Alpha Teknova, Inc. (TKNO)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of Alpha Teknova, Inc.’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates, and assumptions concerning events and financial trends that may affect its future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “the Company,” “Teknova,” “we,” “us,” and “our” are intended to mean the business and operations of 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 approximately 3,000 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. Our products cross all stages of development, from early research through commercialization. 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 primary 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 $37.7 million in 2024, which represents an increase of $1.1 million as compared to $36.7 million in 2023. In 2024 and 2023, only 4.8% and 4.6%, respectively, of our revenue was generated from customers located outside of the U.S. Our sales outside of the U.S. are denominated in U.S. dollars. We primarily generate sales through direct channels and a small salesforce, however, some of our sales are generated through distributors.

We had an operating loss of $26.1 million in 2024 compared to $35.6 million in 2023. Excluding non-recurring charges, we had an operating loss of $24.8 million in 2024 (excluding the following non-recurring charges: $1.3 million related to the reduction in workforce and $0.1 million loss contingency) compared to an operating loss of $29.8 million in 2023 (excluding the following non-recurring charges: $0.7 million related to the reduction in workforce, $2.2 million tradename impairment, $2.2 million long-lived asset impairment, $0.4 million write-off of ATM Facility costs, and $0.3 million loss contingency). While our expenses may fluctuate over the short term, we expect our expenses will increase in future periods, but at a slower rate, in connection with our ongoing activities as we:

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attract, hire, and retain qualified personnel;

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invest in processes and infrastructure to improve operating efficiency and expand capacity at our facilities, including the ramp up of our new, state-of-the-art manufacturing, warehouse, and distribution facilities; and

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build our brand and market, and sell our products and services.

Key Developments

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On January 11, 2024, we announced a reduction in workforce that affected approximately 15% of our employees at that time. We incurred approximately $1.3 million of costs in connection with the reduction in workforce related to severance pay and other termination benefits during the first quarter of 2024. Total annual cost savings from this reduction in workforce are estimated at $6.4 million.

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On January 16, 2024, our board of directors approved a stock option repricing effective on March 14, 2024. The option repricing applies to outstanding options to purchase shares of our common stock as of the repricing date provided that the holder remains employed by us or continues to serve as a member of the board of directors through at least September 14, 2025. Outstanding options with an exercise price that is greater than our closing stock price on March 14, 2024 will be reduced to the fair market value on that date. There will be no changes to the number of shares, the vesting schedule, or the expiration date of the repriced options. The option repricing resulted in additional share-based compensation expense of $0.9 million, of which $0.5 million related to vested stock option awards and was expensed on the repricing date. The remaining $0.4 million related to unvested stock option awards and is being amortized on a straight-line basis over the weighted-average vesting period of those awards of approximately 2.38 years as of March 14, 2024.

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On March 8, 2024, we entered into Amendment No. 5 to our Amended and Restated Credit Agreement which included a waiver of the minimum net revenue covenant violations for each of the periods ending November 30, 2023 and January 31, 2024 and reduced those requirements for future periods up to and including for the twelve months ending December 31, 2024, from $42 million to $34 million. Additionally, Amendment No. 5 removed those requirements for the periods ending January 31, 2025 through December 31, 2025, instead requiring that the minimum net revenue requirement would be determined by MidCap Financial Trust in its reasonable discretion in consultation with our senior management subject to provisions contained therein. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for more information regarding Amendment No. 5 to the Amended and Restated Credit Agreement and the credit facility.

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On March 8, 2024, as a condition to the effectiveness of Amendment No. 5, we issued a warrant to MidCap to purchase up to an aggregate of 125,000 shares (the Common Warrant) of common stock with an exercise price of $2.9934 per share, subject to adjustment as provided therein. On October 15, 2024, MidCap exercised the Common Warrant in full and we issued 65,036 shares of common stock through a cashless exercise in accordance with the conversion terms.

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On July 11, 2024, we entered into a securities purchase agreement (the Purchase Agreement) and a registration rights agreement in connection with a private placement (the July 2024 Offering) with certain accredited investors. Pursuant to the Purchase Agreement, we agreed to offer and sell in the July 2024 Offering 12,385,883 shares of our common stock, $0.00001 par value per share, at an offering price of $1.24 per share. Our controlling stockholder, Telegraph Hill Partners Management Company LLC, through its affiliates Telegraph Hill Partners V, L.P. and THP V Affiliates Fund LLC, our President and Chief Executive Officer and member of its board of directors, Stephen Gunstream, and our Chief Financial Officer, Matthew Lowell, participated in the July 2024 Offering and, collectively, purchased an aggregate of 12,217,740 shares. We received aggregate gross proceeds of approximately $15.4 million from the July 2024 Offering, before deducting offering expenses of $0.2 million. The July 2024 Offering closed on July 12, 2024.

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On March 3, 2025, we entered into the Second Amended and Restated Credit Agreement with MidCap Financial Trust which provides for loan commitments in an aggregate amount of up to $28.245 million consisting of a $23.245 million senior secured term loan and a $5.0 million working capital facility. The

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Second Amended and Restated Credit Agreement includes minimum net revenue requirements that are measured on a trailing twelve-month basis and a minimum cash requirement. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for more information regarding the Second Amended and Restated Credit Agreement and the credit facility.

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. While the rate of inflation moderated in 2024, 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, during 2023 and early 2024, the U.S. Federal Reserve has raised interest rates in response to concerns about inflation, and although the U.S. Federal Reserve lowered interest rates in September of 2024, the direction and timing of future interest rate changes remains uncertain. 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 changes on the results of our operations. For further information regarding the impact of these economic factors on us, please see Item 1A., “Risk Factors” in this report, which is incorporated herein by reference.

Results of Operations

The following tables set forth our results of operations for the years ended December 31, 2024 and 2023 (dollars in thousands):

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Revenue

Our revenue disaggregated by product category, for the years ended December 31, 2024 and 2023 was as follows (dollars in thousands):

Total revenue was $37.7 million in 2024, an increase of $1.1 million, or 2.9%, compared with $36.7 million in 2023. Excluding revenue of $2.7 million from a single large order in 2023, total revenue was up 11% in 2024.

Lab Essentials revenue was $28.9 million in 2024, an increase of $0.1 million, or 0.3%, compared with $28.8 million in 2023. The slight increase in Lab Essentials revenue was attributable to an increased number of customers, partially offset by lower average revenue per customer.

Clinical Solutions revenue was $7.1 million in 2024, an increase of $0.4 million, or 5.3%, compared with $6.7 million in 2023. The increase in Clinical Solutions revenue was attributable to an increased number of customers, partially offset by lower average revenue per customer. Excluding revenue of $2.7 million from a single large order in 2023, Clinical Solutions revenue was up 76% in 2024.

Our revenue disaggregated by geographic region, which is determined based on customer location, for the years ended December 31, 2024 and 2023, was as follows (dollars in thousands):

Revenue from sales to customers in the United States was $35.9 million in 2024, and $35.0 million in 2023. Revenue from U.S. sales was consistent year over year, representing 95.2% and 95.4% of our total revenue in 2024 and 2023, respectively.

Revenue from sales to customers in markets outside of the U.S. was $1.8 million in 2024, and $1.7 million in 2023. Revenue from international sales was also consistent year over year, representing 4.8% and 4.6% of our total revenue in 2024 and 2023, respectively.

Gross profit

Our gross profit for the years ended December 31, 2024 and 2023 was as follows (dollars in thousands):

Gross profit percentage was 19.2% in 2024, and 28.1% in 2023. The decrease in gross profit percentage was primarily driven by $2.8 million of non-recurring and non-cash charges related to the disposal of expired inventory and write down of excess inventory created in the second half of 2022 when we increased production in anticipation of persistent high demand. Excluding the $2.8 million of non-recurring and non-cash charges, the gross profit

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percentage for 2024, would have been 26.5%. The decrease in gross profit was also driven by increased overhead costs, largely depreciation expense following the completion of our new manufacturing facility in 2023, which were partially offset by reduced headcount.

Operating expenses

Our operating expenses for the years ended December 31, 2024 and 2023 were as follows (dollars in thousands):

Research and development expenses were $2.8 million in 2024 and $5.6 million in 2023. The decrease was primarily driven by reduced headcount and supplies expense.

Sales and marketing expenses were $6.3 million in 2024 and $9.3 million in 2023. The decrease was primarily driven by reduced headcount.

General and administrative expenses were $23.2 million in 2024 and $25.5 million in 2023. Excluding the one-time, non-recurring charges in 2024 of $1.4 million of which $1.3 million related to our reduction in workforce and $0.1 million increase in a loss contingency accrual and a total of $1.4 million of one-time non-recurring charges in 2023 of which $0.7 million related to our reduction in workforce, $0.4 million in charges related to our write off of at-the-market facility costs, and $0.3 million related to a loss contingency accrual, general and administrative expenses decreased $2.3 million. The decrease was driven by reduced compensation and benefits and spending, primarily on professional fees and insurance, partially offset by increased stock-based compensation expense related to the stock option repricing as well as facility costs. See “Notes to Financial Statements—Note 12. Stock-Based Compensation” for a more detailed discussion of the stock option repricing.

Amortization of intangible assets was consistent in 2024 and 2023, at $1.1 million.

We incurred a $2.2 million tradename impairment charge in 2023, with no comparable charges in 2024. Refer to the “Notes to Financial Statements—Note 8. Intangible Assets, Net” in our financial statements for details regarding the tradename impairment.

We recorded long-lived asset impairment charges of $2.2 million in 2023, with no comparable charges in 2024. Refer to “Notes to Financial Statements—Note 6. Property, Plant, and Equipment, Net,” in our financial statements for details regarding the long-lived asset impairment.

Other expenses, net

Other expenses, net for the years ended December 31, 2024 and 2023 was as follows (dollars in thousands):

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Total other expenses, net was $0.7 million in 2024, compared to total other expenses, net of $1.5 million in 2023. The decrease in total other expenses, net was primarily due to the $0.8 million loss on extinguishment of debt in 2023 coupled with lower capitalized interest. We capitalized a portion of the interest on funds borrowed to finance certain of our capital expenditures. Capitalized interest costs were zero and $0.9 million in 2024 and 2023, respectively. Additionally, interest expense was lower due to a lower debt balance outstanding despite higher interest rates as well as higher interest income earned on short-term liquid investments.

