Alpha Teknova, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; filed November 14, 2022. Teknova supplies reagents and related products for biopharmaceutical research, development, and production. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $10.7 | $9.4 | $33.5 | $26.8 |
| Gross profit | $4.8 | $4.3 | $15.4 | $12.6 |
| Gross margin | 44.6% | 45.4% | 45.8% | 47.2% |
| Operating loss | $(23.0) | $(3.9) | $(35.4) | $(7.2) |
| Net loss | $(22.5) | $(3.3) | $(34.2) | $(6.2) |
| Net loss per share | $(0.80) | $(0.12) | $(1.22) | $(0.51) |
Q3 revenue rose 13.8%; nine-month revenue rose 25.2%. For the quarter, Lab Essentials grew 31.6% to $9.5 million, while Clinical Solutions fell 45.6% to $0.9 million. For the nine months, Lab Essentials increased 21.5% to $24.8 million and Clinical Solutions increased 76.2% to $7.7 million. Sample Transport revenue fell to $6,000 for the nine-month period as the company ceased production and marketing amid weaker COVID-19 testing demand and greater market supply.
Cost of sales grew faster than quarterly revenue, and management attributed the lower gross margin primarily to higher labor costs. Nine-month margin pressure also reflected higher labor costs, partly offset by lower inventory provisions. Operating expenses increased substantially, including a $16.6 million goodwill impairment in Q3. Excluding that impairment, higher R&D, sales and marketing, and general and administrative spending reflected added personnel and investment in product development, commercial capabilities, and growth infrastructure.
Cash, liquidity, debt, and investment
- At September 30, cash and cash equivalents were $49.9 million, current assets $70.1 million, current liabilities $12.3 million, and reported net working capital $57.7 million. Cash was down $37.7 million from $87.5 million at year-end 2021.
- For the first nine months, operating cash use was $19.4 million, investing cash use was $23.4 million, and financing provided $5.1 million. Capital expenditures were $23.4 million, primarily for facility expansion; property, plant and equipment included $41.1 million of construction in progress.
- Long-term debt was $17.1 million principal, or $16.9 million net of unamortized costs, at September 30. The May 2022 credit facility provided for a $52.135 million term loan and a $5.0 million revolver, with staged additional term-loan availability subject to conditions. The company reported no revolver borrowings in the presented debt balance.
- Management said existing cash and credit sources were expected to fund requirements for at least 24 months, while noting the company may need or elect to seek additional financing. It expected the new Hollister facility to use significant cash over the following 6–12 months.
Material changes, outlook, and risks
- The full $16.6 million goodwill balance was impaired after a significant decline in share price and market capitalization. The test used Level 3 assumptions, including an 18% weighted-average cost of capital. Goodwill was zero at quarter-end; intangible assets remained $17.8 million.
- On November 8, 2022, after quarter-end, the company amended its credit agreements. From December 1, interest shifts from LIBOR to Term SOFR plus the applicable margin (6.45% for term debt and 3.75% for the revolver; 1% floor). The amendment gives lenders discretion over a previously scheduled $10 million term-loan draw, increases prepayment fee percentages by one point, and raises the term-loan exit fee from 5% to 7%.
- The amendment lowered minimum trailing-12-month revenue requirements; for the year ending December 31, 2022, the threshold fell from $42.5 million to $38.0 million. Compliance remains a key financing risk. The company also disclosed that it could not guarantee covenant compliance, expense control, revenue growth, or access to additional capital.
- Management expects expenses to continue increasing, though at a slower rate, as it hires, develops products, builds commercial capabilities, and expands manufacturing capacity. The company expects to increase total production capacity five-fold over two years, subject to execution, supply, staffing, construction, and quality risks. No specific revenue or earnings guidance is stated in the provided filing text.
- Other notable risks include recurring losses, customer and supplier concentration, reliance on purchase orders and limited raw-material suppliers, margin pressure, construction and capacity-ramp execution, and uncertain customer research spending amid economic volatility. More than 10% revenue customers represented 42% of Q3 revenue; one distributor represented 14%. A supplier represented 37% of Q3 inventory purchases.
- Management stated disclosure controls were effective at September 30 and that a previously reported material weakness had been remediated by March 31, 2022. A new ERP system was implemented during Q3; its effect on controls and operations will continue to be monitored. The filing reports no material legal proceedings.
Important facts for investors to verify
- Whether revenue growth, particularly in Lab Essentials and Clinical Solutions, can sustain the company’s increased operating-cost base.
- Cash burn, facility construction spending, and the timing and conditions of future term-loan funding; confirm compliance with the amended revenue covenant.
- The assumptions underlying the goodwill impairment and whether further impairment or margin deterioration occurs.
- Customer and supplier concentration, raw-material availability, and the operational impact of capacity expansion and the ERP implementation.
- The full amended credit agreement terms, including SOFR-based borrowing costs, lender discretion, prepayment charges, and the 7% exit fee.