Teknova(TKNO) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements (Unaudited) Unaudited statements show revenue growth offset by higher operating expenses, resulting in a net loss following the IPO Condensed Balance Sheets Total assets and equity surged due to IPO proceeds, while liabilities grew from new long-term debt Condensed Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $98,013 | $3,315 | +$94,698 | | Total current assets | $111,079 | $16,414 | +$94,665 | | Total assets | $169,163 | $62,911 | +$106,252 | | Liabilities & Equity | | | | | Total current liabilities | $6,204 | $3,962 | +$2,242 | | Long-term debt | $11,826 | $0 | +$11,826 | | Total liabilities | $22,937 | $10,506 | +$12,431 | | Total stockholders' equity | $146,226 | $16,767 | +$129,459 | Condensed Statements of Operations Revenue grew but higher operating expenses led to a net loss in 2021, reversing the prior year's net income Statement of Operations Summary (in thousands) | Metric | Q3 2021 | Q3 2020 | YoY Change | Nine Months 2021 | Nine Months 2020 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $9,392 | $8,984 | +4.5% | $26,783 | $21,140 | +26.7% | | Gross Profit | $4,263 | $5,088 | -16.2% | $12,642 | $12,186 | +3.7% | | (Loss) Income from Operations | $(3,888) | $2,152 | - | $(7,241) | $3,868 | - | | Net (Loss) Income | $(3,251) | $1,533 | - | $(6,156) | $2,993 | - | Net (Loss) Income Per Share | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $(0.12) | $0.07 | $(0.51) | $0.14 | | Diluted EPS | $(0.12) | $0.07 | $(0.51) | $0.14 | Condensed Statements of Cash Flows Financing activities, driven by IPO proceeds, funded cash used in operations and significant investing activities Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(5,987) | $71 | | Net cash (used in) provided by investing activities | $(10,109) | $923 | | Net cash provided by (used in) financing activities | $110,794 | $(1,599) | | Change in cash and cash equivalents | $94,698 | $(605) | Notes to Unaudited Condensed Financial Statements Notes detail the IPO's impact, revenue disaggregation, new credit facilities, and stock-based compensation plans - In June 2021, the company completed its IPO, issuing 6,900,000 shares and receiving $99.1 million in net proceeds after deducting underwriting discounts and offering expenses[34] - On June 28, 2021, all outstanding convertible and redeemable preferred stock was converted into 17,512,685 shares of common stock[35] Revenue by Product Category (in thousands) | Product Category | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Lab Essentials | $7,195 | $5,815 | $20,440 | $15,494 | | Clinical Solutions | $1,690 | $1,354 | $4,354 | $3,141 | | Sample Transport | $73 | $1,593 | $1,035 | $1,767 | | Total Revenue | $9,392 | $8,984 | $26,783 | $21,140 | - In March 2021, the company entered into a new credit agreement for a $27.0 million facility, consisting of a $22.0 million term loan and a $5.0 million revolver[75] The company drew $12.0 million from the term loan on March 26, 2021[78] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by core products, declining margins, and surging operating expenses Results of Operations Revenue growth was offset by a lower gross profit percentage and a significant increase in operating expenses Revenue by Product Category (Nine Months Ended Sep 30, in thousands) | Product Category | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Lab Essentials | $20,440 | $15,494 | +$4,946 | | Clinical Solutions | $4,354 | $3,141 | +$1,213 | | Sample Transport | $1,035 | $1,767 | -$732 | | Total Revenue | $26,783 | $21,140 | +$5,643 | - The gross profit percentage for the nine months ended September 30, 2021, decreased to 47.2% from 57.6% in the prior year, primarily due to a $0.7 million reserve against Sample Transport inventory and increased manufacturing overhead and labor costs[157] Operating Expenses (Nine Months Ended Sep 30, in thousands) | Expense Category | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Research and development | $2,922 | $1,025 | +$1,897 | | Sales and marketing | $2,494 | $1,389 | +$1,105 | | General and administrative | $13,606 | $5,043 | +$8,563 | | Total Operating Expenses | $19,883 | $8,318 | +$11,565 | Non-GAAP Financial Measures Adjusted EBITDA and Adjusted Free Cash Flow both turned negative due to operating losses and higher capital expenditures Reconciliation of Net (Loss) Income to Adjusted EBITDA (in thousands) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | $(3,251) | $1,533 | $(6,156) | $2,993 | | EBITDA | $(3,140) | $2,691 | $(5,143) | $5,314 | | Adjusted EBITDA | $(2,698) | $2,722 | $(4,216) | $5,345 | Adjusted Free Cash Flow (in thousands) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $(2,698) | $2,722 | $(4,216) | $5,345 | | Less: capital expenditures | $(3,907) | $(1,016) | $(12,465) | $(1,969) | | Adjusted Free Cash Flow | $(6,605) | $1,706 | $(16,681) | $3,376 | Liquidity and Capital Resources The company's liquidity was substantially improved by IPO proceeds, which will fund operations and a new facility - The company's primary sources of liquidity are cash from the IPO ($99.1 million net proceeds) and a credit facility[171] As of September 30, 2021, cash and cash equivalents were $98.0 million[171] - A significant use of cash over the next 12 to 18 months is expected to be the construction of a new manufacturing facility in Hollister, California[172][180] - The company entered into a credit agreement in March 2021 for a $27.0 million facility and has drawn $12.0 million of the term loan[174][177] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, this disclosure is not required - The company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[202] Item 4. Controls and Procedures Disclosure controls were deemed ineffective due to a material weakness in accounting for complex transactions - Management concluded that disclosure controls and procedures were not effective as of September 30, 2021[204] - The ineffectiveness is due to a material weakness in the financial close and reporting process for complex, non-routine transactions, which led to an inappropriate accounting for the THP Transaction in 2019[205] - A remediation plan is underway, which includes hiring accounting employees or consultants with specific technical accounting experience[206] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently party to any material legal proceedings - As of the filing date, the company is not a party to any material legal proceedings[214] Item 1A. Risk Factors Key risks include a history of losses, manufacturing challenges, reliance on trade secrets, and 'controlled company' status - The company has a history of operating losses, including a net loss of $6.2 million for the nine months ended September 30, 2021, and may incur losses in the future[216] - The company is a "controlled company" as THP controls approximately 62.5% of the voting power, allowing it to control board elections and corporate decisions, and exempting the company from certain Nasdaq governance rules[354][357] - A material weakness in internal control over financial reporting was identified related to the accounting for complex, non-routine transactions[366] - The company relies primarily on trade secret protection rather than patents, which is difficult to enforce and may not prevent competitors from developing similar technologies independently[320][323] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred, and the use of IPO proceeds remains consistent with the prospectus - There were no unregistered sales of equity securities in the period[408] - The planned use of IPO proceeds has not materially changed from what was disclosed in the Final Prospectus[409]