Benefit from income taxes

Our benefit from income taxes for the years ended December 31, 2024 and 2023 was as follows (dollars in thousands):

Our benefit from income taxes was $0.1 million in 2024, compared to a $0.3 million in 2023. 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) registered direct offering and concurrent private placement completed in September 2023 (collectively, the September 2023 Offerings), which resulted in aggregate gross proceeds of $22.9 million before deducting offering expenses of $0.4 million and the prepayment of $10.0 million owed under the Term Loan as discussed below, and (ii) private placement completed in July 2024 (the July 2024 Offering), which resulted in aggregate gross proceeds of $15.4 million before deducting offering expenses of $0.2 million.

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. During the year ended December 31, 2024, we incurred net losses of $26.7 million. In addition, as of December 31, 2024, we had an accumulated deficit of $118.5 million and $12.1 million in borrowings outstanding under our Term Loan (defined below). As of December 31, 2024, we had $31.6 million of working capital, which included $3.7 million in cash and cash equivalents and $26.7 million in short-term investments.

On March 3, 2025, we entered into the Second Amended and Restated Credit Agreement with MidCap Financial (Midcap) Trust which provides for loan commitments in an aggregate amount of up to $28.245 million consisting of a $23.245 million senior secured term loan (Amended Term Loan) and a $5.0 million working capital facility (Amended Revolver). The Amended Term Loan consists of the $12.135 million balance outstanding under the previous term loan, plus an additional $1.110 million related to the exit fee that would otherwise have been due upon closing of the Second and Amended Restated Term Loan Credit Agreement, as well as an additional tranche of $10.0 million that may become available for use in an acquisition, with MidCap’s consent. The Second Amended and Restated Credit Agreement includes minimum net revenue requirements that are measured on a trailing twelve-month basis and a minimum cash requirement throughout the term of the agreement. For example, our minimum net revenue requirement for the twelve months ending December 31, 2025, is $39.0 million. The minimum cash requirement is $8.0 million, which includes cash and cash equivalents as well as short-term investments in U.S. Treasuries. See “Notes to Financial Statements—Note 17. Subsequent Events” for a more detailed discussion of the material terms of our Second Amended and Restated Credit Agreement.

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We were in compliance with our financial covenants under the terms of Amendment No. 5 to our Amended and Restated Credit Agreement as of December 31, 2024. As a result of recent business improvements, including benefits from the Second Amended and Restated Credit Agreement, and actions taken by management in the 2024 fiscal year to reduce operating costs, and raise additional capital, management believes that there is no longer substantial doubt about our ability to continue as a going concern for the twelve-month period following the date on which the accompanying audited financial statements are being issued. However, debt service requirements in the future require that we continue to execute our plans both in terms of operations and financial results. Additionally, unforeseen events or changes in assumptions may occur and result in material differences between our future financial results or forecasts and the current financial forecast, and those differences could result in management concluding in the future, as it has in the past, that there is substantial doubt about our ability to continue as a going concern based upon the new information.

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 December 31, 2024, 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 following table sets forth, for the periods indicated, net cash flows used in operating activities, used in investing activities and 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 operating activities.

Net cash used in operating activities was $12.4 million in 2024, which primarily consisted of net loss of $26.7 million plus net adjustments for non-cash charges of $15.2 million, offset by net changes in operating assets and liabilities of $0.9 million. The primary non-cash adjustments to net loss included $6.6 million of depreciation and amortization, a $4.5 million provision for inventory, $3.7 million of stock-based compensation, amortization of debt financing costs of $0.4 million, and loss on disposal of property, plant, and equipment of $0.2 million, partially offset by amortization of the discount on short-term investments of $0.3 million. The main drivers of the changes in operating assets and liabilities were a $0.6 million decrease in accounts payable, an increase of $0.5 million in accounts receivable, a $0.4 million decrease in accrued liabilities, partially offset by a decrease in other non-current assets of $0.5 million and a decrease in inventories of $0.2 million.

Net cash used in operating activities was $18.8 million in 2023, which primarily consisted of net loss of $36.8 million plus net adjustments for non-cash charges of $15.7 million and net changes in operating assets and liabilities of $2.2 million. The primary non-cash adjustments to net loss included $5.7 million of depreciation and amortization, $4.1 million of stock-based compensation, a $2.2 million impairment charge related to long-lived assets, a $2.2 million impairment charge related to the Teknova tradename, a $0.8 million loss on extinguishment of debt, $0.5 million in amortization of debt financing costs, and a $0.3 million provision related to our inventory

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reserve. The main drivers of the changes in operating assets and liabilities were a $1.9 million increase in accrued liabilities, a $0.4 million decrease in other non-current assets, a $0.3 million decrease in inventories, and a $0.3 million decrease in accounts receivable, partially offset by a $0.8 million decrease in accounts payable.

Investing Activities

Net cash used in investing activities relates primarily to the purchase and maturity of short-term investments as well as capital expenditures and proceeds from the sale of any long-lived assets.

Net cash used in investing activities was $27.3 million in 2024, which consisted of purchases of short-term investments of $30.3 million and purchases of property, plant, and equipment of $1.1 million, partially offset by maturities of short-term investments of $4.0 million and proceeds from the sale of certain long-lived assets of $0.1 million.

Net cash used in investing activities was $7.7 million in 2023, which consisted of purchases of property, plant, and equipment of $7.9 million, partially offset by proceeds from the sale of certain long-lived assets of $0.2 million.

Financing Activities

Net cash provided by financing activities primarily relates to proceeds from our September 2023 Offerings and July 2024 Offering, proceeds and payments related to our long-term debt, the exercise of stock options, issuance of common stock under our employee stock purchase plan, and other financing activities.

Net cash provided by financing activities was $14.9 million in 2024, which was primarily attributable to net proceeds from the July 2024 Offering of $15.1 million, proceeds from financed insurance premiums of $0.4 million and proceeds of $0.1 million from the issuance of common stock under our employee stock purchase plan, partially offset by the repayment of financed insurance premiums of $0.7 million.

Net cash provided by financing activities was $12.8 million in 2023, which was primarily attributable to net proceeds from the September 2023 Offerings of $22.5 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 $0.6 million, and payment of $0.4 million related to the ATM Facility which were written off during the quarter ended September 30, 2023 as the facility was not utilized. We also received proceeds of $0.1 million from the exercise of stock options and $0.3 million from issuance of common stock under our employee stock purchase plan.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, future events may cause us to change our assumptions and estimates, which may require adjustment. Actual results could differ from these estimates.

We believe the following critical accounting policies involve significant areas where management applies judgments and estimates in the preparation of our financial statements.

Revenue Recognition

We account for revenue in accordance with ASC 606. This process involves identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when or as we satisfy performance obligations.

We recognize revenue from the sale of manufactured products and services when control of promised goods or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in

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exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of our sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer.

Occasionally, we offer rebates, discounts, and returns on our products, however, returns and refunds occur rarely. We record rebates, discounts, and returns at the time they occur. The difference between recording these as they occur and estimating the amount of consideration in exchange for the transfer of promised goods would not have a material impact on the financial statements.

Intangible Assets and Other Long-Lived Assets

We review our definite-lived intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. Recoverability is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider.

Indefinite lived intangible assets are also subject to an impairment test at least annually, as of October 1, or more frequently if events or circumstances indicate that it is more likely than not that the asset is impaired. If the fair value of the asset is less than the carrying amount, an impairment loss would be recognized in an amount equal to the difference between the carrying amount and the fair value. We determined that as of December 31, 2023, the fair value of our indefinite lived intangible assets was less than the carrying amount. As a result, we recorded a $2.2 million impairment charge during the year ended December 31, 2023 related to our tradename, with no comparable charges in 2024. Refer to “Notes to Financial Statements—Note 8. Intangible Assets, Net,” in our financial statements for details regarding the impairment.

Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.

Income Taxes

The asset and liability method is used in accounting for deferred income taxes. Under this method, deferred income taxes are provided for differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accordingly, our tax provision contemplates tax rates currently in effect to determine our current tax provision as well as enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled to determine our deferred tax provision. Any significant fluctuation in rates or changes in tax laws could lead to either increases or decreases in our effective tax rate.

Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the financial statements and would require an adjustment to the provision for income taxes.

Stock-Based Compensation

Stock-based compensation expense is recognized based on the fair value and is expensed on a straight-line basis over the requisite service periods of the award, which generally represents the scheduled vesting period.

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Forfeitures are recognized as they occur. We account for stock-based compensation expense based on the estimated grant date fair value, using the Black-Scholes option-pricing model which requires us to make a number of assumptions, including expected volatility, the expected risk-free interest rate, the expected term and the expected dividend.

These inputs are subjective and generally require significant analysis and judgment to develop. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation is recognized.

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Volatility. Since we have limited historical data on volatility of our stock, expected volatility is based on the volatility of the stock of similar publicly traded entities. In evaluating similarity, we consider factors such as industry, stage of life cycle, size, and financial leverage.

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Fair value of underlying common stock. The fair value of our common stock is determined by the closing price as reported on the Nasdaq Global Market on the date of grant.

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Risk-free interest rate. The risk-free rate that we use is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

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Expected term. As we do not have sufficient historical exercise activity to estimate expected life, the expected life of options granted is determined using the simplified method. The simplified method is based on the vesting period and the contractual term for each grant or for each vesting tranche for awards with graded vesting. The midpoint of the vesting date and the maximum contractual expiration date are used to determine the expected term under this method.

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Dividend yield. We have never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future. Therefore, we use an expected dividend yield of zero. In addition, the terms of the Second Amended and Restated Credit Agreement prohibit us from paying dividends, other than dividends payable in our common stock, without the prior consent of the lender.

Accounting Pronouncements Not Yet Adopted

In December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires disclosure in the rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciliation items in some categories if the items meet a quantitative threshold. The guidance also requires disclosure of income taxes paid, net of refunds, disaggregated by federal (national), state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold. The guidance is effective for fiscal years beginning after December 15, 2024. We are currently evaluating the impact of this standard to determine its impact on our disclosures.

In November 2024, the FASB issued ASU 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40), which requires disaggregation of specific expense categories in the notes to the financial statements and a qualitative description of the remaining expense amounts not separately disaggregated. This standard is effective for annual reporting periods beginning after December 15, 2026, and requires prospective application with the option to apply it retrospectively. We are currently evaluating the impact of adopting this standard to determine its impact on our disclosures.

