Teknova(TKNO) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Condensed Financial Statements (Unaudited) Net loss significantly increased in Q3 and nine months 2022 due to a $16.6 million goodwill impairment, with cash and assets declining and liabilities rising Condensed Statements of Operations Highlights (in thousands) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $10,692 | $9,392 | $33,529 | $26,783 | | Gross Profit | $4,770 | $4,263 | $15,366 | $12,642 | | Goodwill Impairment | $16,613 | $0 | $16,613 | $0 | | Loss from Operations | $(22,954) | $(3,888) | $(35,423) | $(7,241) | | Net Loss | $(22,474) | $(3,251) | $(34,174) | $(6,156) | | Net Loss Per Share | $(0.80) | $(0.12) | $(1.22) | $(0.51) | Condensed Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $49,855 | $87,518 | | Total Current Assets | $70,067 | $101,204 | | Goodwill | $0 | $16,613 | | Total Assets | $160,272 | $166,511 | | Total Liabilities | $48,276 | $23,308 | | Total Stockholders' Equity | $111,996 | $143,203 | - Net cash used in operating activities increased to $19.4 million for the nine months ended Sep 30, 2022, from $6.0 million in the prior year period, primarily due to a higher net loss[129][131][132] - Net cash used in investing activities increased to $23.4 million from $10.1 million year-over-year, driven by purchases of property, plant and equipment[129][133][134] - Net cash from financing activities was $5.1 million, primarily from long-term debt proceeds, a significant decrease from $110.8 million in the prior year which included IPO proceeds[129][136][137] Note 1. Nature of the Business Alpha Teknova provides critical reagents for biopharmaceutical products, manufacturing under Research Use Only (RUO) and Good Manufacturing Practice (GMP) standards - The company provides critical reagents for biopharmaceutical products, including drug therapies, vaccines, and molecular diagnostics[27] - Teknova manufactures products in both Research Use Only (RUO) and the more stringent Good Manufacturing Practice (GMP) categories, holding an ISO 13485:2016 certification since 2017[29] Note 3. Revenue Recognition Revenue is recognized upon goods transfer, with total revenue for the nine months ended September 30, 2022, reaching $33.5 million, primarily from Lab Essentials and Clinical Solutions in the United States Revenue by Business Line (in thousands) | Business Line | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Lab Essentials | $24,838 | $20,440 | | Clinical Solutions | $7,673 | $4,354 | | Sample Transport | $6 | $1,035 | | Other | $1,012 | $954 | | Total Revenue | $33,529 | $26,783 | Revenue by Geographic Region (in thousands) | Geographic Region | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | United States | $32,489 | $25,890 | | International | $1,040 | $893 | | Total Revenue | $33,529 | $26,783 | Note 8. Goodwill and Intangible Assets, Net An interim goodwill impairment test in Q3 2022, triggered by stock price decline, resulted in a full $16.6 million impairment charge, reducing goodwill to zero - A significant decline in the company's common stock price and market capitalization triggered an interim goodwill impairment test in Q3 2022[51] - The company determined that its goodwill was fully impaired and recorded an impairment charge of $16.6 million during the three months ended September 30, 2022[55] - As of September 30, 2022, the carrying amount of goodwill was reduced to zero from $16.6 million at the end of 2021[51] Note 10. Long-Term Debt, Net As of September 30, 2022, net long-term debt increased to $16.9 million from $11.9 million at year-end 2021, under a credit facility with MidCap Financial Trust - In May 2022, the company entered into an Amended and Restated Credit and Security Agreement with MidCap for a $57.135 million credit facility[59][60] Long-Term Debt, Net (in thousands) | Component | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Long-term debt | $17,135 | $12,000 | | Long-term debt, net | $16,878 | $11,870 | Note 15. Subsequent Events On November 8, 2022, the credit agreement was amended to replace LIBOR with SOFR, increase the exit fee to 7%, and reduce the TTM net revenue covenant for December 31, 2022, to $38.0 million - On November 8, 2022, the credit agreement was amended, replacing the LIBOR-based interest rate with a SOFR-based rate effective December 1, 2022[77] - The amendment reduced the trailing twelve-month net revenue covenant for the period ending December 31, 2022, from $42.5 million to $38.0 million[77] - The exit fee on the term loan was increased from 5% to 7% of the total aggregate principal amount[77] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew in Q3 and nine months 2022, but operating losses widened significantly due to a $16.6 million goodwill impairment and increased expenses, impacting liquidity Results of Operations Q3 and nine-month 2022 revenue increased, but operating losses significantly widened due to a $16.6 million goodwill impairment and surging operating expenses Q3 2022 vs Q3 2021 Revenue by Product (in thousands) | Product Category | Q3 2022 | Q3 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Lab Essentials | $9,470 | $7,195 | $2,275 | 31.6% | | Clinical Solutions | $919 | $1,690 | $(771) | (45.6)% | | Sample Transport | $0 | $73 | $(73) | (100.0)% | | Total Revenue | $10,692 | $9,392 | $1,300 | 13.8% | Nine Months 2022 vs 2021 Revenue by Product (in thousands) | Product Category | Nine Months 2022 | Nine Months 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Lab Essentials | $24,838 | $20,440 | $4,398 | 21.5% | | Clinical Solutions | $7,673 | $4,354 | $3,319 | 76.2% | | Sample Transport | $6 | $1,035 | $(1,029) | (99.4)% | | Total Revenue | $33,529 | $26,783 | $6,746 | 25.2% | - The company ceased production of Sample Transport medium in 2021 due to a decline in market demand for COVID-19 testing and an increase in market supply[92][107] - A goodwill impairment charge of $16.6 million was the primary driver of the significant increase in operating loss for both the three and nine-month periods ended September 30, 2022[99][103][116] Liquidity and Capital Resources Cash and cash equivalents significantly decreased to $49.9 million by September 30, 2022, due to operating activities and capital expenditures, requiring potential future financing - As of September 30, 2022, the company had $49.9 million in cash and cash equivalents and $57.7 million in net working capital[120] - A significant use of cash is the construction of a new manufacturing, warehouse, and distribution facility in Hollister, California[120][121] - In November 2022, the company amended its credit agreement, replacing LIBOR with SOFR, increasing the exit fee to 7%, and reducing the TTM net revenue covenant for Dec 31, 2022, to $38.0 million[126] - Management believes existing liquidity sources are sufficient to fund requirements for at least the next 24 months, but acknowledges that additional financing may be needed to execute its business strategy[127][128] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Alpha Teknova is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, Alpha Teknova is not required to provide quantitative and qualitative disclosures about market risk[143] Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 30, 2022, having remediated a prior material weakness and implemented a new ERP system - Management concluded that disclosure controls and procedures were effective as of September 30, 2022[146] - A previously identified material weakness in the financial close and reporting process for complex transactions was remediated as of March 31, 2022[147][148][150] - During the quarter ended September 30, 2022, the company implemented a new enterprise resource planning (ERP) system to enhance internal controls and support business scaling[149] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal proceedings, though it may become involved in ordinary course legal matters - As of the report date, the company is not a party to any material legal proceedings[154] Risk Factors The company faces significant risks including a history of operating losses, a $16.6 million goodwill impairment, customer and supplier dependence, restrictive debt covenants, and 'controlled company' governance - The company has a history of operating losses, including a net loss of $22.5 million in Q3 2022 and $34.2 million for the first nine months of 2022, and may not achieve or maintain profitability[156] - A significant goodwill impairment charge of $16.6 million was recorded in Q3 2022 due to a decline in market capitalization, and future impairments of intangible assets are possible[252] - The business is dependent on a limited number of customers, with those accounting for over 10% of revenue representing 42% of total revenue in Q3 2022[179] - The company is a 'controlled company' under Nasdaq rules due to THP's majority ownership, which exempts it from certain corporate governance requirements, such as having a majority-independent board[300] - The Amended Credit Agreement contains restrictive covenants that could limit operational flexibility, and failure to comply could lead to acceleration of debt[297] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities in the reported period, and the planned use of IPO proceeds has not materially changed - There were no unregistered sales of equity securities in the reported period[352] - The planned use of proceeds from the IPO has not materially changed from what was disclosed in the final prospectus[353] Other Information On November 8, 2022, the company amended its credit agreement, replacing LIBOR with SOFR, increasing the exit fee to 7%, and reducing the TTM net revenue covenant to $38.0 million - On November 8, 2022, the company amended its Credit Agreement with MidCap[357] - The amendment replaced the LIBOR-based interest rate with a SOFR-based rate, increased the exit fee to 7%, and gave lenders discretion over a $10.0 million borrowing tranche for H1 2023[358][359] - The minimum net revenue requirement for the twelve months ending December 31, 2022, was reduced from $42.5 million to $38.0 million[360]