TELA Bio, Inc. annual report, FY2022

TELA Bio, Inc. 2022 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter filing. TELA Bio is a commercial-stage medical technology company developing and selling soft-tissue reconstruction products, primarily the OviTex and OviTex PRS reinforced tissue matrix portfolios.

Business Context

• OviTex products address hernia repair and abdominal wall reconstruction; OviTex PRS addresses plastic and reconstructive surgery.
• Products are sold primarily in the United States through a direct sales force, with limited European sales and distribution.
• Aroa Biosurgery Ltd. is the exclusive manufacturer and supplier of the OviTex portfolio and supplies the ovine-rumen biologic material used in the products.
• As of December 31, 2022, TELA Bio had 173 employees, 67 U.S. sales territories and 123 employees in its U.S. commercial organization.

Financial Performance and Key Metrics

Metric	2022	2021	Change
Revenue	$41.4 million	$29.5 million	Up 41%
Gross profit	$27.0 million	$18.8 million	Up 44%
Gross margin	65%	64%	Up 1 percentage point
Operating expenses	$66.1 million	$48.3 million	Up 37%
Loss from operations	$39.0 million	$29.5 million	Loss increased $9.6 million
Net loss	$44.3 million	$33.3 million	Loss increased 33%
Basic and diluted loss per share	$2.72	$2.30	Loss per share increased
Cash used in operating activities	$40.7 million	$30.4 million	Use increased $10.3 million
Cash and cash equivalents	$42.0 million	$43.9 million	Down $1.9 million

• OviTex revenue was $28.9 million, up from $23.0 million; OviTex PRS revenue was $12.4 million, up from $6.5 million.
• OviTex unit sales increased 34% to 10,083 units, while OviTex PRS unit sales increased 89% to 2,385 units.
• Sales and marketing expense rose 49% to $43.3 million, reflecting expansion of the commercial organization, higher compensation, travel and consulting costs.
• Research and development expense rose 33% to $8.9 million, including an in-process research and development charge, increased headcount and study costs.
• Amortization of intangible assets increased to $0.8 million from $0.3 million, primarily due to a $0.5 million cumulative charge associated with an Aroa milestone obligation.
• 2022 included a $1.2 million loss on extinguishment of debt related to repayment of the prior OrbiMed facility.

Liquidity, Cash Flow and Debt

• Working capital was $50.0 million at year-end 2022, compared with $48.5 million at year-end 2021. The accumulated deficit was $274.2 million.
• Cash used in investing activities was $1.9 million, including a $1.0 million intangible-asset payment and $0.9 million of property and equipment purchases.
• Cash provided by financing activities was $40.9 million, including $34.4 million of net proceeds from an August 2022 equity offering and $40.0 million of new debt proceeds, partially offset by $30.0 million of debt repayment and $3.5 million of debt issuance costs.
• Outstanding MidCap term debt was $40.0 million before unamortized financing costs, with a carrying value of $39.9 million. The facility matures May 1, 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-revenue covenants and restrictions on additional debt, investments, acquisitions, dispositions and dividends.
• 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, but the company expects continuing operating losses and may require additional financing.
• Contractual obligations totaled $83.8 million, including $40.0 million of principal debt, $20.1 million of estimated interest and end-of-term charges, $2.0 million of operating lease commitments and $21.7 million of purchase commitments.

Material Changes Versus 2021

• Revenue growth accelerated, driven by higher unit volume, commercial expansion, greater penetration of existing accounts and stronger international sales.
• Gross margin improved modestly to 65%, mainly because of lower excess and obsolete inventory expense as a percentage of revenue.
• Operating losses and net losses increased because expense growth, particularly sales and marketing, exceeded gross-profit growth.
• The company replaced the OrbiMed credit facility with the MidCap facility and completed a $34.4 million net equity offering, increasing common shares outstanding to 19.2 million at December 31, 2022.
• Sales outside the United States reached $3.2 million, or 8% of total revenue, compared with immaterial international revenue in 2021 and 2020.
• The company adopted the new lease accounting standard on January 1, 2022, recognizing operating lease right-of-use assets and liabilities.

Outlook, Commentary, Risks and Unusual Items

• Management expects continued operating losses in the near term while investing in sales, marketing, product development and clinical activities. The filing does not provide formal revenue or earnings guidance.
• Management reported improvement in demand during the second half of 2022 and expects elective procedure volumes to continue normalizing, but hospital staffing shortages, COVID-19 effects, inflation and financial pressure on hospitals remain uncertainties.
• In October 2022, the BRAVO study reported a 2.6% 24-month hernia recurrence rate and surgical-site occurrences in 38% of the 92-patient study population. The company cautions that clinical data may not predict future results and that OviTex PRS has limited patient clinical data.
• BRAVO II, a prospective study of OviTex in robot-assisted ventral and inguinal hernia repairs, was ongoing.
• The company is pursuing product enhancements, additional OviTex and OviTex PRS configurations, longer shelf life and complementary products. In January 2023, it launched the NIVIS Fibrillar Collagen Pack through a partnership with Collagen Matrix.
• OviTex products have FDA 510(k) clearance held by Aroa; OviTex PRS clearance is held by TELA Bio. The FDA has indicated that a PMA, rather than a 510(k), would be required for a breast-reconstruction indication.
• Principal risks include continued losses and cash burn, potential need for additional capital, debt covenant compliance, dependence on Aroa and a single New Zealand manufacturing site, supply-chain disruption, product liability, regulatory actions or recalls, reimbursement and pricing pressure, competition from larger medical-device companies, and uncertain market acceptance.
• A portion of cash was held at Silicon Valley Bank and Silicon Valley Bank UK during the March 2023 banking events. Management stated that deposits were accessible under government actions and that additional banking relationships were established to mitigate liquidity risk.
• The company had no material pending legal proceedings identified in the filing, and management did not expect ordinary-course matters to have a material adverse effect.

Important Facts for Investors to Verify

• Whether revenue growth and procedure volumes remain strong after the COVID-19-related recovery period.
• Whether sales growth can outpace planned commercial, research and development and administrative spending sufficiently to reduce cash burn.
• Cash runway, future financing requirements and compliance with MidCap minimum-revenue and other debt covenants.
• Progress and capacity expansion at Aroa, including the risk of disruption from reliance on one primary manufacturing location and animal-derived raw materials.
• Adoption, reimbursement, pricing and competitive positioning of OviTex and OviTex PRS.
• Clinical evidence, including BRAVO II results and additional OviTex PRS data, and the regulatory pathway and funding required for any breast-reconstruction indication.
• The value and usability of federal and state net operating loss carryforwards, which totaled approximately $212.3 million and $173.5 million, respectively, but were fully offset by a valuation allowance.