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:

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reduced obligations with respect to financial data, including presenting only two years of audited financial statements;

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an exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

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reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements, and registration statements; and

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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:

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the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more;

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the last day of our fiscal year following the fifth anniversary of the date of the closing of our initial public offering (IPO);

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the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; and

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the date on which we are deemed to be a “large accelerated filer” under 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).

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of Alpha Teknova, Inc.’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates, and assumptions concerning events and financial trends that may affect its future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to "the Company," “Teknova,” we,” “us,” and “our” are intended to mean the business and operations of 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 2,500 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. Our products cross all stages of development, from early research through commercialization. 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 primary 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 $36.7 million in 2023, which represents a decrease of $4.7 million as compared to 2022. In 2023 and 2022, only 4.6% and 3.2%, respectively, of our revenue was generated from customers located outside of the U.S. Our sales outside of the U.S. are denominated in U.S. dollars. We primarily generate sales through direct channels and a small salesforce, however, some of our sales are generated through distributors.

We had an operating loss of $35.6 million in 2023 compared to $49.7 million in 2022. Excluding non-recurring charges, we had an operating loss of $29.8 million in 2023 (excluding the following non-recurring charges: $0.7 million related to the reduction in workforce, $2.2 million tradename impairment, $2.2 million long-lived asset impairment, $0.4 million write-off of ATM Facility costs, and $0.3 million loss contingency) compared to an operating loss of $28.9 million in 2022 (excluding the goodwill impairment of $16.6 million and long-lived asset impairment of $4.2 million). 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:

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attract, hire, and retain qualified personnel;

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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; and

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build our brand and market, and sell our products and services.

Key Developments

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On February 1, 2023, we carried out a reduction in workforce of approximately 40 positions, aimed at reducing operating expenses. We incurred $0.7 million of costs in connection with the reduction in workforce related to severance pay and other termination benefits during the year ended December 31, 2023.

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On March 30, 2023, we entered into a sales agreement (the ATM Facility) with Cowen and Company, LLC, under which the Company may offer and sell, from time to time, shares of common stock having aggregate gross proceeds of up to $50.0 million. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for more information regarding the ATM Facility.

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On September 19, 2023, we completed our registered direct offering and private placements where we received aggregate gross proceeds of $22.915 million, before deducting $0.4 million offering expenses. At the same time, we entered into Amendment No. 4 to the Credit Agreement which included a waiver from our lender of a revenue covenant violation for the period ending July 31, 2023. As a condition to the effectiveness of Amendment No. 4, we prepaid the principal amount of the Term Loan in an amount equal to $10.0 million and recognized a loss on the extinguishment of debt in the amount of $0.8 million related to this prepayment in the statements of operations. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for more information regarding the credit facility.

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On January 11, 2024, we announced a reduction in workforce that affected approximately 15% of our employees at that time. We estimate that we will incur approximately $1.2 million of costs in connection with the reduction in workforce related to severance pay and other termination benefits. We expect the majority of the costs to be incurred and payments made during the first quarter of 2024. Total annual cost savings from this reduction in workforce are estimated at $6.4 million.

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On January 16, 2024, our board of directors approved a stock option repricing effective on March 14, 2024. The option repricing applies to outstanding options to purchase shares of our common stock as of the repricing date provided that the holder remains employed by us or continues to serve as a member of the board of directors through at least September 14, 2025. Outstanding options with an exercise price that is less than our closing stock price will be reduced to the fair market value on that date. There will be no changes to the number of shares, the vesting schedule, or the expiration date of the repriced options. The option repricing will result in additional share-based compensation expense that will be recognized in our statements of operations in future periods; however, the amount of additional share-based compensation expense and the periods over which it will be recognized have not yet been determined.

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On March 8, 2024, we entered into Amendment No. 5 to the Credit Agreement which includes a waiver of the minimum net revenue covenant violations for each of the periods ending November 30, 2023 and January 31, 2024 and reduced these requirements for future periods up to and including for the twelve months ending December 31, 2024, from $42 million to $34 million. Additionally, Amendment No 5 removed these requirements for the periods ending January 31, 2025 through December 31, 2025, instead requiring that the minimum net revenue requirement will be determined by MidCap in its reasonable discretion in consultation with our senior management subject to provisions contained therein. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for more information regarding Amendment No. 5 to the Credit Agreement and the credit facility.

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On March 8, 2024, as a condition to the effectiveness of Amendment No. 5, we issued a warrant to MidCap to purchase up to an aggregate of 125,000 shares (the Common Warrant) of common stock

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with an exercise price of $2.9934 per share, subject to adjustment as provided therein. See “Notes to Financial Statements—Note 17. Subsequent Events,” for a more detailed discussion of the material terms of the Common Warrant.

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 Item 1A., "Risk Factors" in this report, which is incorporated herein by reference.

Results of Operations

The following tables set forth our results of operations for the years ended December 31, 2023 and 2022 (dollars in thousands):

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Revenue

Our revenue disaggregated by product category, for the years ended December 31, 2023 and 2022 was as follows (dollars in thousands):

Total revenue was $36.7 million in 2023, a decrease of $4.7 million, or 11.4%, compared with $41.4 million in 2022.

Lab Essentials revenue was $28.8 million in 2023, a decrease of $3.0 million, or 9.4%, compared with $31.8 million in 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 $6.7 million in 2023, a decrease of $1.7 million, or 20.2%, compared with $8.4 million in 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 years ended December 31, 2023 and 2022, was as follows (dollars in thousands):

Revenue from sales to customers in the United States was $35.0 million in 2023, and $40.1 million in 2022. Revenue from U.S. sales was consistent year over year, representing 95.4% and 96.8% of our total revenue in 2023 and 2022, respectively.

Revenue from sales to customers in markets outside of the U.S. was $1.7 million in 2023, and $1.3 million in 2022. Revenue from international sales was also consistent year over year, representing 4.6% and 3.2% of our total revenue in 2023 and 2022, respectively.

Gross profit

Our gross profit for the years ended December 31, 2023 and 2022 was as follows (dollars in thousands):

Gross profit percentage was 28.1% in 2023, and 42.2% in 2022. 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.

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Operating expenses

Our operating expenses for the years ended December 31, 2023 and 2022 were as follows (dollars in thousands):

Research and development expenses were $5.6 million in 2023 and $7.7 million in 2022. The decrease was primarily driven by reduced headcount and professional fees as well as reduced supplies and equipment expenses.

Sales and marketing expenses were $9.3 million in 2023 and $9.2 million in 2022. 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 $25.5 million in 2023 and $28.3 million in 2022. Excluding the one-time, non-recurring charges related to the reduction in workforce of $0.7 million, the $0.4 million write off of ATM Facility costs, and $0.3 million accrual for legal claim recorded in 2023, general and administrative expenses decreased $4.3 million compared to 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 in 2023 and 2022, at $1.1 million.

We incurred a $16.6 million goodwill impairment charge in 2022, with no comparable charges in 2023. Refer to the “Notes to Financial Statements—Note 8. Intangible Assets, Net” in our financial statements for details regarding the goodwill impairment.

We incurred a $2.2 million tradename impairment charge in 2023, with no comparable charges in 2022. Refer to the “Notes to Financial Statements—Note 8. Intangible Assets, Net” in our financial statements for details regarding the tradename impairment.

We recorded long-lived asset impairment charges of $2.2 million in 2023 and $4.2 million in 2022. Refer to “Notes to Financial Statements—Note 6. Property, Plant, and Equipment, Net,” in our financial statements for details regarding the long-lived asset impairment.

Other (expenses) income, net

Other (expenses) income, net for the years ended December 31, 2023 and 2022 was as follows (dollars in thousands):

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Total other expenses, net was $1.5 million in 2023, compared to total other income, net of $0.3 million in 2022. The increase in total other expenses, net was attributable to higher interest expense primarily driven by an increase in our average debt balance 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 capitalized a portion of the interest on funds borrowed to finance certain of our capital expenditures. Capitalized interest costs were $0.9 million and $1.6 million in 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.

Benefit from income taxes

Our benefit from income taxes for the years ended December 31, 2023 and 2022 was as follows (dollars in thousands):

Our benefit from income taxes was $0.3 million in 2023, compared to a $1.9 million in 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 were 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 and the prepayment of $10.0 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 December 31, 2023, we have limited capital resources to fund ongoing operations. During the year ended December 31, 2023, we incurred net losses of $36.8 million. In addition, as of December 31, 2023, we had an accumulated deficit of $91.8 million and borrowings outstanding under our Term Loan (defined below). As of December 31, 2023, we had $36.8 million of working capital, which included $28.5 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. 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.

As of December 31, 2023, we had an outstanding principal amount of $12.1 million under a senior secured term loan (the Term Loan) pursuant to Amendment No. 4 to our Credit Agreement with MidCap Financial Trust (MidCap). On March 8, 2024, we entered into limited waivers and amendments (collectively Amendment No. 5, or, as amended, the Amended Credit Agreement) which includes a waiver from MidCap of the revenue covenant

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violations for each of the periods ending November 30, 2023 and January 31, 2024. Amendment No. 5 also reduced these requirements for future periods up to and including for the twelve months ending December 31, 2024, from $42 million to $34 million. Amendment No. 5 also removed those requirements for the periods ending January 31, 2025 through December 31, 2025, instead requiring that for each applicable twelve-month period ending after December 31, 2024, 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) $34.0 million. In addition, Amendment No. 5 also removed the advance rate for finished goods inventory in the determination of the borrowing base for the Revolving Loan and increased the minimum cash requirement from $9.0 million to $10.0 million. Finally, Amendment No. 5 conditions the next borrowing under the Revolving Loan on the Company achieving net revenue for the preceding twelve-month period of at least $38.0 million down from $45.0 million. See “Notes to Financial Statements—Note 17. Subsequent Events” for a more detailed discussion of the material terms of our Amended Credit Agreement.

To the extent we continue to experience unfavorable market conditions, like other companies in our industry, we may be unable to comply with the monthly revenue covenant during 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.

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 December 31, 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.

