TELA Bio, Inc. annual report, FY2023

TELA Bio, Inc. — Form 10-K Summary

Business Context and Reporting Period

TELA Bio is a commercial-stage medical technology company focused on soft-tissue reconstruction products. Its primary portfolios are OviTex for hernia repair and abdominal wall reconstruction and OviTex PRS for plastic and reconstructive surgery. The filing covers the fiscal year ended December 31, 2023, with comparisons to 2022 and 2021.

Products are primarily sold directly to hospitals and ambulatory surgery centers through a predominantly U.S.-based sales organization. Aroa Biosurgery Ltd. is the exclusive contract manufacturer and supplier of the OviTex and OviTex PRS portfolios under a long-term license and supply agreement.

Financial Performance and Key Metrics

Metric	2023	2022	Change
Revenue	$58.5 million	$41.4 million	Up 41%
Gross profit	$40.1 million	$27.0 million	Up 48%
Gross margin	69%	65%	Up 4 percentage points
Total operating expenses	$84.2 million	$66.1 million	Up 27%
Loss from operations	$(44.1) million	$(39.0) million	Loss increased $5.1 million
Net loss	$(46.7) million	$(44.3) million	Loss increased 5%
Basic and diluted loss per share	$(2.04)	$(2.72)	Improved, partly due to share issuance
Cash used in operating activities	$(40.9) million	$(40.7) million	Broadly unchanged

• OviTex revenue was $39.4 million, up from $28.9 million; OviTex PRS revenue was $18.7 million, up from $12.4 million. Other revenue was $0.3 million.
• OviTex unit sales increased 36% to 13,675 units, while OviTex PRS unit sales increased 49% to 3,544 units.
• Sales outside the U.S. totaled $6.1 million, or 10% of revenue, versus $3.2 million, or 8%, in 2022.
• Sales and marketing expense increased 38% to $59.7 million, primarily due to commercial organization expansion, compensation, travel, consulting and marketing costs.
• Research and development expense increased 8% to $9.6 million. Stock-based compensation expense increased to $5.0 million from $4.0 million.
• Interest expense increased 29% to $5.2 million due to higher borrowings and variable interest rates. Other income was $2.6 million, primarily reflecting higher interest income and foreign currency effects.
• Accumulated deficit was $320.9 million at December 31, 2023, compared with $274.2 million at December 31, 2022.

Liquidity, Cash Flow and Debt

• Cash and cash equivalents were $46.7 million at December 31, 2023, compared with $42.0 million at year-end 2022. Cash, cash equivalents and restricted cash totaled $47.0 million.
• Working capital was $54.8 million, compared with $50.0 million at year-end 2022.
• Cash used in investing activities was $0.6 million, primarily for property and equipment.
• Cash provided by financing activities was $46.3 million, primarily from the April 2023 public offering of 5.2 million shares at $9.50 per share, which generated approximately $46.3 million of net proceeds.
• Debt consisted primarily of $40.0 million of MidCap term loans, with a carrying value of $40.5 million including the end-of-term charge. The facility matures in May 2027 and bears interest at 6.25% plus the greater of one-month Term SOFR or 1.0%.
• The MidCap facility is secured by substantially all company assets, including intellectual property, and includes minimum net revenue covenants and restrictions on additional debt, investments, acquisitions, dispositions and dividends.
• Contractual obligations totaled $68.4 million, including $40.0 million of principal debt payments, $17.6 million of interest and end-of-term charges, $3.7 million of lease commitments and $7.1 million of purchase commitments.
• Management stated that existing cash resources are expected to fund operations and capital requirements for at least the next 12 months from issuance of the filing, although additional capital may be required.

Material Changes Versus the Prior Comparable Period

• Revenue growth accelerated through higher unit volumes, new customer additions, deeper penetration of existing accounts and increased international sales.
• Gross margin improved from 65% to 69%, primarily because of lower excess and obsolete inventory charges as a percentage of revenue and lower amortization of intangible assets.
• Operating expenses grew faster than revenue in absolute terms, especially sales and marketing expense, resulting in a larger operating loss despite improved gross profit.
• Net loss increased modestly, while loss per share improved because the weighted-average share count increased from 16.3 million to 22.9 million.
• Operating cash burn remained approximately $40.9 million despite revenue growth, reflecting continued investment in commercial expansion, research and development and working capital.
• Inventory increased to $13.2 million from $11.8 million, and accounts receivable increased to $9.7 million from $6.6 million.

Guidance, Outlook, Commentary and Unusual Items

• Management expects continued operating losses in the near term while investing in sales and marketing, product development, clinical activities and market expansion. The filing does not provide quantitative revenue or earnings guidance.
• Management plans to expand the direct commercial organization, increase hospital and GPO/IDN access, develop additional OviTex and OviTex PRS configurations and pursue complementary product partnerships.
• Two larger OviTex LPR configurations were launched in February 2023. OviTex PRS Long-Term Resorbable launched in August 2023. New inguinal hernia repair configurations were expected to launch in the second quarter of 2024.
• In September 2023, TELA Bio entered a distribution agreement for LiquiFix hernia mesh fixation devices; the full U.S. commercial launch occurred in March 2024.
• In March 2024, the company sold its NIVIS distribution rights for an initial $5.0 million payment and potential additional payments of $3.0 million to $7.0 million based on sales over the following two years.
• The company remains highly dependent on Aroa for manufacturing, supply of ovine rumen and certain regulatory clearances. Aroa’s primary manufacturing facility is located in Auckland, New Zealand.
• Key risks include sustained operating losses, additional financing needs, variable-rate debt, minimum revenue covenants, reimbursement and pricing pressure, competition from larger medical device companies, regulatory changes, product liability, supply disruption, limited clinical data for certain products and dependence on surgeon adoption.
• The FDA has indicated that a premarket approval, rather than a 510(k) clearance, would be required for a breast reconstruction indication for OviTex PRS. The company is discussing an IDE protocol but has no assurance of receiving approval.
• The company reported no cybersecurity incidents or threats that materially affected, or were reasonably likely to materially affect, its business, results of operations or financial condition.
• Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023. KPMG LLP issued an unqualified audit opinion on the consolidated financial statements; an auditor attestation of internal control was not required because TELA Bio is an emerging growth company.

Most Important Facts for Investors to Verify

• Whether revenue growth and unit-volume gains continue to offset the substantial expansion in sales, marketing, research and development and administrative spending.
• The company’s cash runway relative to approximately $40.9 million of annual operating cash burn and the timing of any additional equity or debt financing.
• Compliance with the MidCap facility’s minimum net revenue covenants and the company’s ability to refinance or repay the $40.0 million principal due in 2027.
• Aroa’s manufacturing capacity, quality performance and ability to provide uninterrupted supply from its New Zealand facility.
• Market adoption, reimbursement and pricing trends for OviTex, OviTex PRS and the newly distributed LiquiFix products.
• Regulatory progress and clinical evidence for expanded indications, particularly the potential breast reconstruction application requiring PMA approval.
• The effect of inventory levels, product shelf life and excess-and-obsolete inventory charges on future gross margins and cash flow.
• The economics and actual cash receipts from the March 2024 NIVIS distribution-rights sale, including contingent payments.