TELA Bio, Inc. — Q2 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, principally the OviTex and OviTex PRS reinforced tissue matrix portfolios. The company markets primarily in the United States through a direct sales force and has a smaller European presence. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $14.5 million, up 39% | $26.4 million, up 42% |
| Gross profit | $10.2 million | $18.1 million |
| Gross margin | 70%, versus 63% | 69%, versus 62% |
| Loss from operations | $10.4 million | $21.6 million |
| Net loss | $10.8 million, or $0.46 per share | $22.8 million, or $1.08 per share |
| Operating cash flow | Not separately provided | $(22.8) million |
- Second-quarter revenue comprised $10.1 million from OviTex, $4.4 million from OviTex PRS and $0.05 million from other products. International sales were $1.5 million in the quarter and $2.5 million year to date.
- Unit sales increased 41% for OviTex and 27% for OviTex PRS in the second quarter. For the first six months, unit sales increased 41% and 42%, respectively.
- Sales and marketing expense increased 32% in the quarter and 37% year to date as the commercial organization expanded. Research and development expense increased 20% in the quarter and 11% year to date.
- Interest expense increased to $1.3 million in the quarter and $2.5 million year to date, primarily because of the MidCap facility and higher variable rates.
- Cash and cash equivalents were $65.3 million at June 30, 2023, compared with $42.0 million at December 31, 2022. Working capital was $76.1 million, compared with $50.0 million at year-end.
- Total liabilities were $54.4 million and stockholders’ equity was $40.0 million at June 30, 2023. The accumulated deficit was $297.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher unit sales, expansion of the commercial organization, new customers, increased penetration of existing accounts and growing international sales.
- Gross margin improved principally because of lower excess and obsolete inventory charges as a percentage of revenue.
- Amortization of intangible assets declined materially because the second quarter of 2022 included a $0.5 million cumulative amortization charge related to an Aroa licensing milestone.
- Net loss improved by $2.0 million in the quarter and $0.8 million year to date. The year-to-date comparison benefited from the absence of the $1.2 million loss on extinguishment of debt recorded in 2022, although operating losses increased.
- The company completed an underwritten public offering of 5,219,190 common shares at $9.50 per share, including the underwriters’ overallotment, generating approximately $46.3 million of net proceeds. Shares outstanding increased to 24.5 million at June 30, 2023 from 19.2 million at December 31, 2022.
- Operating cash use remained high at $22.8 million for the first six months, while financing cash inflow of $46.2 million, primarily from the equity offering, produced a $23.2 million increase in cash.
Debt, Liquidity, Outlook and Risks
- The company had $40.0 million of principal outstanding under the MidCap Term Loan, with a carrying value of $40.2 million including the end-of-term charge and issuance-cost adjustments. 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 quarterly minimum net revenue requirements and other covenants. The company may access an additional $10.0 million tranche only if specified conditions are met, including $65.0 million of net product revenue over the preceding four quarters by fiscal year-end 2023.
- Management stated that existing cash resources are expected to fund capital requirements and operations for at least the next 12 months from the filing date. The company expects continued losses and may seek additional equity or debt financing if its resources are insufficient.
- No formal revenue or earnings guidance is provided in the filing. Management expects continued investment in sales and marketing, research and development, new product configurations and strategic partnerships.
- Key risks include continued volatility in elective surgical volumes, hospital staffing and financial pressures, inflation, interest-rate increases, reimbursement and pricing pressure, competition, reliance on Aroa as exclusive contract manufacturer, supply-chain disruption, regulatory requirements, product liability, intellectual-property protection and the need for additional capital.
- The company disclosed exposure to uninsured cash deposits and stated that it established additional banking relationships following the 2023 Silicon Valley Bank disruption. A 1% increase in interest rates would have increased first-half 2023 interest expense by approximately $0.2 million.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls. It reported no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether revenue growth and unit-volume gains continue after the expansion of the sales organization.
- Whether the 69% first-half gross margin is sustainable given inventory, manufacturing, reimbursement and pricing risks.
- Cash-burn trends and the duration of the stated liquidity runway relative to the company’s projected operating losses.
- Compliance with the MidCap facility’s quarterly revenue covenants and the conditions for accessing the additional $10.0 million tranche.
- Future dilution from additional equity financing, equity awards or the company’s $50.0 million at-the-market program, under which no sales were reported during the first six months of 2023.
- Dependence on Aroa for OviTex manufacturing and the company’s ability to obtain regulatory clearance and commercial adoption for new products, including OviTex PRS Long-Term Resorbable.