TELA Bio, Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
TELA Bio is a commercial-stage medical technology company focused on reinforced tissue matrices for hernia repair, abdominal wall reconstruction, and plastic and reconstructive surgery. Its principal products are OviTex and OviTex PRS, manufactured by Aroa Biosurgery Limited. The filing covers the unaudited quarter ended March 31, 2020, and was filed May 15, 2020.
OviTex products were sold to more than 265 hospital accounts through 39 U.S. sales territories. OviTex PRS received FDA 510(k) clearance in April 2019 and remained in a controlled commercial launch.
Financial Highlights
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $3.7 million | $3.3 million | Up 13% |
| Gross profit | $2.2 million | $1.8 million | Up 22% |
| Gross margin | 59% | 54% | Up 5 percentage points |
| Operating expenses | $8.7 million | $7.0 million | Up 25% |
| Loss from operations | $6.5 million | $5.2 million | Loss increased 25% |
| Net loss | $7.2 million | $6.0 million | Loss increased 21% |
| Net loss per share | $0.63 | $27.00 | Not directly comparable after IPO-related share conversion |
| Cash used in operating activities | $7.3 million | $7.8 million | Improved by $0.5 million |
Revenue included $3.2 million from OviTex and $0.5 million from OviTex PRS. OviTex unit sales increased 32% to 1,081 units from 820 units; OviTex PRS sales totaled 101 units.
Sales and marketing expense increased 32% to $5.3 million, primarily from expanded sales personnel and commercial activity. General and administrative expense increased 90% to $2.5 million, driven by higher insurance, professional fees, compensation, and bad debt expense. Research and development expense decreased 45% to $0.9 million, principally because of lower licensing, outside development, and laboratory costs.
Liquidity, Cash Flow, and Debt
- Cash and cash equivalents were $41.4 million at March 31, 2020, compared with $45.3 million at December 31, 2019.
- Short-term investments were $5.3 million, resulting in total cash, cash equivalents, and short-term investments of $46.7 million, compared with $54.6 million at year-end 2019.
- Working capital was $51.1 million, compared with $57.6 million at December 31, 2019.
- Net cash decreased by $3.9 million during the quarter. Investing activities provided $3.9 million, primarily from sales and maturities of short-term investments; financing activities used $0.5 million, mainly for IPO costs.
- Long-term related-party debt was $30.4 million, consisting primarily of a $30.0 million OrbiMed term loan. The loan matures November 16, 2023, bears interest at 9.75% as of March 31, 2020, and requires a minimum cash balance of $2.0 million.
- The OrbiMed facility is secured by substantially all assets other than intellectual property, includes a negative pledge on intellectual property, and contains customary covenants and events of default.
- Management stated that existing cash and short-term investments should fund operations and capital requirements for at least the next 12 months from the filing date, although additional financing may be required thereafter.
Material Changes Versus the Prior Comparable Period
- Revenue growth moderated late in the quarter as COVID-19 caused hospitals and patients to defer elective procedures.
- Gross margin improved from 54% to 59%, mainly because of lower excess and obsolete inventory charges.
- Operating losses widened as commercial infrastructure and public-company costs increased faster than revenue.
- Net loss attributable to common stockholders improved relative to the prior period shown in per-share terms because the 2019 IPO and preferred-stock conversion substantially increased the share count; the absolute net loss increased.
- Stock-based compensation increased to $0.4 million from $0.1 million.
- All preferred stock was converted into common stock in connection with the November 2019 IPO, and preferred-stock warrants were converted into common-stock warrants.
Guidance, Outlook, Commentary, and Risks
Management expected COVID-19 to have a significantly greater negative financial impact in the second quarter than in the first quarter and specifically expected Q2 2020 revenue to decline. The filing provides no numerical full-year revenue or earnings guidance.
- Elective-surgery deferrals, reduced hospital access, travel restrictions, and virtual selling may reduce product demand, delay planned launches, and slow customer and surgeon adoption.
- Manufacturing and distribution through Aroa were largely uninterrupted at the filing date, but staffing, production, transportation, and cross-border supply-chain disruptions remained possible.
- Management implemented expense controls, including travel and event reductions, a hiring freeze, temporary salary reductions of 5% to 35% through July 15, 2020, and suspension of employer 401(k) matching contributions.
- The company continued to prioritize critical research and development and clinical programs but was evaluating the timing and scope of planned product-development initiatives.
- The company has recurring losses, negative operating cash flow, and an accumulated deficit of $175.1 million. Future financing may dilute shareholders or impose restrictive debt covenants, and financing availability could be affected by COVID-19-related market volatility.
- The company relies substantially on Aroa for manufacturing and on reimbursement, market acceptance, regulatory clearances, intellectual-property protection, and competition against larger medical-device companies.
- No material legal proceedings or off-balance-sheet arrangements were reported. Disclosure controls were reported effective, and no material change in internal control over financial reporting was identified.
Investor Verification Items
- Verify the pace of elective-surgery recovery and the effect on Q2 and subsequent OviTex and OviTex PRS revenue.
- Monitor quarterly cash burn, liquidity runway, and compliance with the OrbiMed minimum cash covenant.
- Assess whether sales and marketing investments can generate revenue growth sufficient to reduce operating losses.
- Review Aroa manufacturing capacity, supply-chain continuity, and the terms of the February 2020 license, product-development, and supply-agreement addendum.
- Track the controlled launch and adoption of OviTex PRS, reimbursement conditions, competitive products, and regulatory developments.
- Evaluate potential future equity or debt financing needs and the associated dilution, covenants, fees, and repayment obligations.