TELA Bio, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
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. The company sells principally through a direct U.S. sales force, supplemented by distributors in Europe. This unaudited Form 10-Q covers the three months ended March 31, 2023, with comparisons to the three months ended March 31, 2022.
- OviTex revenue was $8.0 million, up from $5.7 million.
- OviTex PRS revenue was $3.9 million, up from $2.5 million.
- The company had 73 U.S. sales territories at March 31, 2023.
- In March 2023, the company received an additional 510(k) clearance for OviTex PRS Long-Term Resorbable.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $11.9 million | $8.2 million | Up 45% |
| Gross profit | $7.9 million | $5.0 million | Up 58% |
| Gross margin | 66% | 61% | Up 5 percentage points |
| Operating expenses | $19.2 million | $14.8 million | Up 29% |
| Loss from operations | $(11.3) million | $(9.8) million | Loss increased $1.4 million |
| Net loss | $(12.0) million | $(10.9) million | Loss increased 11% |
| Basic and diluted loss per share | $(0.63) | $(0.75) | Improved due primarily to higher share count |
| Operating cash flow | $(11.6) million | $(10.4) million | Cash use increased $1.1 million |
Revenue growth was attributed to higher unit sales, expansion of the commercial organization, new customers, increased penetration within existing accounts and stronger international sales. OviTex unit sales increased 40% to 2,850, while OviTex PRS unit sales increased 63% to 768.
- Cost of revenue, excluding amortization, was $3.9 million, up 24%. The increase reflected higher product purchases, partly offset by a lower excess and obsolete inventory charge.
- Sales and marketing expense was $13.5 million, up 44%, primarily due to higher compensation, travel, consulting and employee-related costs.
- General and administrative expense was $3.6 million, up 5%.
- Research and development expense was $2.1 million, up 2%.
- Interest expense was $1.2 million, up 37%, reflecting higher borrowings and a higher variable interest rate.
- Other income was $0.5 million compared with other expense of $0.1 million in the prior-year period, primarily due to higher interest income and favorable foreign currency effects.
- Stock-based compensation expense was $1.1 million, compared with $0.9 million.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $30.1 million at March 31, 2023, compared with $42.0 million at December 31, 2022.
- Working capital was $39.1 million at March 31, 2023, compared with $50.0 million at year-end 2022.
- Net cash used in operating activities was $11.6 million. Inventory increased by $3.9 million during the quarter, contributing to operating cash use.
- Cash used in investing activities was $0.1 million, primarily for property and equipment.
- Cash used in financing activities was $0.2 million, primarily for employee tax withholding related to stock-based compensation.
- Long-term debt was $40.1 million, consisting principally of $40.0 million borrowed under the MidCap Term Loan.
- The MidCap loan matures May 1, 2027 and bears interest at 6.25% plus the greater of one-month Term SOFR or 1.0%. It is secured by substantially all company assets, including intellectual property.
- The credit agreement contains minimum quarterly net revenue requirements, other covenants and events of default. The company may access an additional $10.0 million tranche subject to conditions, including achieving $65.0 million of trailing four-quarter net product revenue by fiscal year-end 2023.
- Management stated that existing cash resources were expected to fund capital requirements and operations for at least the next 12 months from the filing date.
Material Changes, Outlook and Risks
- The company remains unprofitable, with an accumulated deficit of $286.3 million at March 31, 2023, and expects additional losses for the foreseeable future.
- Management expects continued investment in sales and marketing, research and development, product enhancements and market expansion. Sales and marketing and general and administrative expenses are expected to rise in absolute dollars, although management expects them to decline as a percentage of revenue as revenue grows.
- COVID-19-related hospital staffing shortages, elective procedure volumes, hospital financial strain and procedure backlogs continue to create uncertainty regarding demand and revenue growth.
- Inflation, interest-rate increases, banking instability, geopolitical conditions and capital-market volatility could increase costs, reduce demand or limit access to financing.
- The company depends on Aroa Biosurgery as its exclusive contract manufacturer for the OviTex portfolio. Product supply, manufacturing performance and supply-chain integrity are material operating dependencies.
- Reimbursement coverage, pricing pressure, competition, product acceptance, regulatory approvals, product liability and intellectual-property protection remain significant risks.
- Cash held at Silicon Valley Bank and its U.K. affiliate was available following the March 2023 banking events. The company established additional bank accounts to mitigate liquidity concentration risk.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Subsequent Event
On April 21, 2023, after quarter-end, TELA Bio issued 5,219,190 shares in an underwritten public offering at $9.50 per share and received approximately $46.4 million in net proceeds. This increased liquidity but also diluted existing shareholders.
Most Important Facts for Investors to Verify
- Whether revenue growth and unit-volume gains continue after the 45% year-over-year increase in Q1.
- Whether the expanded commercial organization can generate revenue growth faster than sales and marketing spending.
- The company’s quarterly cash burn, cash runway and need for additional financing despite the April 2023 equity offering.
- Compliance with the MidCap credit agreement’s minimum net revenue covenants and the conditions for accessing the additional $10.0 million tranche.
- Product supply, manufacturing capacity and contract dependence on Aroa Biosurgery.
- The pace of normalization in elective surgical procedures and the effects of hospital staffing, reimbursement and macroeconomic pressures.
- The commercial adoption and regulatory progress of OviTex PRS Long-Term Resorbable and other pipeline products.
- The effect of ongoing losses, debt service, variable interest rates and future equity issuance on shareholder dilution and financial flexibility.