Accounting Standards Codification (ASC) 205-40, Presentation of Financial Statements—Going Concern, requires us to evaluate our ability to continue as a going concern for the twelve-month period following the date on which the financial statements are available for issuance. We performed an assessment to determine whether there were conditions or events that, considered individually and in the aggregate, raised substantial doubt about our ability to continue as a going concern for the twelve-month period following the date on which our financial statements are being issued. This assessment indicated certain negative conditions and events, described further above related to our availability of capital resources and ability to meet the monthly revenue covenant under our Amended Credit Agreement, that raise substantial doubt about our ability to continue as a going concern.

The accompanying financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, 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 the audited financial statements. As such, the accompanying 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 we 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 provided by financing activities (in thousands):

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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 operating activities.

Net cash used in operating activities was $18.8 million in 2023, which primarily consisted of net loss of $36.8 million plus net adjustments for non-cash charges of $15.7 million and net changes in operating assets and liabilities of $2.2 million. The primary non-cash adjustments to net loss included $5.7 million of depreciation and amortization, $4.1 million of stock-based compensation, a $2.2 million impairment charge related to long-lived assets, a $2.2 million impairment charge related to the Teknova tradename, a $0.8 million loss on extinguishment of debt, $0.5 million in amortization of debt financing costs, and a $0.3 million provision related to our inventory reserve. The main drivers of the changes in operating assets and liabilities were a $1.9 million increase in accrued liabilities, a $0.4 million decrease in other non-current assets, a $0.3 million decrease in inventories, and a $0.3 million decrease in accounts receivable, partially offset by a $0.8 million decrease in accounts payable.

Net cash used in operating activities was $27.4 million in 2022, which primarily consisted of net loss of $47.5 million plus net adjustments for non-cash charges of $27.4 million, offset by net changes in operating assets and liabilities of $7.3 million. The primary non-cash adjustments to net loss included a $16.6 million goodwill impairment charge, a $4.2 million impairment charge related to long-lived assets, $3.7 million of stock-based compensation, $3.2 million of depreciation and amortization, a $0.7 million provision related to our inventory reserve, partially offset by $1.9 million in deferred taxes. The main drivers of the changes in operating assets and liabilities were a $7.6 million increase in inventories and $2.1 million increase in other non-current assets, partially offset by a $1.2 million decrease in income taxes receivable, $0.6 million increase in accounts payable, and $0.4 million decrease in accounts receivable.

Investing Activities

Net cash used in investing activities relates primarily to capital expenditures, partially offset by proceeds from the sale of certain long-lived assets.

Net cash used in investing activities was $7.7 million in 2023, which consisted of purchases of property, plant, and equipment of $7.9 million, partially offset by proceeds from the sale of certain long-lived assets of $0.2 million.

Net cash used in investing activities was $28.1 million in 2022, which consisted of purchases of property, plant, and equipment.

Financing Activities

Net cash provided by financing activities primarily relates to proceeds from our Offerings, proceeds and payments related to our long-term debt, the exercise of stock options, issuance of common stock under our employee stock purchase plan, and other financing activities.

Net cash provided by financing activities was $12.8 million in 2023, which was primarily attributable to net proceeds from the Offerings of $22.5 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 $0.6 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 $0.3 million from issuance of common stock under our employee stock purchase plan.

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Net cash provided by financing activities was $10.3 million in 2022, which was primarily attributable to proceeds from long-term debt of $10.1 million, partially offset by payment of 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 $0.3 million from issuance of common stock under our employee stock purchase plan.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, future events may cause us to change our assumptions and estimates, which may require adjustment. Actual results could differ from these estimates.

We believe the following critical accounting policies involve significant areas where management applies judgments and estimates in the preparation of our financial statements.

Revenue Recognition

We account for revenue in accordance with ASC 606. This process involves identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when or as we satisfy performance obligations.

We recognize revenue from the sale of manufactured products and services when control of promised goods or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of our sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer.

Occasionally, we offer rebates, discounts, and returns on our products, however, returns and refunds occur rarely. We record rebates, discounts, and returns at the time they occur. The difference between recording these as they occur and estimating the amount of consideration in exchange for the transfer of promised goods would not have a material impact on the financial statements.

Intangible Assets and Other Long-Lived Assets

We review our definite-lived intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. Recoverability is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider.

Indefinite lived intangible assets are also subject to an impairment test at least annually, as of October 1, or more frequently if events or circumstances indicate that it is more likely than not that the asset is impaired. If the fair value of the asset is less than the carrying amount, an impairment loss would be recognized in an amount equal to the difference between the carrying amount and the fair value. We determined that as of December 31, 2023, the fair value of our indefinite lived intangible assets was less than the carrying amount. As a result we recorded a $2.2 million impairment charge during the year ended December 31, 2023 related to our tradename, with no comparable

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charges in 2022. Refer to “Notes to Financial Statements—Note 8. Intangible Assets, Net,” in our financial statements for details regarding the impairment.

Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.

Income Taxes

The asset and liability method is used in accounting for deferred income taxes. Under this method, deferred income taxes are provided for differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accordingly, our tax provision contemplates tax rates currently in effect to determine our current tax provision as well as enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled to determine our deferred tax provision. Any significant fluctuation in rates or changes in tax laws could lead to either increases or decreases in our effective tax rate.

Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the financial statements and would require an adjustment to the provision for income taxes.

Stock-Based Compensation

Stock-based compensation expense is recognized based on the fair value and is expensed on a straight-line basis over the requisite service periods of the award, which generally represents the scheduled vesting period. Forfeitures are recognized as they occur. We account for stock-based compensation expense based on the estimated grant date fair value, using the Black-Scholes option-pricing model which requires us to make a number of assumptions, including expected volatility, the expected risk-free interest rate, the expected term and the expected dividend.

These inputs are subjective and generally require significant analysis and judgment to develop. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation is recognized.

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Volatility. Since we have limited historical data on volatility of our stock, expected volatility is based on the volatility of the stock of similar publicly traded entities. In evaluating similarity, we consider factors such as industry, stage of life cycle, size, and financial leverage.

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Fair value of underlying common stock. The fair value of our common stock is determined by the closing price as reported on the Nasdaq Global Market on the date of grant.

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Risk-free interest rate. The risk-free rate that we use is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

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Expected term. As we do not have sufficient historical exercise activity to estimate expected life, the expected life of options granted is determined using the simplified method. The simplified method is based on the vesting period and the contractual term for each grant or for each vesting tranche for awards with graded vesting. The midpoint of the vesting date and the maximum contractual expiration date are used to determine the expected term under this method.

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Dividend yield. We have never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future. Therefore, we use an expected dividend yield of zero. In addition, the terms of the Amended Credit Agreement prohibit us from paying dividends, other than dividends payable in our common stock, without the prior consent of the lender.

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Accounting Pronouncements Not Yet Adopted

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. Additionally, all disclosure requirements under the guidance are also required for public entities with a single reportable segment. The amendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. We are currently evaluating the impact of this standard to determine its impact on our disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires disclosure in the rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciliation items in some categories if the items meet a quantitative threshold. The guidance also requires disclosure of income taxes paid, net of refunds, disaggregated by federal (national), state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold. The guidance is effective for fiscal years beginning after December 15, 2024. We are currently evaluating the impact of this standard to determine its impact on our disclosures.

Recent Securities and Exchange Commission (SEC) Final Rules Not Yet Adopted

In March 2024, the SEC adopted final rules under SEC Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors, which requires registrants to provide certain climate-related information in their registration statements and annual reports. The rules require information about a registrant’s climate-related risks that have materially impacted, or are reasonably likely to have a material impact on its business, results of operations, or financial condition. In addition, certain disclosures related to severe weather events and other natural conditions will be required in the registrant’s audited financial statements. Disclosure requirements will begin phasing in for fiscal years beginning on or after January 1, 2025. We are currently evaluating the impact of these new final rules on our financial statements and disclosures.

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:

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reduced obligations with respect to financial data, including presenting only two years of audited financial statements;

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an exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

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reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements, and registration statements; and

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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.

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Under the JOBS Act, we will remain an emerging growth company until the earliest to occur of:

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the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more;

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the last day of our fiscal year following the fifth anniversary of the date of the closing of our initial public offering (IPO);

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the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; and

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the date on which we are deemed to be a “large accelerated filer” under 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).

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of Alpha Teknova, Inc.’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates, and assumptions concerning events and financial trends that may affect its future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to "the Company," “Teknova,” we,” “us,” and “our” are intended to mean the business and operations of Alpha Teknova, Inc.

A discussion regarding our financial condition and results of operations for the fiscal year ended December 31, 2022 compared to the fiscal year ended December 31, 2021 is presented below. A discussion regarding our financial condition and results of operations for the fiscal year ended December 31, 2021 compared to the fiscal year ended December 31, 2020 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 18, 2022.

Overview

Since our founding in 1996, we have been producing critical reagents for the research, 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 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, including commercialization.

We have two primary product categories: Lab Essentials and Clinical Solutions. Previously, we had a third product category, Sample Transport, which we ceased producing in 2021. Our products cross all stages of development, from early research through commercialization. We offer three primary product types: pre-poured media plates for cell growth and cloning; liquid cell culture media and supplements for cellular expansion; and molecular biology reagents for sample manipulation, resuspension, and purification. We offer our liquid cell culture media and supplements and molecular biology reagents in both of our two product categories; pre-poured media plates are available in our Lab Essentials category only.

In 2017, we achieved ISO 13485:2016 certification, 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 regulatory 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 $41.4 million in 2022, which represents an increase of $4.5 million as compared to 2021. In 2022 and 2021, only 3.2% and 2.9%, respectively, of our revenue was generated from customers located outside of the U.S. Our sales outside of the U.S. are denominated in U.S. dollars. Approximately 76% of our

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revenue for the year ended December 31, 2022, was generated from sales through direct channels and a small salesforce, with the remainder generated through sales by distributors.

We had an operating loss of $49.7 million in 2022 compared to $12.0 million in 2021. 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;

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invest in processes and infrastructure to enable manufacturing automation and expand capacity, including the ongoing buildout of our new, state-of-the-art manufacturing, warehouse and distribution facilities;

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introduce new products and services and create and protect intellectual property;

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build our brand and market, and sell new and existing products and services; and

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potentially acquire businesses or technologies to accelerate the growth of our business.

