TELA Bio, Inc. 2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2019. TELA Bio is a commercial-stage medical technology company developing and selling reinforced tissue matrices for hernia repair, abdominal wall reconstruction, and plastic and reconstructive surgery. Its principal products are OviTex and OviTex PRS, manufactured exclusively by Aroa Biosurgery Ltd. in New Zealand.
OviTex products have FDA 510(k) clearance and were sold to approximately 250 hospital accounts through a predominantly U.S. direct sales organization. OviTex PRS received FDA 510(k) clearance in April 2019 and began a limited commercial launch in May 2019.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $15.4 million | $8.3 million | Up 87% |
| Gross profit | $9.3 million | $2.9 million | Up 215% |
| Gross margin | 60% | 36% | Up 24 percentage points |
| Operating loss | $19.2 million | $17.8 million | Loss increased 8% |
| Net loss | $22.4 million | $21.1 million | Loss increased 6% |
| Net loss attributable to common stockholders | $30.2 million | $29.9 million | Loss increased 1% |
| Cash used in operating activities | $25.5 million | $19.9 million | Use increased $5.6 million |
| Cash, cash equivalents and short-term investments | $54.6 million | $17.3 million | Up $37.3 million |
| Working capital | $57.6 million | $13.7 million | Up $43.9 million |
| Long-term debt | $30.2 million | $29.7 million | Nearly unchanged |
Revenue consisted of $14.0 million from OviTex and $1.4 million from OviTex PRS. OviTex unit sales increased to 3,779 from 2,110, while the company sold 240 OviTex PRS units during its limited launch. Sales and marketing expense increased to $18.1 million, while general and administrative expense increased to $6.2 million. Research and development expense declined modestly to $4.2 million.
Material changes versus the prior comparable period
- Revenue growth was driven by increased unit sales, greater penetration of existing accounts, commercial expansion, and the introduction of larger OviTex sizes.
- Gross margin improved primarily because of lower excess and obsolete inventory charges and the absence of the $0.4 million cumulative amortization effect recorded in 2018.
- Operating losses widened despite revenue growth because sales and marketing spending increased by $4.4 million and general and administrative expense increased by $1.3 million.
- Interest expense doubled to $3.6 million, reflecting the larger outstanding debt balance and higher interest rate. The 2018 $1.8 million loss on debt extinguishment did not recur.
- The 2018 $2.2 million gain on litigation settlement did not recur.
- The November 2019 IPO generated approximately $50.6 million of net proceeds. Preferred stock converted into common stock, resulting in $30.96 million of stockholders’ equity at year-end versus a $137.86 million deficit in 2018.
Cash flow, debt and liquidity
Operating cash burn increased to $25.5 million. Investing cash use was $12.0 million, including $9.3 million of short-term investments, $2.5 million of intangible asset payments, and $0.2 million of capital expenditures. Financing activities provided $65.5 million, primarily from the IPO and $14.4 million of Series B preferred stock proceeds.
The company had $30.0 million of principal outstanding under its OrbiMed senior secured term loan, with a carrying value of $30.2 million including the end-of-term charge. The loan matures in November 2023, bears interest at 7.75% plus the greater of one-month LIBOR or 2.0% (9.75% at December 31, 2019), requires a minimum cash balance of $2.0 million, and includes restrictive covenants and a $3.0 million exit fee.
Management stated that existing cash resources and short-term investments were expected to fund operations and capital requirements for at least the next 12 months from the filing date. The company nevertheless expects continuing operating losses and may require additional financing.
Outlook, management commentary and risks
- Management intended to expand the U.S. commercial organization, increase hospital-account penetration, pursue additional GPO and IDN contracts, and gradually expand OviTex PRS commercialization during 2020.
- Planned development activities included additional OviTex LPR sizes, self-grip technology, larger resorbable OviTex products, additional polymers, further clinical studies, and discussions with the FDA regarding an IDE for breast reconstruction.
- The BRAVO study enrolled 91 patients. Among the first 32 patients completing 12-month follow-up, there were no hernia recurrences, explantations, or surgical site occurrences requiring follow-up surgery. The filing cautions that the study is single-arm, interim, and based on a limited patient population.
- COVID-19 was identified as a material emerging risk because elective surgery cancellations, restricted hospital access, travel restrictions, supply-chain disruption, manufacturing constraints, and capital-market volatility could reduce sales and delay operations.
- The company is highly dependent on Aroa for intellectual property, raw materials, manufacturing, regulatory support, and supply. Manufacturing is concentrated in one New Zealand facility, although expansion and contingency rights exist.
- Additional risks include continued losses, uncertain market acceptance, competition from larger medical-device companies, reimbursement and pricing pressure, regulatory compliance, product liability, recalls, intellectual-property disputes, inventory expiration, and the need for additional capital.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement persist after accounting for inventory charges, product mix, pricing, and Aroa’s 27% revenue-sharing cost.
- The company’s cash runway relative to its approximately $25.5 million annual operating cash burn and $30.0 million debt maturity in 2023.
- Progress in OviTex PRS adoption, OviTex LPR expansion, GPO and IDN contracting, and growth in active hospital accounts.
- Final and longer-term BRAVO study outcomes, including 24-month recurrence, complication, and explantation data.
- The operational resilience and capacity of Aroa’s sole manufacturing facility, including the effect of COVID-19 or other supply disruptions.
- Regulatory status for future product modifications and any breast-reconstruction indication, which is not covered by the current OviTex PRS clearance.
- Potential dilution, covenant restrictions, interest-rate exposure, the $3.0 million debt exit fee, and the remaining Aroa purchase and milestone commitments.
- The effectiveness of internal controls: the filing states that management and the auditor had not yet performed the Section 404 evaluation applicable to the newly public company.