Alpha Teknova, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited financial statements; dollar amounts below are in millions unless otherwise noted. Teknova supplies catalog and custom reagents used in biopharmaceutical research, development, and production, including Lab Essentials, Clinical Solutions, and Sample Transport products.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $8.31 | $6.04 | $17.39 | $12.16 |
| Gross profit / margin | $3.35 / 40.3% | $3.47 / 57.4% | $8.38 / 48.2% | $7.10 / 58.4% |
| Operating income (loss) | $(2.53) | $0.70 | $(3.35) | $1.72 |
| Net income (loss) | $(2.25) | $0.51 | $(2.91) | $1.46 |
| Cash from operations | Not provided separately | Not provided separately | $(1.15) | $1.70 |
| Capital expenditures | $4.67 | $0.58 | $8.56 | $0.95 |
- Q2 revenue increased about 38% year over year; six-month revenue increased about 43%. Growth was led by Lab Essentials, supported by higher average revenue per customer and more customers.
- Q2 operating expenses were $5.88 million versus $2.77 million a year earlier. For the first half, they were $11.73 million versus $5.38 million. Management cited increased hiring, research and development, sales and customer support, public-company costs, professional fees, and infrastructure spending.
- Gross margin contracted materially. Management attributed the decline primarily to a $0.7 million reserve against Sample Transport inventory, higher manufacturing overhead, and higher labor costs.
- At June 30, cash and cash equivalents were $108.02 million; working capital was $112.4 million. Total assets were $172.57 million and total liabilities were $23.53 million. Long-term debt was $12.0 million gross, or $11.78 million net of issuance costs; there were no Revolver borrowings.
- Six-month financing cash flow was $112.06 million, principally reflecting $99.1 million net IPO proceeds and approximately $11.9 million in term-loan proceeds. The company spent $8.56 million on property, plant, and equipment. It reported non-GAAP Adjusted EBITDA of $(1.52) million and Adjusted Free Cash Flow of $(10.08) million for the first half.
Material changes versus the prior comparable period
- Teknova moved from profit to loss: Q2 net income of $0.51 million in 2020 became a $2.25 million net loss in 2021; first-half net income of $1.46 million became a $2.91 million net loss.
- Revenue growth did not translate into higher gross profit in Q2, as cost of sales rose to $4.96 million from $2.58 million and gross margin fell 17.1 percentage points.
- Sample Transport revenue was $37,000 in Q2 2021 versus $174,000 in Q2 2020. First-half revenue was $961,000 versus $174,000, reflecting its launch in 2020 and subsequent waning COVID-19 testing demand.
- The June IPO raised $99.1 million net. Preferred shares converted into 17.5 million common shares, and the company ended the quarter with 28.0 million common shares outstanding.
- Property, plant, and equipment, net, rose to $18.33 million from $10.01 million at year-end, with construction in progress increasing to $8.43 million from $2.03 million.
Outlook, risks, contingencies, and unusual items
- Management expects expenses to increase as it hires, expands R&D and commercial functions, invests in automation and manufacturing capacity, and bears public-company costs. It is building a new Hollister manufacturing facility, which management says is likely to be the largest operating cash use over the next 12–18 months; it expects capacity to expand substantially.
- Management stated existing liquidity and the credit facility should fund requirements for at least 24 months. No specific revenue, earnings, or margin guidance was provided.
- The MidCap facility totals up to $27 million: a $22 million staged term loan and a $5 million working-capital revolver. The term loan bears interest at one-month LIBOR plus 6.45%, subject to a 1.50% floor, and matures March 1, 2026. Further borrowing is subject to conditions, including revenue and EBITDA targets; minimum trailing-12-month revenue covenants rise over time. The company reported compliance at June 30.
- COVID-19 testing demand declined and market supply of transport medium increased. Teknova fully reserved its Sample Transport inventory; management noted uncertainty about future demand and the potential effect of pandemic developments.
- Revenue and supply-chain concentration are relevant: the three largest customers represented 35% of Q2 revenue and 32% of first-half revenue; two suppliers represented 48% and 50% of inventory purchases, respectively. The company says one customer and one supplier in these concentration disclosures are distributors with diversified underlying bases.
- Disclosure controls were deemed ineffective at June 30 because of an unremediated material weakness in the financial close and reporting process for complex, non-routine transactions. The weakness had contributed to incorrect accounting for the 2019 THP transaction. Management was working to remediate it by adding technical accounting expertise; the auditor had not assessed internal-control effectiveness.
- No material litigation was reported. Operating leases required future minimum payments of $7.15 million as of June 30. The company identified no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue growth and customer gains continue, particularly in Lab Essentials and Clinical Solutions, and whether the Q2 margin decline reverses as the inventory reserve and higher costs affect results.
- The extent and timing of Sample Transport inventory charges, future demand, and any remaining exposure to COVID-19-related products.
- Manufacturing expansion progress, capacity utilization, capital spending, and the effect of expansion on operating cash flow and margins.
- Revenue-covenant headroom and conditions for subsequent term-loan advances; interest-rate exposure under the LIBOR-linked facility and the status of any benchmark transition.
- Customer and supplier concentration, including the ability to maintain supply and customer relationships as the business scales.
- Progress in remediating the material weakness and establishing effective disclosure controls and financial reporting processes.
- Management’s liquidity assessment in light of operating cash use, planned capital expenditures, lease obligations, and potential additional financing needs.