TELA Bio, Inc. — Q1 2022 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 OviTex for hernia repair and abdominal wall reconstruction and OviTex PRS for plastic and reconstructive surgery. The company primarily sells in the United States through a direct sales force and uses Aroa Biosurgery as its exclusive manufacturer and supplier.
The filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The interim financial statements are unaudited. As of March 31, 2022, TELA had 53 U.S. sales territories and 14,556,748 common shares outstanding.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $8.231 million | $5.877 million | Up 40% |
| Gross profit | $4.999 million | $3.465 million | Up 44% |
| Gross margin | 61% | 59% | Up 2 percentage points |
| Operating expenses | $14.843 million | $10.734 million | Up 38% |
| Loss from operations | $(9.844) million | $(7.269) million | Loss increased |
| Net loss | $(10.862) million | $(8.136) million | Loss increased 34% |
| Basic and diluted loss per share | $(0.75) | $(0.56) | Loss increased |
| Cash used in operating activities | $(10.430) million | $(8.585) million | Cash use increased |
Revenue growth was driven by higher unit sales, expansion of the commercial organization, increased penetration of existing accounts, a higher average selling price for OviTex PRS and stronger international sales. OviTex revenue was $5.661 million, while OviTex PRS revenue was $2.548 million. Unit sales increased 37% for OviTex and 74% for OviTex PRS.
Sales and marketing expense increased 49% to $9.378 million, general and administrative expense increased 25% to $3.458 million, and research and development expense increased 20% to $2.007 million. Stock-based compensation expense was $0.901 million, compared with $0.694 million in the prior-year quarter. The company also recorded an $0.845 million inventory excess and obsolescence charge.
Cash and cash equivalents were $33.016 million at March 31, 2022, down from $43.931 million at December 31, 2021. Working capital was $38.0 million, compared with $48.5 million at year-end. The company reported an accumulated deficit of $240.8 million and stated that it has incurred recurring losses and negative operating cash flows since inception.
Debt included $30.0 million of principal under the related-party OrbiMed term loan and $31.669 million of carrying value including the end-of-term charge and unamortized issuance costs. The facility matures November 16, 2023, bears interest at 7.75% plus the greater of one-month LIBOR or 2.0%, and requires a minimum cash balance of $2.0 million. The company reported an effective interest rate of 9.75% at March 31, 2022.
Material changes versus the prior comparable period
- Revenue increased $2.354 million, or 40%, reflecting higher product volumes and commercial expansion.
- Gross profit increased $1.534 million and gross margin improved from 59% to 61%, primarily because inventory-obsolescence charges were lower as a percentage of revenue.
- Operating expenses increased $4.109 million, led by a $3.079 million increase in sales and marketing expense.
- Net loss increased $2.726 million, or 34%, as operating expense growth exceeded gross profit growth.
- Operating cash use increased $1.845 million to $10.430 million, principally due to the larger net loss and increased inventory investment.
- Inventory increased to $10.267 million from $7.658 million at December 31, 2021, while accounts payable increased to $5.703 million from $2.414 million.
- The company adopted the lease accounting standard on January 1, 2022 and recognized a $1.339 million operating lease right-of-use asset and related lease liabilities.
Guidance, outlook, risks and unusual items
Management did not provide a specific revenue or earnings forecast. Based on its current business plan, management stated that existing cash resources are expected to fund operations and capital requirements for at least the next 12 months from the filing date. The company expects continued losses and additional investment in sales, marketing, research and development.
COVID-19 resurgences and hospitalizations reduced surgical volumes and product demand, particularly in January and February 2022; management reported improvement in March. Future procedure volumes remain uncertain because of potential new variants, hospital staffing shortages, elective-surgery restrictions, patient deferrals and hospital cash preservation.
Other key risks include reliance on Aroa for manufacturing and supply, competition from larger medical-device companies, product adoption and reimbursement uncertainty, regulatory requirements, product liability and safety events, intellectual property protection, the need for additional financing, and macroeconomic and geopolitical conditions including the Russia-Ukraine conflict.
The OrbiMed facility is secured by substantially all company assets other than intellectual property and contains customary covenants and events of default. Principal repayment is due at maturity, together with a 10% end-of-term charge on principal borrowings and potential prepayment penalties. The company had a $50.0 million at-the-market equity program but made no sales under it during the quarter.
Management stated that there were no material changes to previously disclosed risk factors, no material legal proceedings, and no off-balance-sheet arrangements. Disclosure controls and procedures were deemed effective.
Important facts for investors to verify
- Whether surgical volumes and revenue growth remain resilient as COVID-19 effects, hospital staffing constraints and elective-procedure deferrals evolve.
- Whether sales growth can outpace continued expansion in sales, marketing and research and development spending.
- The company’s ability to reduce operating cash burn and fund operations through the November 2023 debt maturity.
- Compliance with the OrbiMed minimum cash covenant and the terms, interest expense, end-of-term charge and repayment requirements of the related-party facility.
- Inventory levels, future excess-and-obsolescence charges and dependence on Aroa for manufacturing and supply continuity.
- Progress and regulatory requirements for new products, including the potential premarket approval pathway for an OviTex PRS breast-reconstruction indication.
- Potential dilution or financing risk if the company needs to use its at-the-market program or obtain additional equity or debt financing.