Key Developments

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On May 10, 2022, we entered into the Amended and Restated Credit and Security Agreements which provide for loan commitments in an aggregate amount of up to $57.135 million from $27.0 million under the previous credit agreements. Subsequently, on November 8, 2022, we entered into Amendment No. 1 to the Credit Agreements, and on March 28, 2023, we entered into Amendment No. 2 to the Credit Agreements, which reduced the requirements for trailing twelve months net revenue for all future periods, among other things. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility” for more information regarding the credit facility.

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On October 13, 2022, we announced an early access program for novel products to address critical pain points in cell and gene therapy bioproduction.

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On November 9, 2022, we announced a new WFI Quality Water product line for the bioprocessing market.

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On December 7, 2022, our new, state-of-the-art manufacturing facility became operational for research-grade products.

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On February 1, 2023, we carried out a reduction in workforce of approximately 40 positions, aimed at reducing operating expenses. Total annual cost savings are estimated at $4 million.

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On March 30, 2023, we entered into a Sales Agreement with Cowen and Company, LLC, under which the Company may offer and sell, from time to time, shares of common stock having aggregate gross proceeds of up to $50.0 million.

Impact of Broader Economic Trends on Our Business

We are closely monitoring increased 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. The impact of future inflation and interest rate increases on the results of our operations cannot be accurately predicted. For further information regarding the impact of these economic factors on the Company, please see Item 1A., "Risk Factors" in this report, which is incorporated herein by reference.

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We continue to closely monitor the impact of the ongoing COVID-19 pandemic on all aspects of our business, including how it will continue to impact customers, employees, suppliers, business partners, and distribution channels. We believe that we have successfully navigated the uncertain environment associated with the COVID-19 pandemic and that we will continue to do so, but the situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with customers, team members, and business partners. For further information regarding the impact of the COVID-19 pandemic on the Company, please see Item 1A., "Risk Factors" in this report, which is incorporated herein by reference.

Results of Operations

The following tables set forth our results of operations for the years ended December 31, 2022 and 2021 (dollars in thousands):

Revenue

Our revenue disaggregated by product category, for the years ended December 31, 2022 and 2021 was as follows (dollars in thousands):

Total revenue was $41.4 million in 2022, an increase of $4.5 million, or 12.3%, compared with $36.9 million in 2021.

Lab Essentials revenue was $31.8 million in 2022, an increase of $4.6 million, or 16.9%, compared with $27.2 million in 2021. The increase in Lab Essentials revenue was primarily attributable to higher average revenue per customer as the average number of customers remained consistent year over year.

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Clinical Solutions revenue was $8.4 million in 2022, an increase of $1.7 million, or 24.3%, compared with $6.8 million in 2021. The increase in Clinical Solutions revenue was primarily attributable to higher average revenue per customer as the average number of customers remained consistent year over year.

Sample Transport revenue was not significant in 2022, compared to $1.5 million in 2021. The decline in Sample Transport revenue was due to the decline in market demand for COVID-19 testing and an increase in market supply of sample transport products, each of which began in early 2021. As a result, in 2021, we decided to cease production of sample transport medium and no longer market those products. Please see Item 1A., “Risk Factors”, for a discussion of the impact of the COVID-19 pandemic on the operations of our business and the uncertainties associated with global epidemics that may have an adverse impact on our operating results, cash flows, and financial condition in the future.

Our revenue disaggregated by geographic region for the years ended December 31, 2022 and 2021, was as follows (dollars in thousands):

Revenue from sales to customers in the United States was $40.1 million in 2022, and $35.8 million in 2021. Revenue from U.S. sales was consistent year over year, representing 96.8% and 97.1% of our total revenue in 2022 and 2021, respectively.

Revenue from sales to customers in markets outside of the U.S. was $1.3 million in 2022, and $1.1 million in 2021. Revenue from international sales was also consistent year over year, representing 3.2% and 2.9% of our total revenue in 2022 and 2021, respectively.

Gross profit

Our gross profit for the years ended December 31, 2022 and 2021 was as follows (dollars in thousands):

Gross profit percentage was 42.2% in 2022, and 47.8% in 2021. The decrease in gross profit percentage from 2021 was primarily driven by higher labor costs and supplies as a percentage of revenue.

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Operating expenses

Our operating expenses for the years ended December 31, 2022 and 2021 were as follows (dollars in thousands):

Research and development expenses were $7.7 million in 2022 and $4.3 million in 2021. The increase was primarily driven by increased headcount, professional fees, and supplies to support our new product and process development efforts.

Sales and marketing expenses were $9.2 million in 2022 and $3.8 million in 2021. The increase was primarily driven by increased headcount to develop our commercial capabilities and improve customer support, as well as higher marketing and stock-based compensation expenses.

General and administrative expenses were $28.3 million in 2022 and $20.4 million in 2021. The increase was primarily driven by increased headcount as well as stock-based compensation, insurance, and occupancy expenses incurred to support our growth strategy.

Amortization of intangible assets was consistent in 2022 and 2021, at $1.1 million.

We incurred a $16.6 million goodwill impairment charge in 2022, with no comparable charges in 2021. Refer to “Notes to Financial Statements—Note 8—Goodwill and Intangible Assets, Net,” in our financial statements for details regarding the impairment.

We incurred a $4.2 million impairment charge related to long-lived assets in 2022, with no comparable charges in 2021. Refer to “Notes to Financial Statements—Note 6—Property, Plant, and Equipment, Net,” in our financial statements for details regarding the impairment.

Other income (expenses), net

Other income (expenses), net for the years ended December 31, 2022 and 2021 was as follows (dollars in thousands):

Total other income, net was $0.3 million in 2022, as we capitalized $1.6 million of interest during the year. Total other (expense), net was $0.6 million in 2021, primarily due to interest expense related to our Amended Credit Agreement.

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Benefit from income taxes

Our benefit from income taxes for the years ended December 31, 2022 and 2021 was as follows (dollars in thousands):

Our benefit from income taxes was $1.9 million in 2022, which was primarily due to a federal deferred tax benefit from losses during such period. Our benefit from income taxes was $2.8 million in 2021. The decrease in our benefit for income taxes was attributable to operating losses not expected to be benefitted and the goodwill impairment charge disallowed for tax purposes.

Liquidity and Capital Resources

The primary source of financing for our operations was our IPO, which we completed in June 2021 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.

As of December 31, 2022, we had $50.3 million in working capital, which included $42.2 million in cash and cash equivalents. In addition to our existing cash and cash equivalents balance, another source of liquidity is our credit facility as described below in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility”.

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 nearly completed the build out of our new manufacturing, warehouse and distribution facilities in Hollister, California.

As of December 31, 2022, 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.

Credit Facility

On May 10, 2022, we entered into the Amended and Restated Credit and Security Agreement (Term Loan) as borrower, with MidCap Financial Trust (MidCap), as agent and lender, and the additional lenders from time to time party thereto (the Term Loan Credit Agreement) and the Amended and Restated Credit and Security Agreement (Revolving Loan) as borrower, with MidCap as agent and lender, and the additional lenders from time to time party thereto (the Revolving Loan Credit Agreement, together with the Term Loan Credit Agreement, the Credit Agreement). The Credit Agreement provided for a $57.135 million credit facility (the Credit Facility) consisting of a $52.135 million senior secured term loan (the Term Loan) and a $5.0 million working capital facility (the Revolver). The Term Loan consisted of the $12.0 million balance made available in 2021 under the previous credit facility and an additional $40.135 million, staged such that $5.135 million was funded upon closing of the Credit Agreement, an additional $5.0 million was funded on October 31, 2022, $10.0 million was to be available in the first half of 2023, $10.0 million was to be available in the second half of 2023 and $10.0 million was to be available in the first half of 2024, with the borrowing in the second half of 2023 and in the first half of 2024 being contingent upon achieving trailing twelve months of Clinical Solutions revenue of $15.0 million and $19.0 million, respectively, and liquidity requirements (as defined in the Credit Agreement) of $10.0 million and $15.0 million, respectively. The maximum loan amount under the Revolver was $5.0 million, and we were permitted to request the lenders to increase such amount up to $15.0 million. Borrowings on the Revolver were limited in accordance with a borrowing base calculation.

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The interest on the Term Loan was based on the annual rate of one-month London Inter-Bank Offered Rate (LIBOR) plus 6.45%, subject to a LIBOR floor of 1.00%. If any advance under the Term Loan was prepaid at any time, the prepayment fee was based on the amount being prepaid and an applicable percentage amount, such as 3%, 2%, or 1%, based on the date the prepayment was made after the closing date of the Term Loan. Interest on the outstanding balance of the Revolver was payable monthly in arrears at an annual rate of one-month LIBOR plus 3.75%, subject to a LIBOR floor of 1.00%.

The maturity date of the Credit Facility is May 1, 2027. On the date of termination of the Term Loan or the date on which the obligations under the Term Loan become due and payable in full, we would pay an exit fee in an amount equal to 5.00% of the total aggregate principal amount of term loans made pursuant to the Term Loan as of such date. The Credit Agreement contained a financial covenant based upon a trailing twelve months of net revenue, including a requirement of $42.5 million in the twelve months ending December 31, 2022.

On November 8, 2022, we entered into Amendment No. 1 to the Credit Agreement (Amendment No. 1 or, as amended, the Amended Credit Agreement) which (i) replaced the LIBOR-based interest rate with a rate equal to the forward-looking one-month term Secured Overnight Financing Rate adjusted upward by 0.10% (or Term SOFR, as defined in Amendment No. 1) plus an applicable margin (6.45%, for the Term Loan and 3.75% for the Revolver), with a Term SOFR floor of 1.00%, and with such interest rate calculation change taking effect on December 1, 2022, (ii) increased the applicable prepayment fee percentage amounts by one percentage point, (iii) gave lenders discretion regarding the $10.0 million in borrowing that was previously guaranteed to be available under the Term Loan in the first half of 2023, and (iv) reduced our requirements for trailing twelve months of net revenue for all future periods—for example, for the twelve months ending December 31, 2022, our minimum net revenue requirement was reduced from $42.5 million to $38.0 million, where as of December 31, 2022, the Company was in compliance with this requirement. Concurrent with Amendment No. 1, the exit fee due on the date of termination of the Term Loan or the date on which the obligations under the Term Loan become due and payable in full, increased from 5.00% to 7.00% of the total aggregate principal amount of term loans made pursuant to the Term Loan as of such date.

