TELA Bio, Inc. annual report, FY2020

TELA Bio, Inc. — FY2020 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2020, filed March 25, 2021. TELA Bio is a commercial-stage medical technology company developing and selling reinforced tissue matrices for hernia repair, abdominal wall reconstruction, and plastic and reconstructive surgery. Its principal products are OviTex and OviTex PRS, manufactured exclusively by Aroa Biosurgery Ltd.

The company operated in one segment and primarily served the U.S. market. As of December 31, 2020, it had more than 325 active hospital accounts, 45 U.S. sales territories, and 108 employees worldwide.

Financial performance and liquidity

Metric	FY2020	FY2019	Change
Revenue	$18.2 million	$15.4 million	Up 18%
Gross profit	$11.2 million	$9.3 million	Up 21%
Gross margin	62%	60%	Up 2 percentage points
Operating loss	$25.3 million	$19.2 million	Loss increased 32%
Net loss	$28.8 million	$22.4 million	Loss increased 28%
Net loss per share	$2.23	$17.10	Improved due primarily to higher share count
Cash used in operations	$24.5 million	$25.5 million	Improved by $1.1 million

• Revenue included $15.1 million from OviTex and $3.1 million from OviTex PRS. OviTex units sold increased 27% to 4,794, while OviTex PRS units increased to 663 from 240.
• Sales and marketing expense increased 22% to $22.1 million, primarily from higher personnel, benefits, and commission costs.
• General and administrative expense increased 63% to $10.1 million, driven by higher insurance, professional fees, stock-based compensation, and salaries.
• Research and development expense was $4.3 million, broadly consistent with 2019.
• Cash and cash equivalents were $74.4 million at year-end, versus $45.3 million at December 31, 2019. Working capital was $76.6 million.
• The company had a $196.7 million accumulated deficit and continued to report recurring operating losses and negative operating cash flow.
• Cash provided by financing activities was $44.4 million, primarily reflecting net proceeds from the June 2020 follow-on offering.

Material changes versus the prior comparable period

• Revenue grew 18%, despite COVID-19-related postponements of elective procedures and reduced hospital access.
• Gross margin improved from 60% to 62%, primarily because of lower excess and obsolete inventory expense as a percentage of revenue.
• Operating expenses grew faster than revenue, resulting in a larger operating and net loss.
• Stock-based compensation increased to $2.1 million from $0.5 million.
• In June 2020, TELA Bio issued 3.0 million common shares at $16.00 per share and received net proceeds of $44.7 million.
• The company converted short-term investments into cash; investing activities provided $9.1 million in 2020 compared with $12.0 million of cash used in 2019.
• Management implemented temporary salary reductions, suspended 401(k) matching contributions from April through July, and reduced travel, events, and consulting costs in response to COVID-19. Matching contributions resumed in August 2020.

Debt, commitments, and liquidity

• Outstanding principal under the OrbiMed secured term loan was $30.0 million, with a carrying amount of $30.8 million including the end-of-term charge and issuance costs.
• The loan matures November 16, 2023, bears interest at 7.75% plus the greater of one-month LIBOR or 2.0%, and had a 9.75% rate at December 31, 2020.
• The facility requires a minimum cash balance of $2.0 million, is secured by substantially all assets other than intellectual property, and includes restrictive covenants and default provisions.
• Total contractual obligations were $48.1 million, including $30.0 million of principal, $11.4 million of interest and end-of-term charges, $2.4 million of operating leases, and $4.3 million of Aroa purchase commitments.
• Management stated that existing cash resources were expected to fund operations and capital requirements for at least 12 months from the filing date. The company also maintained a $50.0 million at-the-market equity program, with no sales through December 31, 2020.

Guidance, outlook, commentary, and risks

• Management provided no quantitative revenue or earnings guidance. It reported limited visibility into near-term growth because of the continuing COVID-19 pandemic.
• Elective procedure volumes improved after the second quarter but became more volatile in the second half of the fourth quarter as COVID-19 cases and hospitalizations increased.
• Management planned to continue expanding its direct sales organization, hospital and surgeon relationships, GPO and IDN contracts, clinical evidence, and product pipeline.
• OviTex PRS commercialization expanded in June 2020. A breast reconstruction indication would require an FDA PMA rather than a 510(k) clearance; the product was not cleared for breast reconstruction at year-end.
• Clinical evidence remains limited. In the BRAVO study, 92 patients were enrolled; two of 76 patients with 12-month follow-up experienced recurrences adjacent to the original repairs, and one of 51 patients with 24-month follow-up experienced a surgical site occurrence. These are interim or post-market study results and may not predict broader clinical outcomes.
• Aroa is the exclusive manufacturer and supplier and operates primarily from one facility in Auckland, New Zealand. Supply disruption, manufacturing capacity, quality issues, shipping interruptions, or problems sourcing ovine rumen could materially affect results.
• Substantially all revenue depends on OviTex products, which represented 83% of 2020 revenue. The company faces competition from larger, better-capitalized medical device companies and remains dependent on surgeon adoption, reimbursement, regulatory compliance, and sales-force execution.
• The company expects continued operating losses and may require additional capital. Future equity financing could dilute shareholders, while debt financing could impose additional restrictions.
• Other material risks include product liability, recalls, intellectual property disputes, healthcare fraud and abuse compliance, privacy obligations, inventory expiration, reimbursement pressure, and volatility in the common stock.

Most important facts for investors to verify

• Whether elective procedure volumes and revenue growth recover sustainably after COVID-19 disruptions.
• Whether sales growth can outpace expanding sales, marketing, administrative, and research costs sufficiently to reduce cash burn.
• The pace of adoption and revenue contribution from OviTex PRS and newer OviTex products.
• Aroa’s manufacturing capacity, quality compliance, supply continuity, and progress on planned facility expansion.
• The company’s ability to fund operations while servicing the $30.0 million OrbiMed loan and meeting contractual purchase commitments.
• Final results from the BRAVO study and additional clinical evidence supporting safety, efficacy, durability, and reimbursement.
• Regulatory progress for future product modifications and any breast reconstruction indication, including the potentially more demanding PMA pathway.
• Future use of the $50.0 million at-the-market program and the resulting potential for shareholder dilution.