# Alpha Teknova, Inc. (TKNO) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Alpha Teknova, Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1850902/000095017025035705/tkno-20241231.htm
Accession: 0000950170-25-035705
Filing date: 2025-03-07
Report date: 2024-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/TKNO/
All MD&A years: /company/TKNO/mda/
Previous year: /company/TKNO/mda/fy2023/ (FY 2023)
Next year: /company/TKNO/mda/fy2025/ (FY 2025)

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;

▪
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

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

Key Developments

•
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.

▪
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.

▪
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.

▪
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.

▪
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.

▪
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):

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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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):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2024","","","2023","","","$ Change","","","% Change"],["Lab Essentials","","$","28,883","","","$","28,800","","","$","83","","","","0.3","%"],["Clinical Solutions","","","7,097","","","","6,738","","","","359","","","","5.3","%"],["Other","","","1,765","","","","1,146","","","","619","","","","54.0","%"],["Total revenue","","$","37,745","","","$","36,684","","","$","1,061","","","","2.9","%"]]
[[/GREPCENT_TABLE]]

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):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2024","","","2023","","","$ Change","","","% Change"],["United States","","$","35,919","","","$","35,000","","","$","919","","","","2.6","%"],["International","","","1,826","","","","1,684","","","","142","","","","8.4","%"],["Total revenue","","$","37,745","","","$","36,684","","","$","1,061","","","","2.9","%"]]
[[/GREPCENT_TABLE]]

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):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2024","","","2023","","","$ Change","","","% Change"],["Cost of sales","","$","30,514","","","$","26,388","","","$","4,126","","","","15.6","%"],["Gross profit","","","7,231","","","","10,296","","","","(3,065",")","","","(29.8",")%"],["Gross profit %","","","19.2","%","","","28.1","%"]]
[[/GREPCENT_TABLE]]

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

56

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):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2024","","","2023","","","$ Change","","","% Change"],["Research and development","","$","2,759","","","$","5,567","","","$","(2,808",")","","","(50.4",")%"],["Sales and marketing","","","6,320","","","","9,330","","","","(3,010",")","","","(32.3",")%"],["General and administrative","","","23,150","","","","25,450","","","","(2,300",")","","","(9.0",")%"],["Amortization of intangible assets","","","1,148","","","","1,148","","","","\u2014","","","","\u2014"],["Tradename impairment","","","\u2014","","","","2,169","","","","(2,169",")","","","(100.0",")%"],["Long-lived assets impairment","","","\u2014","","","","2,195","","","","(2,195",")","","","(100.0",")%"],["Total operating expenses","","$","33,377","","","$","45,859","","","$","(12,482",")","","","(27.2",")%"]]
[[/GREPCENT_TABLE]]

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):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2024","","","2023","","","$ Change","","","% Change"],["Interest expense, net","","$","(687",")","","$","(833",")","","$","146","","","","(17.5",")%"],["Other income, net","","","\u2014","","","","142","","","","(142",")","","","(100.0",")%"],["Loss on extinguishment of debt","","","\u2014","","","","(824",")","","","824","","","","(100.0",")%"],["Total other expenses, net","","$","(687",")","","$","(1,515",")","","$","828","","","","(54.7",")%"]]
[[/GREPCENT_TABLE]]

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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):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2024","","","2023","","","$ Change","","","% Change"],["Benefit from income taxes","","$","(88",")","","$","(298",")","","$","210","","","","(70.5",")%"],["Effective tax rate","","","0.3","%","","","0.8","%"]]
[[/GREPCENT_TABLE]]

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):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2024","","","2023"],["Net cash used in operating activities","","$","(12,391",")","","$","(18,814",")"],["Net cash used in investing activities","","","(27,275",")","","","(7,737",")"],["Net cash provided by financing activities","","","14,890","","","","12,799"],["Net decrease in cash and cash equivalents","","$","(24,776",")","","$","(13,752",")"]]
[[/GREPCENT_TABLE]]

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).