On March 28, 2023, we entered into Amendment No. 2 to the Credit Agreement (Amendment No. 2) which (i) increased the applicable margin from 6.45% to 7.00% for the Amended Term Loan and from 3.75% to 4.00% for the Amended Revolver, and increased the Term SOFR floor from 1.00% to 4.50% on both the Amended Term Loan and Amended Revolver, (ii) gave lenders discretion regarding the $10.0 million in borrowings in the second half of 2023 and the $10.0 million in borrowings in the first half of 2024 by removing the trailing twelve month Clinical Solutions revenue requirement that was previously required under the Amended Term Loan, (iii) removed the increase in the minimum cash covenant from $10.0 million to $15.0 million on the $10.0 million in borrowings in the first half of 2024, and added the $10.0 million minimum cash covenant requirement throughout the remaining term of the Amended Credit Agreement, and (iv) reduced the requirements for trailing twelve months of net revenue for all future periods—for example, for the twelve months ending December 31, 2023, the minimum net revenue requirement was reduced from $45.0 million to $42.0 million. Concurrent with Amendment No. 2, the exit fee due on the date of termination of the Amended Term Loan, or the date on which the obligations under the Amended Term Loan become due and payable in full, increased from 7.0% percent to 8.5% of the total aggregate principal amount of term loans made pursuant to the Term Loan (including amendments thereto) as of such date. Other than the modifications described in this paragraph and in Item 9B below, the Amended Credit Agreement continues unmodified in all other material respects.

We believe these sources of liquidity, in addition to the net proceeds from our IPO, which closed on June 29, 2021, will be sufficient to fund our liquidity requirements for at least the next 12 months. Our principal liquidity requirements are to fund our operations and capital expenditures. We may, however, require or elect to secure additional financing as we continue to execute our business strategy. If we require or elect to raise additional funds, we may do so through equity or debt financing, which may or may not be available on favorable terms and could require us to agree to covenants that limit our operating flexibility.

To meet the Company’s future working capital needs, the Company may need to raise additional debt or equity financing. While the Company has implemented a plan to control its expenses and to satisfy its obligations under the Amended Credit Agreement throughout the one year period from the date of issuance of these annual

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financial statements, the Company cannot guarantee that it will be able to maintain compliance with its loan agreements, raise additional capital, contain expenses, or increase revenue.

The following table sets forth, for the periods indicated, net cash flows used in operating activities, used in investing activities and 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 $27.4 million in 2022, which primarily consisted of net loss of $47.5 million plus net adjustments for non-cash charges of $27.4 million, offset by net changes in operating assets and liabilities of $7.3 million. The primary non-cash adjustments to net income included a $16.6 million goodwill impairment charge, $4.2 million impairment charge related to long-lived assets, $3.7 million of stock-based compensation, $3.2 million of depreciation and amortization, $0.7 million of inventory reserve, partially offset by $1.9 million in deferred taxes. Net cash used in changes in operating assets and liabilities consisted primarily of a $7.6 million increase in inventories and $2.1 million increase in other non-current assets, partially offset by a $1.2 million decrease in income taxes receivable, $0.6 million increase in accounts payable and $0.4 million decrease in accounts receivable.

Net cash used in operating activities was $9.1 million in 2021, which primarily consisted of net loss of $9.8 million plus net adjustments for non-cash charges of $2.5 million, offset by net changes in operating assets and liabilities of $1.8 million. The primary non-cash adjustments to net income included $2.9 million of depreciation and amortization, $1.6 million of stock-based compensation, $0.4 million of inventory reserve, partially offset by $2.8 million in deferred taxes. Net cash used in changes in operating assets and liabilities consisted primarily of a $2.3 million increase in inventories, $1.3 million increase in prepaid expenses and other current assets, partially offset by a $1.8 million increase in accrued liabilities and $0.3 million increase in accounts payable.

Investing Activities

Net cash used in investing activities relates primarily to capital expenditures and purchases of marketable securities, partially offset by proceeds from maturities and sales of marketable investments.

Net cash used in investing activities was $28.1 million for the year ended December 31, 2022, which consisted of purchases of property, plant, and equipment.

Net cash used in investing activities was $17.5 million for the year ended December 31, 2021, which primarily consisted of purchases of property, plant, and equipment of $19.9 million. This was partially offset by receipt of proceeds from sales and maturities of short-term marketable securities of $1.1 million and $0.7 million, respectively, and proceeds from a loan to a related party of $0.5 million.

Financing Activities

Net cash provided by financing activities primarily relates to proceeds from our IPO, net of underwriters’ commissions and discounts, payment of issuance costs of the IPO, and proceeds from long-term debt.

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Net cash provided by financing activities was $10.3 million for the year ended December 31, 2022, which was primarily attributable to proceeds from long-term debt of $10.1 million, partially offset by related debt issuance costs of $0.2 million and payment of exit fee costs related to our debt refinancing of $0.1 million. We also received proceeds of $0.1 million from the exercise of stock options and $0.3 million from issuance of common stock under our employee stock purchase plan.

Net cash provided by financing activities was $110.8 million for the year ended December 31, 2021, which was primarily attributable to proceeds from the IPO, net of underwriters’ commissions and discounts, of $102.7 million and proceeds from long-term debt pursuant to our previous credit agreement of $11.9 million, partially offset by payment of costs related to our IPO of $3.6 million and debt issuance costs of $0.2 million.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, future events may cause us to change our assumptions and estimates, which may require adjustment. Actual results could differ from these estimates.

We believe the following critical accounting policies involve significant areas where management applies judgments and estimates in the preparation of our financial statements.

Revenue Recognition

We account for revenue in accordance with ASC 606. This process involves identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when or as we satisfy performance obligations.

We recognize revenue from the sale of manufactured products and services when control of promised goods or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of our sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer.

Occasionally, we offer rebates, discounts, and returns on our products, however, returns and refunds occur rarely. We record rebates, discounts, and returns at the time they occur. The difference between recording these as they occur and estimating the amount of consideration in exchange for the transfer of promised goods would not have a material impact on the financial statements.

Goodwill

Goodwill is the excess of the fair value of the company above the fair value accounting basis of the net assets and liabilities of the company under pushdown accounting. Goodwill is not amortized, but is tested for impairment annually as of October 1, or more frequently if events or circumstances indicate that the carrying value may no longer be recoverable and that an impairment may have occurred. We operate as one segment and one reporting unit, and therefore goodwill is tested for impairment at the entity level.

We first consider qualitative factors that indicate impairment may have occurred. Such indicators may include macro-economic conditions such as adverse industry or market conditions; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel. If the qualitative assessment indicates a reduction in the carrying value is more likely than not to have occurred, we perform a quantitative assessment, comparing the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit

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exceeds the fair value, an impairment has occurred, and an impairment loss is recognized for the difference up to the carrying value of the reporting unit’s goodwill.

The fair value of the reporting unit was determined using a combination of an income approach and market approach. We incurred a $16.6 million goodwill impairment charge in 2022, with no comparable charges in 2021. Refer to “Notes to Financial Statements—Note 8—Goodwill and Intangible Assets, Net,” in our financial statements for details regarding the impairment.

Application of the goodwill impairment test requires judgments, including a qualitative assessment to determine whether there are any impairment indicators, and determining the fair value of the reporting unit. A number of significant assumptions and estimates are involved in a quantitative assessment. In the application of the income approach to forecast future cash flows, revenue and operating income growth rates, discount rates, and other factors are used. Additionally, assumptions related to guideline company financial multiples are used in the market approach.

Intangible Assets and Other Long-Lived Assets

We review our definite-lived intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of our long-lived assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider.

Indefinite-lived intangible assets are also subject to an impairment test at least annually, as of October 1, or more frequently if events or circumstances indicate that it is more likely than not that the asset is impaired. If the fair value of the asset is less than the carrying amount, an impairment loss would be recognized in an amount equal to the difference between the carrying amount and the fair value. We determined that it is not more likely than not that the fair value of our indefinite-lived intangible assets is less than the carrying amount.

Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.

Income Taxes

The asset and liability method is used in accounting for deferred income taxes. Under this method, deferred income taxes are provided for differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accordingly, our tax provision contemplates tax rates currently in effect to determine our current tax provision as well as enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled to determine our deferred tax provision. Any significant fluctuation in rates or changes in tax laws could lead to either increases or decreases in our effective tax rate.

Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the financial statements and would require an adjustment to the provision for income taxes.

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Stock-Based Compensation

Stock-based compensation expense is recognized based on the fair value and is expensed on a straight-line basis over the requisite service periods of the award, which generally represents the scheduled vesting period. Forfeitures are recognized as they occur. We account for stock-based compensation expense based on the estimated grant date fair value, using the Black-Scholes option-pricing model which requires us to make a number of assumptions, including expected volatility, the expected risk-free interest rate, the expected term and the expected dividend.

These inputs are subjective and generally require significant analysis and judgment to develop. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation is recognized.

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Volatility. Since we have limited historical data on volatility of our stock, expected volatility is based on the volatility of the stock of similar publicly traded entities. In evaluating similarity, we consider factors such as industry, stage of life cycle, size, and financial leverage.

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Fair value of underlying common stock. The fair value of our common stock is determined by the closing price as reported on the Nasdaq Global Market on the date of grant.

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Risk-free interest rate. The risk-free rate that we use is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

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Expected term. As we do not have sufficient historical exercise activity to estimate expected life, the expected life of options granted is determined using the simplified method. The simplified method is based on the vesting period and the contractual term for each grant or for each vesting tranche for awards with graded vesting. The midpoint of the vesting date and the maximum contractual expiration date are used to determine the expected term under this method.

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Dividend yield. We have never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future. Therefore, we use an expected dividend yield of zero. In addition, the terms of the Amended Credit Agreement prohibit us from paying dividends, other than dividends payable in our common stock, without the prior consent of the lender.

Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses and will apply to accounts receivable. The new guidance became effective for Teknova’s annual and interim periods beginning January 1, 2023. We are currently evaluating the impact of the adoption of the standard on the financial statements and do not anticipate the standard to have a significant impact.

Emerging Growth Company and a Smaller Reporting Company

We qualify as an “emerging growth company” as defined in the JOBS Act. For 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:

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reduced obligations with respect to financial data, including presenting only two years of audited financial statements;

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an exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

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reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements, and registration statements; and

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exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements.

