30, 2023, we had an outstanding principal amount of $12.1 million under a senior secured term loan (the Term Loan) pursuant to our amended credit agreement with MidCap Financial Trust (the Amended Credit Agreement). As previously disclosed in our Form 10-Q for the period ended June 30, 2023, the Company determined that it was not in compliance with the trailing twelve months minimum net revenue covenant as of July 31, 2023. As a result, the Company entered into Amendment No. 4 to the Credit Agreement (Amendment No. 4, or as amended, the Amended Credit Agreement) which includes a waiver from MidCap of the revenue covenant violation for the period ending July 31, 2023. As a condition to the effectiveness of Amendment No. 4, the Company prepaid the principal amount of the Term Loan in an amount equal to $10.0 million (the Term Loan Prepayment). Amendment No. 4 reduced these requirements for future periods up to and including for the twelve months ending December 31, 2025—for example, the Company’s minimum net revenue requirement was reduced (i) for the twelve months ending December 31, 2023, from $42.0 million to $36.5 million, (ii) for the twelve months ending December 31, 2024, from $49.0 million to $42.0 million, and (iii) for the twelve months ending December 31, 2025, from $58.8 million to $50.0 million. Amendment No. 4 also removed those requirements for the periods ending January 31, 2026 through March 31, 2027, instead requiring that for each applicable twelve-month period ending after December 31, 2025, 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) $50.0 million. In addition, the minimum cash requirement was reduced from $10.0 million to $9.0 million. Additionally, Amendment No. 4 conditions the next borrowing under the Revolving Loan on the Company achieving net revenue for the preceding twelve-month period of at least $45.0 million. See “Notes to Financial Statements—Note 10—Debt, Net,” for a more detailed discussion of the material terms of our Amended Credit Agreement.

We were in compliance with our financial covenants under the terms of the Amended Credit Agreement as of September 30, 2023. However, we continue to experience unfavorable market conditions, like other companies in our industry, which have led us to lower our revenue projections. 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. Failing to comply with the monthly revenue covenant would be an event of default under the Amended Credit Agreement and the lender would have the right, but not the obligation, to accelerate our obligations to pay the outstanding balance due and payable under the Term Loan. If we violate one or more of our covenants under the Amended Credit Agreement 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. See “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 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 September 30, 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.

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):

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 $15.9 million for the nine months ended September 30, 2023, which primarily consisted of net loss of $26.1 million plus net adjustments for non-cash charges of $10.8 million, offset by net changes in operating assets and liabilities of $0.6 million. The primary non-cash adjustments to net loss included $4.0 million of depreciation and amortization, $3.1 million of stock-based compensation, a $2.2 million impairment charge related to long-lived assets, $0.8 million loss on extinguishment of debt, and $0.4 million in amortization of debt financing costs. The main drivers of the changes in operating assets and liabilities were a $0.9 million decrease in accounts payable, a $0.7 million increase in accounts receivable, a $0.7 million increase in prepaid expenses and other current assets, partially offset by a $0.8 million increase in accrued liabilities, a $0.6 million decrease in inventories, and a $0.3 million decrease other non-current assets.

Net cash used in operating activities was $19.4 million for the nine months ended September 30, 2022, which primarily consisted of net loss of $34.2 million plus net adjustments for non-cash charges of $21.3 million, offset by net changes in operating assets and liabilities of $6.5 million. The primary non-cash adjustments to net loss included a $16.6 million goodwill impairment charge, $2.7 million of stock-based compensation and $2.3 million of depreciation and amortization, partially offset by $1.1 million in deferred taxes. Net cash used in changes in operating assets and liabilities consisted primarily of a $5.1 million increase in inventories, a $1.1 million increase in prepaid expenses and other current assets, a $1.0 million increase in other non-current assets, a $0.9 million increase in accounts receivable, and a $0.7 million increase in contract assets, partially offset by a $1.1 million decrease in income taxes receivable, a $1.0 million increase in accounts payable, and a $0.3 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 $7.6 million and $23.4 million for the nine months ended September 30, 2023 and 2022, respectively.

