TELA Bio, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2019. TELA Bio is a commercial-stage medical technology company focused on OviTex Reinforced Tissue Matrix products for hernia repair, abdominal wall reconstruction, and plastic and reconstructive surgery. OviTex PRS received FDA 510(k) clearance in April 2019 and had a limited launch in May 2019. Products are manufactured and supplied exclusively by Aroa Biosurgery Ltd.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $4.0 million | $2.2 million | $10.6 million | $5.8 million |
| Gross profit | $2.6 million | $1.4 million | $6.3 million | $1.9 million |
| Gross margin | 66% | 62% | 60% | 33% |
| Loss from operations | $(3.9) million | $(2.5) million | $(13.3) million | $(12.3) million |
| Net loss | $(4.7) million | $(2.8) million | $(15.9) million | $(13.7) million |
| Net loss attributable to common stockholders | $(6.7) million | $(4.7) million | $(22.7) million | $(20.5) million |
| Net loss per common share | $(22.58) | $(15.84) | $(76.62) | $(69.70) |
Revenue increased 80% year over year in the quarter and 81% for the first nine months. OviTex unit sales increased 74% in the quarter and 77% year to date. OviTex PRS contributed 90 units in the quarter and 103 units year to date.
Operating expenses were $6.5 million in Q3 and $19.6 million for the first nine months. Sales and marketing increased 31% in Q3 and 32% year to date as the company expanded its commercial organization. The company remained unprofitable, with an accumulated deficit of $160.4 million at September 30, 2019.
Cash used in operating activities was $18.3 million for the first nine months, compared with $14.2 million in the prior-year period. Investing cash use was $2.7 million, including a $2.5 million intangible-asset payment. Financing activities provided $14.4 million, primarily from Series B preferred stock issuance. Cash and cash equivalents declined to $10.7 million from $17.3 million at December 31, 2018.
At September 30, 2019, current assets were $17.6 million and current liabilities were $6.3 million. Long-term debt was $30.1 million, consisting primarily of the related-party OrbiMed term loan. The loan bears interest at 9.86% at period end, matures in November 2023, requires a minimum cash balance of $2.0 million, and is secured by substantially all assets other than intellectual property.
Material changes versus the prior comparable period
- Revenue growth reflected higher unit sales, expansion of the direct sales force, deeper penetration of existing accounts, and larger OviTex sizes.
- Gross margin improved to 66% in Q3 and 60% year to date, mainly because excess and obsolete inventory charges were lower as a percentage of revenue. The prior-year period included a material inventory shelf-life-related reserve.
- Year-to-date gross profit benefited from a $0.5 million reduction in cost of revenue and a $0.5 million reduction in intangible-asset amortization.
- Sales and marketing investment increased substantially, while Q3 general and administrative and research and development expenses declined.
- The prior-year results included a $2.2 million litigation settlement gain and a $0.6 million loss on extinguishment of debt; neither recurred in 2019.
- Interest expense increased to $2.7 million year to date from $1.0 million, primarily because of higher outstanding debt and interest rates.
- Series B preferred stock issuances generated $14.5 million of gross proceeds during the first nine months.
Guidance, outlook, risks, and unusual items
Management expects continued operating losses and negative cash flows in the near term while it expands sales and marketing and invests in research and development. It expects sales and marketing and general and administrative expenses to increase in absolute dollars, although management anticipates those expenses may decline as a percentage of revenue as revenue grows. No quantitative revenue or earnings guidance was provided.
In November 2019, after the reporting date, TELA Bio completed its initial public offering of 4,398,700 common shares at $13.00 per share and received approximately $50.7 million in net proceeds. Management stated that existing cash, credit-facility availability, and IPO proceeds were expected to fund operations for at least the next 12 months.
Key risks include dependence on Aroa for manufacturing and supply, product-market acceptance, competition, reimbursement and coverage, regulatory developments, intellectual-property protection, clinical and commercial execution, additional financing needs, and the company’s recurring losses. The OrbiMed facility includes financial and operational covenants, a minimum cash requirement, floating-rate exposure, prepayment penalties, and a 10% exit fee on principal borrowings. No material legal proceedings or off-balance-sheet arrangements were reported.
The company completed a one-for-24.69 reverse stock split on October 28, 2019; share and per-share information in the filing was retrospectively adjusted. Preferred stock and preferred stock warrants converted into common stock or common-stock warrants in connection with the IPO.
Important facts for investors to verify
- Whether revenue growth and OviTex PRS adoption continue after the limited PRS launch and IPO.
- The company’s cash-burn rate, remaining IPO proceeds, and timing of potential additional financing.
- Compliance with the OrbiMed facility’s minimum cash balance and other covenants, including the availability and terms of the additional $5.0 million tranche.
- Future gross margins and the potential for additional excess or obsolete inventory charges.
- Dependence on Aroa’s manufacturing capacity, supply terms, regulatory status, and intellectual-property arrangements.
- Clinical outcomes, reimbursement, competitive products, and market acceptance of OviTex and OviTex PRS.
- The effect of the reverse stock split, IPO conversion terms, preferred-stock conversion, warrants, and post-IPO equity awards on dilution.