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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 of:

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the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more;

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the last day of our fiscal year following the fifth anniversary of the date of the closing of our initial public offering (IPO);

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the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; and

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the date on which we are deemed to be a “large accelerated filer” under 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).

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of Alpha Teknova, Inc.’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect its future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to "the Company," “Teknova,” we,” “us,” and “our” are intended to mean the business and operations of Alpha Teknova, Inc.

Overview

Since our founding in 1996, we have been providing critical reagents that enable the discovery, research, development, and production of biopharmaceutical products such as drug therapies, novel 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. We offer three primary product types: pre-poured media plates for cell growth and cloning, liquid cell culture media and supplements for cellular expansion, and molecular biology reagents for sample manipulation, resuspension, and purification.

In 2017, we achieved ISO 13485:2016 certification, 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 regulatory 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 location. 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 warehouses in Hollister, California and Mansfield, Massachusetts to our customers and distributors pursuant to purchase orders. We typically recognize revenue when products are shipped.

We generated revenue of $36.9 million in 2021, which represents an increase of $5.6 million as compared to 2020. In 2021 and 2020, only 2.9% and 3.7%, respectively, of our revenue was generated from customers located outside of the U.S. Our sales outside of the U.S. are denominated in U.S. dollars. Approximately 71% of our revenue for the year ended December 31, 2021 was generated from sales through direct channels and a limited salesforce, with the remainder generated through distributor sales.

We had an operating loss of $12.0 million in 2021 compared to $4.7 million of operating income in 2020. We expect our expenses will continue to increase in future periods in connection with our ongoing activities as we:

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attract, hire, and retain qualified personnel;

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invest in processes and infrastructure to enable manufacturing automation and expand capacity;

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build research and development (R&D) capacity to introduce new products and services and create intellectual property;

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build our brand, market, and sell new and existing products and services;

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potentially acquire businesses or technologies to accelerate the growth of our business; and

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function as a public company.

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Key Developments

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On March 26, 2021, we entered into the Credit Agreement which provides for loan commitments in an aggregate amount of up to $27.0 million and drew down $12.0 million on the term loan thereunder. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility” for more information regarding the credit facility.

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On June 29, 2021, we completed an IPO in which we issued and sold 6,900,000 shares of our common stock at a public offering price of $16.00 per share. We received $99.1 million in net proceeds, after deducting underwriting discounts and commissions of $7.7 million and offering expenses of $3.6 million.

Impact of COVID-19 on Our Business

We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact customers, employees, suppliers, vendors, business partners, and distribution channels. In an effort to protect the health and safety of our employees, we took proactive action from the earliest signs of the outbreak, which included implementing social distancing policies at our facilities, facilitating remote working arrangements and imposing employee travel restrictions. We are unable to predict the impact that the COVID-19 pandemic will have on our future financial position and operating results due to numerous uncertainties. These uncertainties include the severity of the virus and any variants, the duration of the outbreak, governmental, business or other actions, impacts on our supply chain, the effect on customer demand, and buying patterns, the health of our workforce and our ability to meet staffing needs throughout the critical functions. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown. In addition, we cannot predict the impact that the COVID-19 pandemic will have on our customers, vendors, suppliers, and other business partners; however, any material effect on these parties could adversely impact us.

We believe that we have successfully, and will continue to successfully, navigate the uncertain environment associated with the COVID-19 pandemic. This includes implementing enhanced measures focusing on the safety of our customers and employees as well as improved operating discipline across our business. Our overall liquidity is strong, and we believe we are able to meet our operating cash needs and other investing and financing cash requirements at this time, including those necessary to grow the business as economic conditions improve.

The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with customers, team members, and business partners. For further information regarding the impact of the COVID-19 pandemic on the Company, please see Item 1A., "Risk Factors" in this report, which is incorporated herein by reference.

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Results of Operations

The following tables set forth our results of operations for the years ended December 31, 2021 and 2020 (dollars in thousands):

Revenue

Our revenue disaggregated by product category, for the years ended December 31, 2021 and 2020 was as follows (dollars in thousands):

Total revenue was $36.9 million in 2021, an increase of $5.6 million, or 17.9%, compared with $31.3 million in 2020.

Lab Essentials revenue was $27.2 million in 2021, an increase of $5.9 million, or 28.0%, compared with $21.2 million in 2020. The increase in Lab Essentials revenue was due in roughly equal measure to a higher average revenue per customer and an increased number of customers.

Clinical Solutions revenue was $6.8 million in 2021, an increase of $2.0 million, or 41.3%, compared with $4.8 million in 2020. The increase in Clinical Solutions revenue was attributable to an increased number of customers somewhat offset by lower average revenue per customer.

Sample Transport revenue was $1.5 million in 2021, a decrease of $2.8 million, or 64.4%, compared with $4.3 million in 2020. The decline in Sample Transport revenue was due to the decline in market demand for COVID-19 testing and an increase in market supply of sample transport products, each of which began in early 2021. Please see Item 1A., “Risk Factors”, for a discussion of the impact of the COVID-19 pandemic on the operations of our business and the uncertainties associated with global epidemics that may have an adverse impact on our operating results, cash flows and financial condition in the future.

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Our revenue disaggregated by geographic region, for the years ended December 31, 2021 and 2020, was as follows (dollars in thousands):

Revenue from sales to customers in the United States was $35.8 million in 2021, and $30.1 million in 2020. Revenue from U.S. sales represented 97.1% percent and 96.3% of our total revenue in 2021 and 2020, respectively. We experienced significant U.S. growth due to higher revenue in all product categories except Sample Transport.

Revenue from sales to customers in markets outside of the U.S. was $1.1 million in 2021, and $1.2 million in 2020. Revenue from international sales represented 2.9% and 3.7% of our total revenue in 2021 and 2020, respectively. Revenue from sales to customers in markets outside the U.S. decreased as a percentage of total revenue due to lower international revenue and higher overall revenue in 2021. Our sales to customers outside of the U.S. are denominated in U.S. dollars.

Gross profit

Our gross profit for the years ended December 31, 2021 and 2020 was as follows (dollars in thousands):

Gross profit percentage was 47.8% in 2021, and 56.7% in 2020. The decrease in gross profit percentage in 2021 was primarily driven by an increase in manufacturing overhead and higher labor costs as a percentage of revenue as well as a $0.4 million reserve taken against Sample Transport inventory.

Operating expenses

Our operating expenses for the years ended December 31, 2021 and 2020 were as follows (dollars in thousands):

Research and development expenses were $4.3 million in 2021 and $1.5 million in 2020. The increase was primarily driven by increased headcount, depreciation, and various discretionary costs to support our new product and process development efforts.

Sales and marketing expenses were $3.8 million in 2021 and $2.2 million in 2020. The increase was primarily driven by increased headcount to develop our commercial presence and increase customer support, as well as higher levels of promotional spending.

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General and administrative expenses were $20.4 million in 2021 and $8.2 million in 2020. The increase was primarily driven by increased headcount as well as professional fees, stock-based compensation, insurance, and information technology expenses, to build the infrastructure necessary to support our growth strategy.

Provision for (benefit from) income taxes

Our provision for (benefit from) income taxes for the years ended December 31, 2021 and 2020 was as follows (dollars in thousands):

Our benefit from income taxes was $2.8 million in 2021, which was primarily due to a federal deferred tax benefit from losses during such period. Our provision for income taxes was $1.2 million in 2020. The decrease in our provision for income taxes was attributable to a decrease in operating income.

Other income (expenses), net

Other income (expenses), net for the years ended December 31, 2021 and 2020 was as follows (dollars in thousands):

Other expenses, net was $0.6 million in 2021 compared to $0.1 million of total other income, net in 2020. The increase in other expenses, net was primarily driven by interest expense due to debt outstanding in 2021 with no comparable debt balance in 2020.

Liquidity and Capital Resources

The primary source of financing for our operations was our IPO, which we completed in June 2021 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. As of December 31, 2021, we had $93.5 million in working capital, which included $87.5 million in cash and cash equivalents.

In addition to our existing cash and cash equivalents balance, another source of liquidity is our credit facility as described below in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility”.

To facilitate our expected growth, we expect to continue to use our sources of liquidity to make investments as we expand our operations and increase capacity. In particular, we are building out new manufacturing, warehouse and distribution facilities in Hollister, California, which we expect to be a significant use of cash over the next 12 to 18 months. We are carrying the majority of these fixed assets as construction in progress on our balance sheet until the facilities and related equipment are put into service. These uses of cash are not reasonably likely to result in material changes in the Company’s liquidity. In addition, we may also lease or purchase additional office, manufacturing, warehouse and/or distribution facilities. See “Notes to Financial Statements—Note 15—Obligations under Operating Leases,” for a discussion of our lease obligations reflected on our balance sheet.

We may also use our liquidity to pursue potential acquisitions that further or accelerate our business strategy.

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Credit Facility

On March 26, 2021, we entered into the Credit Agreement. The Credit Agreement provides for a $27.0 million credit facility (the Facility) consisting of a $22.0 million senior, secured term loan (the Term Loan), and a $5.0 million working capital facility (the Revolving Loan). The Term Loan is staged such that $12.0 million was available immediately, an additional $5.0 million was available on September 30, 2021, and $5.0 million may be available in 2022, contingent upon achieving (i) trailing twelve months of net revenue of $37.0 million if the proposed funding date is on or after January 1, 2022 and before July 1, 2022 or $38.5 million if the proposed funding date is on or after July 1, 2022 and on or before September 30, 2022 and (ii) earnings before interest, taxes, depreciation and amortization (EBITDA) targets (as defined in the Credit Agreement). We opted not to draw down the $5.0 million Term Loan tranche available on September 30, 2021. Borrowings on the Revolving Loan are limited to a borrowing base calculation. As of December 31, 2021, there was no drawdown on the Revolving Loan. The proceeds from the Facility are being used for working capital and general corporate purposes.