Financing Activities

Net cash provided by financing activities was $13.4 million for the nine months ended September 30, 2023, which was primarily attributable to proceeds from the Offerings of $22.9 million and proceeds from financed insurance premiums of $1.0 million, partially offset by repayment of long-term debt of $10.0 million, repayment of financed insurance premiums of $0.3 million and payment of offering costs of $0.4 million related to the ATM Facility. We also received proceeds of $0.1 million from the exercise of stock options and $0.1 million from issuance of common stock under our employee stock purchase plan.

Net cash provided by financing activities was $5.1 million for the nine months ended September 30, 2022, which was primarily attributable to proceeds from long-term debt of $5.1 million, partially offset by related debt issuance costs of $0.2 million and payment of exit fee costs of $0.1 million related to our debt refinancing. We also received proceeds of $0.1 million from the exercise of stock options and $0.1 million from issuance of common stock under our employee stock purchase plan.

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 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.

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 September 30, 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 September 30, 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 due to errors identified and resulting adjustments recorded. 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, the errors identified with respect to adjustments related to income taxes recorded amounted to a material weakness. The material weakness remained un-remediated as of September 30, 2023.

Management’s Plan to Remediate the Material Weakness

We 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 September 30, 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 identified conditions and events 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. However, we have identified certain negative conditions and events, described further below, that raise substantial doubt about our ability to continue as a going concern.

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.

Additionally, we are subject to certain financial covenants under the terms of the Amended Credit Agreement. These financial covenants include (i) a trailing twelve months minimum net revenue covenant that we must meet each calendar month, and (ii) a requirement to maintain a minimum level of cash at all times through the term of the Amended Credit Agreement. We were in compliance with our financial covenants as of September 30, 2023; however, we continue to experience unfavorable market conditions, like other companies in our industry, which have led us to lower our revenue projections. As a result, we believe that we may be unable to comply with the monthly revenue covenant for the twelve-month period following the date on which the financial statements are available for issuance. Failing to comply with the monthly revenue covenant would be an event of default under the Amended Credit Agreement and the lender would have the right, but not the obligation, to accelerate our obligations to pay the outstanding balance due and payable under the Term Loan. If we violate one or more of our covenants under the Amended Credit Agreement 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.

The uncertainty regarding our ability to continue as a going concern could materially adversely affect our share price and our ability to service our indebtedness, raise new capital or enter into commercial transactions. To address these matters, the Company may take actions that materially and adversely affect our business, including significant reductions in research, development, administrative, and commercial activities, reduction of our employee base, and ultimately curtailing or ceasing operations, any of which could materially adversely affect our business, financial condition, results of operations, and share price.

If we fail to comply with the covenants and other obligations under the Amended Credit Agreement, the lender may be able to accelerate amounts owed under the facilities and may foreclose upon the assets securing our obligations.

Our indebtedness under the Amended Credit Agreement is secured by substantially all of our assets. We may not be able to comply with the financial covenants contained in the Amended Credit Agreement, which would allow the lenders to accelerate the required repayment of all or a portion of the amounts due, if they choose not to grant us a waiver or agree to an accommodation. In addition, if we do not meet our other covenants under the Amended Credit Agreement, the lender would be able to accelerate the required repayment of amounts due and, if they are not repaid, could foreclose upon the assets securing our obligations with respect to such indebtedness.

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 $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 and nine months ended September 30, 2023, we incurred net losses of $10.2 million and $26.1 million, respectively, and during the three and nine months ended September 30, 2022, we incurred net losses of $22.5 million and $34.2 million. While our operating expenses may fluctuate in the short term, we expect that our operating expenses will continue to increase as we grow our business. We have also 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 Offerings, 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 past growth and 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 62.9% of the voting power of our outstanding common stock), which may be sold only in compliance with certain limitations. In addition, in October of 2023, the Company filed a registration statement on Form S-1 under the Securities Act registering for resale all shares sold in the PIPE Private Placement. As a result, all shares sold in the Offerings are freely tradable subject to the restrictions applicable to affiliates discussed above.

As of September 30, 2023, we have 40,727,780 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 such shares or are perceived by the market as intending to do so. 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 September 30, 2023, there were 312,174, 1,617,953 and 2,319,091 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 number 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.