TELA Bio, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022; filed August 11, 2022. TELA Bio is a commercial-stage medical technology company focused on soft-tissue reconstruction products, principally OviTex and OviTex PRS. The filing presents unaudited U.S. GAAP interim results.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $10.4 million, up 38% | $18.6 million, up 39% |
| Gross profit | $6.6 million | $11.5 million |
| Gross margin | 63%, versus 67% | 62%, versus 64% |
| Operating loss | $10.2 million | $20.1 million |
| Net loss | $12.7 million, or $0.88 per share | $23.6 million, or $1.62 per share |
| Operating cash flow | Not separately disclosed | $(22.1) million |
- Revenue growth reflected higher unit sales, expansion of the commercial organization, increased penetration of existing accounts and stronger international sales. Six-month OviTex unit sales increased 33% and OviTex PRS unit sales increased 84% year over year.
- Sales and marketing expense increased 48% to $20.4 million for the six months, primarily from higher personnel, commissions, travel and consulting costs. General and administrative expense increased 24% to $7.1 million, while research and development expense increased 14% to $4.1 million.
- Gross margin declined primarily because of a $0.5 million cumulative amortization charge related to a probable final milestone payment under the Aroa license. The company also recorded a $1.2 million inventory excess and obsolescence charge during the six-month period.
- Cash and cash equivalents were $27.7 million at June 30, 2022, compared with $43.9 million at December 31, 2021. Working capital was $33.7 million, compared with $48.5 million at year-end.
- Total assets were $51.3 million and total liabilities were $52.9 million. Stockholders’ deficit was $1.5 million at June 30, 2022, compared with equity of $20.1 million at December 31, 2021.
- Cash used in operating activities increased from $14.2 million to $22.1 million. Investing cash outflow was $0.5 million, and financing activities provided $6.5 million.
Debt, Liquidity and Commitments
- On May 26, 2022, TELA Bio entered into a MidCap credit agreement and borrowed $40.0 million under a $50.0 million facility. Proceeds were used partly to repay the $30.0 million OrbiMed related-party facility.
- The MidCap loan matures May 1, 2027 and bears interest at 6.25% plus the greater of one-month Term SOFR or 1.0%. It includes an interest-only period, revenue covenants, a first-priority security interest over company assets including intellectual property, prepayment fees and a 5% exit fee on principal borrowings.
- The additional $10.0 million tranche is subject to conditions, including achieving $65.0 million of net product revenue over the preceding four quarters by fiscal year-end 2023.
- Contractual obligations totaled $71.0 million, including $40.0 million of debt principal, $16.3 million of interest and end-of-term charges, $11.5 million of purchase commitments, $2.2 million of operating lease commitments and a $1.0 million probable milestone payment to Aroa.
- Management stated that existing cash resources were expected to fund capital requirements and operations for at least the next 12 months from the filing date. The company has an at-the-market program permitting up to $50.0 million of common stock sales, but reported no sales under the program during the six months ended June 30, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, but operating expenses grew nearly as quickly, resulting in a 54% increase in quarterly net loss and a 44% increase in six-month net loss.
- Gross margin declined by four percentage points for the quarter and two percentage points for the six-month period.
- Debt was refinanced from the related-party OrbiMed facility into the MidCap facility. The refinancing generated a $1.2 million loss on extinguishment of debt.
- Cash declined by $16.2 million during the first half of 2022 despite $6.5 million of net financing cash inflow, reflecting the company’s continuing operating cash burn.
- The company adopted the new lease accounting standard on January 1, 2022 and recognized operating lease assets and liabilities for its Malvern facility.
Outlook, Commentary and Risks
- The company expects continued losses in the near term while investing in sales, marketing, research and development and commercial expansion. No specific revenue or earnings guidance was provided.
- COVID-19 resurgences and hospital staffing constraints reduced surgical volumes, particularly in January and February 2022. Management reported improvement in March and the second quarter but continued uncertainty from the Omicron BA.4 and BA.5 subvariants and potential future variants.
- Key risks include elective procedure deferrals, hospital access and staffing shortages, supply-chain disruption, reliance on Aroa as exclusive manufacturer and supplier, product acceptance and reimbursement, competition, regulatory requirements, intellectual-property protection, inflation, geopolitical conditions and the need for additional financing.
- Revenue concentration remains significant: substantially all revenue was generated from U.S. hospital accounts, and sales outside the United States were immaterial for the periods presented.
- The filing reported no material legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls and procedures.
Investor Verification Items
- Verify compliance with the MidCap facility’s quarterly minimum revenue covenants and the conditions for accessing the additional $10.0 million tranche.
- Monitor cash burn, available liquidity and the timing or terms of any future equity or debt financing.
- Assess whether revenue growth can outpace planned sales and marketing investment and restore operating leverage.
- Track gross-margin effects from Aroa milestones, inventory obsolescence charges, royalties and product mix.
- Evaluate the durability of surgical volumes following COVID-19 disruptions and the impact of future variants or hospital staffing shortages.
- Confirm the timing and amount of the $1.0 million probable Aroa milestone payment and other purchase commitments.