The interest on the Term Loan is based on the annual rate of one-month LIBOR plus 6.45%, subject to a LIBOR floor of 1.50%. If any advance under the Term Loan is prepaid at any time, the prepayment fee is based on the amount being prepaid and an applicable percentage amount, such as 3%, 2%, or 1%, based on the date the prepayment is made after the closing date of the Term Loan. The Credit Agreement contains a financial covenant based upon a trailing twelve months of net revenue, including a requirement of $32.0 million in the twelve months ended December 31, 2021. As of December 31, 2021, we were in compliance with this requirement. The outstanding balance on the Facility will be due in full on March 1, 2026. At the end of the Term Loan, we will pay an exit fee of $0.6 million, which represents 5% of the $12.0 million in borrowings made available immediately on March 26, 2021. Such fee is being accreted to interest expense over the life of the Term Loan. We incurred $0.3 million of debt issuance costs which are recorded in long-term debt, net of current portion in the balance sheets. On March 26, 2021, we drew the full $12.0 million of the Term Loan available. As of December 31, 2021, the outstanding balance on the Term Loan was $12.0 million ($11.9 million net of debt issuance costs), and such balance is presented as long-term debt on the balance sheet (in thousands).

The maximum loan amount under the Revolving Loan (the Revolving Loan Commitment Amount) is $5.0 million, which we may request the Lenders to increase up to $15.0 million. The amount available to us under the Revolving Loan at any one time shall be based upon an amount equal to: (i) 85% of the net collectable value of our domestic accounts receivable; plus (ii) 50% of domestic eligible finished goods inventory that does not exceed $1.0 million. Additionally, availability from finished goods inventory cannot exceed 25% of the total borrowing base availability. Interest on the outstanding balance of the Revolving Loan will be payable monthly in arrears at an annual rate of one-month LIBOR plus 3.75%, subject to a LIBOR floor of 1.50%. There was no outstanding balance on the Revolving Loan as of December 31, 2021.

The Credit Agreement includes a financial covenant that requires us to maintain certain minimum revenue, tested monthly based on trailing 12 months net revenue. Calendar year-end net revenue covenants are a based on the achievement of a minimum revenue of $32.0 million at December 31, 2021, $37.5 million at December 31, 2022, $42.0 million at December 31, 2023, $46.5 million at December 31, 2024 and $51.5 million at December 31, 2025. In connection with the Facility, the Lenders received a perfected first priority security interest in all existing and after-acquired assets of the Company.

We believe these sources of liquidity, in addition to the net proceeds from our IPO, which closed on June 29, 2021, will be sufficient to fund our liquidity requirements for at least the next 24 months. Our principal liquidity requirements are to fund our operations (which includes, but is not limited to, maintaining sufficient levels of inventory to meet the anticipated demand of our customers), and to fund our capital expenditures, including the expansion of our manufacturing operations such as the construction of a new manufacturing, warehouse and distribution facilities in Hollister, California, which we expect to be a significant use of cash over the next 12 months. We may, however, require or elect to secure additional financing as we continue to execute our business strategy. If we require or elect to raise additional funds, we may do so through equity or debt financing, which may or may not be available on favorable terms and could require us to agree to covenants that limit our operating flexibility.

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The following table sets forth, for the periods indicated, net cash flows provided by (used in) operating activities, provided by (used in) investing activities and provided by (used in) financing activities (in thousands):

Operating Activities

Net cash provided by operating activities consists primarily of net income 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 $9.1 million in 2021, which primarily consisted of net loss of $9.8 million plus net adjustments for non-cash charges of $2.4 million, offset by net changes in operating assets and liabilities of $1.7 million. The primary non-cash adjustments to net income included $2.9 million of depreciation and amortization, $1.6 million of stock-based compensation, $0.4 million of inventory reserve, partially offset by $2.8 million in deferred taxes. Net cash used in changes in operating assets and liabilities consisted primarily of a $2.3 million increase in inventories, $1.3 million increase in prepaid expenses and other current assets, partially offset by a $1.8 million increase in accrued liabilities and $0.3 million increase in accounts payable.

Net cash provided by operating activities was $2.5 million for the year ended December 31, 2020, which primarily consisted of net income of $3.6 million plus net adjustments for non-cash charges of $4.4 million, partially offset by net changes in operating assets and liabilities of $5.5 million. The primary non-cash adjustments to net income are $2.0 million of depreciation and amortization and $2.1 million of deferred taxes. The significant impact from changes in net operating assets and liabilities was primarily driven by a $2.4 million increase in accounts receivable, $1.2 million increase in income taxes receivable, $0.9 million increase in prepaid expenses and other current assets, and $1.0 million increase in inventories.

Investing Activities

Net cash (used in) provided by investing activities relates primarily to capital expenditures and purchases of marketable securities, partially offset by proceeds from maturities and sales of marketable investments.

Net cash used in investing activities was $17.6 million for the year ended December 31, 2021, which primarily consisted of purchases of property, plant and equipment of $20.0 million. This was partially offset by receipt of proceeds from sales and maturities of short-term marketable securities of $1.1 million and $0.7 million, respectively, and proceeds from a loan to a related party of $0.5 million.

Net cash used in investing activities was $1.7 million for the year ended December 31, 2020, which primarily consisted of purchase of property, plant and equipment of $5.5 million and purchase of short-term marketable securities of $1.8 million. This was partially offset by proceeds from sales and maturities of short-term marketable securities of $1.7 million and $3.7 million, respectively.

Financing Activities

Net cash provided by (used in) financing activities primarily relates to proceeds from our IPO, net of underwriters’ commissions and discounts, payment of issuance costs of the IPO, and proceeds from long-term debt.

Net cash provided by financing activities was $110.8 million for the year ended December 31, 2021, which was primarily attributable to proceeds from the IPO, net of underwriters’ commissions and discounts, of $102.7

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million and proceeds from long-term debt pursuant to the Facility of $11.9 million, partially offset by payment of costs related to our IPO of $3.6 million.

Net cash used in financing activities was $1.6 million for the year ended December 31, 2020 and was primarily attributable to pushdown accounting adjustments.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, future events may cause us to change our assumptions and estimates, which may require adjustment. Actual results could differ from these estimates.

We believe the following critical accounting policies involve significant areas where management applies judgments and estimates in the preparation of our financial statements.

Revenue Recognition

We account for revenue in accordance with ASC 606. This process involves identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when or as we satisfy performance obligations.

We recognize revenue from the sale of manufactured products and services when control of promised goods or services are transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of our sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer.

Occasionally, we offer rebates, discounts, and returns on our products, however returns and refunds are an extremely rare occurrence and are not explicitly or implicitly part of the purchase order. We record rebates, discounts, and returns at the time in which they occur. The difference between recording these as they occur and estimating the amount of consideration in exchange for the transfer of promised goods would not have a material impact on the financial statements.

Goodwill

Goodwill is the excess of the fair value of the company above the fair value accounting basis of the net assets and liabilities of the company under pushdown accounting. Goodwill is not amortized, but is tested for impairment annually as of October 1, or more frequently if events or circumstances indicate that the carrying value may no longer be recoverable and that an impairment may have occurred. We operate as one segment and one reporting unit, and therefore goodwill is tested for impairment at the entity level.

We first consider qualitative factors that indicate impairment may have occurred. Such indicators may include macro-economic conditions such as adverse industry or market conditions; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel. If the qualitative assessment indicates a reduction in the carrying value is more likely than not to have occurred, we perform a quantitative assessment, comparing the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds the fair value, an impairment has occurred, and an impairment loss is recognized for the difference up to the carrying value of the reporting unit’s goodwill.

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The fair value of the reporting unit was determined using a combination of an income approach and market approach. We completed our annual impairment assessment in the fourth quarter of 2021 and determined that it is not more likely than not that the fair value of the entity is less than its carrying amount.

Application of the goodwill impairment test requires judgments, including a qualitative assessment to determine whether there are any impairment indicators, and determining the fair value of the reporting unit. A number of significant assumptions and estimates are involved in a quantitative assessment. In the application of the income approach to forecast future cash flows, revenue and operating income growth rates, discount rates and other factors are used. Additionally, assumptions related to guideline company financial multiples are used in the market approach.

While we believe that our estimates of current value are reasonable, if actual results differ from the estimates and judgments used including such items as future cash flows and the volatility inherent in markets which we serve, impairment charges against the carrying value of those assets could be required in the future.

Intangible Assets and Other Long-Lived Assets

We review our definite-lived intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of our long-lived assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider.

Indefinite-lived intangible assets are also subject to an impairment test at least annually, as of October 1, or more frequently if events or circumstances indicate that it is more likely than not that the asset is impaired. If the fair value of the asset is less than the carrying amount, an impairment loss would be recognized in an amount equal to the difference between the carrying amount and the fair value. We completed our assessment in the fourth quarter of 2021 and determined that it is not more likely than not that the fair value of our indefinite-lived intangible assets is less than the carrying amount.

Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.

Income Taxes

The asset and liability method is used in accounting for deferred income taxes. Under this method, deferred income taxes are provided for differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accordingly, our tax provision contemplates tax rates currently in effect to determine our current tax provision as well as enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled to determine our deferred tax provision. Any significant fluctuation in rates or changes in tax laws could lead to either increases or decreases in our effective tax rate.

Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the financial statements and would require an adjustment to the provision for income taxes.

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Stock-Based Compensation

Stock-based compensation expense is recognized based on the fair value and is expensed on a straight-line basis over the requisite service periods of the award, which generally represents the scheduled vesting period. Forfeitures are recognized as they occur. We account for stock-based compensation expense based on the estimated grant date fair value, using the Black-Scholes option-pricing model which requires us to make a number of assumptions, including expected volatility, the expected risk-free interest rate, the expected term and the expected dividend.

These inputs are subjective and generally require significant analysis and judgment to develop. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation is recognized.

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Volatility. Since we have limited historical data on volatility of our stock, expected volatility is based on the volatility of the stock of similar publicly traded entities. In evaluating similarity, we consider factors such as industry, stage of life cycle, size, and financial leverage.

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Risk-free interest rate. The risk-free rate that we use is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

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Expected term. As we do not have sufficient historical exercise activity to estimate expected life, the expected life of options granted is determined using the simplified method. The simplified method is based on the vesting period and the contractual term for each grant or for each vesting tranche for awards with graded vesting. The midpoint of the vesting date and the maximum contractual expiration date is used as the expected term under this method.

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Dividend yield. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future. Therefore, we use an expected dividend yield of zero. In addition, the terms of the Credit Agreement prohibit us from paying dividends, other than dividends payable on our common stock, without the prior consent of the lender.