TELA Bio, Inc. Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020, and was filed November 12, 2020. TELA Bio is a commercial-stage medical technology company focused on OviTex Reinforced Tissue Matrix products for hernia repair, abdominal wall reconstruction, and plastic and reconstructive surgery. OviTex products are manufactured and supplied exclusively by Aroa Biosurgery Ltd. The company primarily sells through a direct U.S. sales force and had 44 sales territories and more than 270 hospital accounts at quarter-end.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $5.3 million, up 34% | $12.5 million, up 19% |
| Gross profit | $3.3 million | $7.6 million |
| Gross margin | 62%, versus 66% prior year | 60%, unchanged |
| Operating loss | $6.9 million, versus $3.9 million | $18.5 million, versus $13.3 million |
| Net loss | $7.7 million, versus $4.7 million | $21.0 million, versus $15.9 million |
| Net loss per share | $0.53 | $1.69 |
| Cash used in operations | Not provided for the quarter | $17.4 million |
Third-quarter revenue included $4.5 million from OviTex and $0.8 million from OviTex PRS. Unit sales increased to 1,350 OviTex units from 925 and 158 OviTex PRS units from 90 in the comparable quarter. For the nine-month period, OviTex unit sales increased 26% to 3,300, while OviTex PRS unit sales increased to 374 from 103.
Sales and marketing expense increased 34% in the quarter and 24% year to date, reflecting expanded commercialization activities, personnel, and post-market clinical studies. General and administrative expense increased 116% in the quarter and 95% year to date, driven by insurance, compensation, stock-based compensation, and professional fees. Research and development expense increased 133% in the quarter but decreased 4% year to date.
At September 30, 2020, cash and cash equivalents were $81.5 million, working capital was $83.7 million, and total assets were $92.4 million. The company had no short-term investments at quarter-end, compared with $9.3 million at December 31, 2019. Accounts receivable were $2.6 million and inventory was $4.0 million.
Long-term related-party debt was $30.7 million, including $30.0 million of principal and an end-of-term charge, net of unamortized issuance costs. The OrbiMed term loan bears interest at 9.75% at September 30, 2020 and matures November 16, 2023. Total stockholders’ equity was $56.3 million, while accumulated deficit was $188.9 million.
Material changes versus the prior comparable period
- Revenue increased $1.3 million, or 34%, in the third quarter and $2.0 million, or 19%, for the nine-month period.
- Third-quarter gross margin declined four percentage points because of higher excess and obsolete inventory charges. The company recorded a $1.2 million inventory excess and obsolescence charge year to date.
- Operating expenses increased $3.7 million, or 57%, in the quarter and $6.5 million, or 33%, year to date, resulting in materially higher operating and net losses.
- Cash from operations improved modestly from the prior year, but remained negative at $17.4 million for the first nine months.
- Cash increased by $36.2 million during the first nine months, primarily because of $44.7 million of net proceeds from a June 2020 underwritten offering of 3.0 million common shares.
- Common shares outstanding increased substantially following the IPO and June offering; 14.4 million shares were outstanding at September 30, 2020.
Guidance, outlook, risks, and unusual items
Management expects continuing operating losses and stated that existing cash resources and short-term investments are expected to fund operations for at least the next 12 months from the filing date. The filing does not provide specific revenue, earnings, or margin guidance.
COVID-19 caused deferrals of elective procedures and continued to create uncertainty regarding hospital access, procedure volumes, customer inventory replenishment, revenue growth, manufacturing, supply chain continuity, and product development. Procedure volumes improved from the second quarter and sales improved steadily beginning in May, but management could not predict the impact on the fourth quarter or beyond.
The company implemented cost-containment measures, including reduced salaries from April 16 through July 15, 2020, lower travel, event, and consulting spending, and a temporary suspension of 401(k) matching contributions. The matching program was reinstated in August 2020.
Key business risks include reliance on Aroa for manufacturing and supply, competition from larger medical-device companies, market acceptance and reimbursement, regulatory approval, product liability and safety events, intellectual-property protection, the need for additional capital, and dependence on key personnel. The OrbiMed facility is secured by substantially all company assets other than intellectual property and requires a minimum cash balance of $2.0 million. An event of default could accelerate repayment and increase the applicable interest rate by 3%.
The BRAVO post-market study was fully enrolled at 92 patients. Interim results reported no recurrences among 85 patients at 90 days, one recurrence among 57 patients assessed at 12 months, and no recurrences or long-term complications among 20 patients assessed at 24 months. These are interim results and do not establish future clinical or commercial performance.
The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Management concluded that disclosure controls and procedures were effective as of September 30, 2020.
Most important facts for investors to verify
- Whether elective procedure volumes and OviTex revenue continued to recover after September 30, 2020 as COVID-19 cases and hospital restrictions changed.
- The sustainability of revenue growth relative to sales and marketing investment and the path toward reducing operating losses.
- The effect of inventory levels and future excess or obsolete inventory charges on gross margin and cash usage.
- Cash burn, remaining liquidity, and whether additional equity or debt financing will be required before profitability.
- Terms, covenants, interest expense, prepayment penalties, and November 2023 maturity obligations under the OrbiMed facility.
- Progress of OviTex PRS commercialization, potential breast-reconstruction studies, and new product development.
- Manufacturing and supply-chain continuity under the exclusive Aroa relationship.