TELA Bio, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
TELA Bio is a commercial-stage medical technology company focused on tissue reinforcement materials, primarily OviTex and OviTex PRS, for hernia repair, abdominal wall reconstruction, and plastic and reconstructive surgery. Products are manufactured and supplied exclusively by Aroa Biosurgery Ltd. The filing covers the quarter and nine months ended September 30, 2021; financial statements are unaudited.
As of September 30, 2021, TELA had 45 U.S. sales territories and products used by more than 380 hospital accounts. The company remains unprofitable and has incurred recurring operating losses and negative operating cash flow since inception.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $7.7 million, up 44% | $21.1 million, up 68% |
| Gross profit | $4.6 million | $13.2 million |
| Gross margin | 60%, versus 62% | 62%, versus 60% |
| Operating loss | $7.2 million | $21.8 million |
| Net loss | $8.3 million, or $0.57 per share | $24.7 million, or $1.71 per share |
| Operating cash flow | Not separately provided | $(20.8) million |
Revenue growth was driven by higher unit sales, expansion of the commercial organization, new accounts, and increased penetration within existing accounts. Nine-month unit sales increased 62% for OviTex and 143% for OviTex PRS. OviTex generated $16.5 million of nine-month revenue and OviTex PRS generated $4.6 million.
- Cash and cash equivalents were $53.6 million at September 30, 2021, down from $74.4 million at December 31, 2020.
- Working capital was $56.2 million, compared with $76.6 million at year-end 2020.
- Total assets were $68.8 million and stockholders’ equity was $27.7 million.
- Inventory increased to $6.3 million from $3.9 million, while accounts receivable increased to $3.6 million from $2.7 million.
- Cash used in investing activities was $0.3 million; financing activities provided $0.4 million, primarily from stock-option exercises.
- The company had an accumulated deficit of $221.3 million at September 30, 2021.
Debt and capital structure
Long-term related-party debt was $31.3 million, consisting of a $30.0 million OrbiMed term loan, a $3.0 million end-of-term charge, and unamortized debt costs. The loan matures November 16, 2023, bears interest at 7.75% plus the greater of one-month LIBOR or 2.0% (9.75% at September 30, 2021), and requires the company to maintain at least $2.0 million of cash. Principal is due at maturity, subject to prepayment penalties and a 10% exit fee.
TELA maintained a $50.0 million at-the-market equity offering program but reported no sales under the program during the first nine months of 2021.
Material changes versus the prior comparable period
- Quarterly revenue increased $2.3 million, or 44%; nine-month revenue increased $8.5 million, or 68%.
- Quarterly gross margin declined two percentage points to 60%, primarily because of higher excess and obsolete inventory charges. Nine-month gross margin improved two percentage points to 62%.
- Quarterly operating expenses increased 16% to $11.8 million. Nine-month operating expenses increased 34% to $35.0 million, led by sales and marketing and research and development spending.
- Quarterly net loss increased 7%; nine-month net loss increased 17%.
- Operating cash use increased from $17.4 million to $20.8 million for the nine-month period.
- The company recorded a $1.3 million excess and obsolete inventory charge and $2.8 million of stock-based compensation during the first nine months, compared with $1.2 million and $1.5 million, respectively, in the prior-year period.
- Unlike 2020, the first nine months of 2021 included no follow-on equity offering proceeds; 2020 financing cash flow included $44.7 million of net follow-on offering proceeds.
Outlook, commentary, risks, and unusual items
Management expects continuing losses in the near term while it invests in sales and marketing, product development, and research and development. Based on its current business plan, management believes existing cash resources are sufficient to fund operations and capital requirements for at least the next 12 months from the filing date. Additional financing may nevertheless be required, and could dilute existing shareholders or impose restrictive debt covenants.
COVID-19, including the delta variant, affected hospital activity and is believed to have reduced third-quarter revenue, particularly in September, through elective-surgery deferrals. Future procedure volumes, hospital staffing, vaccine mandates, supply-chain conditions, and the emergence of new variants remain uncertain.
- Manufacturing and supply are concentrated with Aroa in New Zealand; future pandemic-related staffing, production, shipping, or supply-chain disruptions could affect results.
- Commercial success depends on product adoption, reimbursement and coverage, competition, hospital access, and the effectiveness of the direct sales force.
- OviTex PRS expansion into breast reconstruction would require an FDA Investigational Device Exemption study and premarket approval rather than 510(k) clearance.
- Research and development spending is expected to increase as TELA develops additional OviTex and OviTex PRS products and features.
- The OrbiMed facility is secured by substantially all company assets other than intellectual property and includes customary default provisions and a minimum-cash covenant.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue growth and unit growth continue as COVID-19-related hospital disruptions subside.
- Whether gross margins remain near historical levels given inventory obsolescence charges and the fixed 27% of net sales product cost payable to Aroa.
- The pace of cash consumption and the company’s ability to fund operations through the November 2023 debt maturity.
- Compliance with the OrbiMed minimum-cash covenant and other loan covenants, including the maturity repayment and exit-fee requirements.
- Progress, regulatory requirements, and costs associated with OviTex PRS clinical development and potential breast reconstruction expansion.
- Future financing needs and the potential dilution or restrictions associated with equity or debt financing.
- Reliance on Aroa for manufacturing, supply, and certain regulatory clearances.