TELA Bio, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2020. TELA Bio is a commercial-stage medical technology company focused on OviTex and OviTex PRS reinforced tissue matrices for soft-tissue reconstruction. Products are primarily sold in the United States through a direct sales force and manufactured by Aroa Biosurgery Ltd.
As of June 30, 2020, the company had 41 U.S. sales territories and products in more than 270 hospital accounts. OviTex PRS commercialization was expanded in June 2020.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Revenue | $3.5 million | $3.3 million | Up 6% |
| Gross profit | $2.1 million | $1.9 million | Up 9% |
| Gross margin | 59% | 58% | Up 1 percentage point |
| Operating loss | $(5.2) million | $(4.3) million | Loss increased 20% |
| Net loss | $(6.1) million | $(5.3) million | Loss increased 16% |
| Net loss per share | $(0.53) | $(27.06) | Not comparable due to share-count changes |
For the six months ended June 30, 2020, revenue was $7.2 million, up 9% from $6.6 million. Gross profit was $4.3 million versus $3.7 million, and gross margin improved to 59% from 56%. Operating loss was $11.7 million versus $9.5 million, and net loss was $13.3 million versus $11.2 million.
- Q2 revenue included $2.9 million from OviTex and $0.6 million from OviTex PRS. OviTex unit sales declined 1% year over year, while OviTex PRS unit sales increased to 115 from 13.
- Operating expenses totaled $7.3 million in Q2, including sales and marketing of $4.1 million, general and administrative expenses of $2.1 million, and research and development expenses of $1.0 million.
- Six-month operating cash flow was negative $13.7 million compared with negative $13.0 million in the prior-year period.
- Cash and cash equivalents were $85.5 million at June 30, 2020, compared with $45.3 million at December 31, 2019. Working capital was $90.5 million.
- The company had $30.0 million of principal outstanding under its OrbiMed credit facility, reported at $30.5 million including the end-of-term charge and related costs.
- The OrbiMed facility bears interest at 7.75% plus the greater of one-month LIBOR or 2.0%; the rate was 9.75% at June 30, 2020. It matures November 16, 2023 and requires a minimum cash balance of $2.0 million.
Material changes versus the prior comparable period
- Revenue increased despite COVID-19-related reductions in elective procedures. Q2 OviTex unit volume decreased modestly, while OviTex PRS volumes grew substantially from the limited 2019 launch.
- Gross margin improved primarily because of lower excess and obsolete inventory charges as a percentage of revenue.
- Q2 sales and marketing expense increased 4%, largely due to higher headcount-related costs, while general and administrative expense increased 78% due principally to higher insurance, professional fees, and stock-based compensation.
- Q2 research and development expense decreased 7%; six-month research and development expense decreased 30%, primarily due to lower licensing, outside development, and laboratory costs.
- The company issued 3.0 million common shares in a June 2020 underwritten offering at $16.00 per share, generating net proceeds of approximately $44.7 million.
- Cash increased by $40.2 million during the first six months, primarily from the public offering and proceeds from the sale or maturity of short-term investments, partially offset by operating cash use.
- Preferred-stock-related accounting items largely ceased after the November 2019 IPO conversion of preferred stock and preferred-stock warrants into common stock and common-stock warrants.
Guidance, outlook, commentary, and risks
- Management stated that COVID-19 materially reduced procedure volumes. Average daily sales were more than 70% below pre-pandemic levels at the low point in April, improved through May and June, and exceeded pre-pandemic levels in late June.
- The timing and sustainability of procedure recovery remain uncertain. Potential adverse factors include renewed government restrictions, COVID-19 case increases, patient deferrals, hospital resource constraints, loss of insurance coverage, and hospitals preserving cash or delaying inventory replenishment.
- Sales, marketing, and research and development activities continued, but sales professionals primarily used virtual selling programs rather than in-person activities.
- Aroa’s manufacturing and supply chain were largely uninterrupted as of the filing, although future staffing, production, or delivery disruptions remain possible.
- Management implemented cost-containment measures, including reduced travel, events, and consulting spending, temporary salary reductions from April 16 through July 15, 2020, and suspension of 401(k) matching contributions. Matching contributions were reinstated in August 2020.
- The company expects continuing operating losses and stated that existing cash resources and short-term investments should fund operations for at least the next 12 months from issuance of the filing. Additional financing may be required thereafter and could dilute shareholders or impose restrictive covenants.
- Key risks include dependence on Aroa, competition, product adoption and reimbursement, regulatory and intellectual-property matters, product liability, supply-chain disruption, COVID-19 effects, and the company’s history of recurring losses and negative operating cash flow.
- No material legal proceedings, off-balance-sheet arrangements, or material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether elective surgical procedure volumes and revenue growth remain above pre-pandemic levels or deteriorate with future COVID-19 developments.
- The pace of OviTex PRS adoption and whether the expanded launch produces material incremental revenue.
- Cash burn relative to the $85.5 million cash balance and the company’s ability to reach profitability without additional capital.
- Compliance with the OrbiMed facility’s covenants, minimum cash requirement, floating interest rate, prepayment penalties, and 2023 maturity.
- The effect of continued operating losses, stock-based compensation, and potential future equity or debt financing on shareholder dilution and liquidity.
- Aroa’s ability to maintain regulatory compliance, manufacturing capacity, and uninterrupted supply of products.