TELA Bio, Inc. 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022; filed November 10, 2022. TELA Bio is a commercial-stage medical technology company focused on soft-tissue reconstruction products, principally the OviTex and OviTex PRS portfolios. The financial statements are unaudited.
Financial Performance and Position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $11.2 million | $7.7 million | $29.8 million | $21.1 million |
| Gross profit | $7.3 million | $4.6 million | $18.9 million | $13.2 million |
| Gross margin | 66% | 60% | 63% | 62% |
| Loss from operations | $(9.5) million | $(7.2) million | $(29.6) million | $(21.8) million |
| Net loss | $(10.7) million | $(8.3) million | $(34.3) million | $(24.7) million |
| Net loss per share | $(0.64) | $(0.57) | $(2.24) | $(1.71) |
- Revenue mix: Q3 revenue included $7.8 million from OviTex, $3.3 million from OviTex PRS and $33,000 from other products. Nine-month revenue included $20.5 million from OviTex, $9.2 million from OviTex PRS and $80,000 from other products.
- Unit volumes: Q3 OviTex units increased 32% year over year to 2,631, while OviTex PRS units increased 105% to 618. For the nine-month period, OviTex units increased 33% to 7,096 and OviTex PRS units increased 91% to 1,733.
- Operating expenses: Q3 sales and marketing expense increased 61% to $11.2 million, research and development increased 49% to $2.1 million, and general and administrative expense was $3.5 million. Nine-month sales and marketing expense increased 52% to $31.6 million, general and administrative expense increased 16% to $10.6 million, and research and development expense increased 24% to $6.2 million.
- Cash flow: Cash used in operations was $29.8 million for the first nine months of 2022, compared with $20.8 million in the prior-year period. Investing cash use was $0.8 million, primarily for property and equipment. Financing activities provided $41.1 million.
- Liquidity: Cash and cash equivalents were $54.2 million at September 30, 2022, compared with $43.9 million at December 31, 2021. Working capital was $58.7 million, and the accumulated deficit was $264.2 million.
- Debt: Long-term debt was $39.8 million net of unamortized financing costs. The company had $40.0 million outstanding under the MidCap Term Loan and no remaining OrbiMed debt.
- Balance sheet: Total assets were $79.6 million and stockholders’ equity was $23.3 million at September 30, 2022. Inventory increased to $12.1 million from $7.7 million at year-end 2021, while accounts receivable increased to $5.7 million from $4.2 million.
Material Changes Versus the Prior Comparable Period
- Revenue grew 46% in Q3 and 41% for the first nine months, driven primarily by higher unit sales, expansion of the commercial organization, greater penetration of existing accounts and stronger international sales.
- Gross margin improved to 66% in Q3 and 63% year to date, primarily because of lower excess and obsolete inventory provisions as a percentage of revenue.
- Losses widened as operating investment outpaced revenue growth. Q3 net loss increased 30%, and nine-month net loss increased 39%.
- Amortization of intangible assets increased substantially for the nine-month period, partly because a $1.0 million payment obligation to Aroa became probable in June 2022 and was recorded as a developed technology intangible asset.
- In May 2022, TELA Bio borrowed $40.0 million under a new MidCap facility, repaid the $30.0 million OrbiMed facility and recorded a $1.2 million loss on debt extinguishment.
- In August 2022, the company sold 4.6 million common shares at $8.00 per share and received net proceeds of $34.4 million.
- The company adopted the new lease standard on January 1, 2022, recording a $1.4 million operating lease right-of-use asset and a $1.8 million lease liability.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued losses for the foreseeable future while investing in sales and marketing, research and development and market expansion.
- Management believes existing cash resources will fund operations and capital requirements for at least the next 12 months from the filing date, but may seek additional equity or debt financing if requirements exceed available resources.
- The MidCap facility matures in May 2027, bears interest at 6.25% plus the greater of one-month Term SOFR or 1.0%, and is secured by substantially all company assets, including intellectual property. It includes quarterly minimum-revenue covenants and restrictions on additional debt, investments, acquisitions, dispositions and dividends.
- The company may access an additional $10.0 million Tranche 2 under the MidCap facility subject to conditions, including achieving $65.0 million of net product revenue over the preceding four quarters by fiscal year-end 2023.
- COVID-19 resurgences, hospital staffing shortages, reduced hospital access and deferral of elective procedures caused demand volatility. Management reported improvement in the second quarter followed by softening in June that continued into the third quarter, with limited visibility for near-term revenue growth.
- Supply-chain and manufacturing risks remain concentrated in Aroa Biosurgery, the exclusive contract manufacturer for OviTex products. Management reported that manufacturing was largely uninterrupted through the period but identified potential exposure to staffing, shipping, geopolitical and pandemic-related disruptions.
- Other key risks include product acceptance and competition, reimbursement and coverage, regulatory approvals, intellectual property, dependence on key personnel, inflation, interest-rate exposure, foreign exchange and the need for additional capital.
- The company recorded $1.8 million of excess and obsolete inventory charges during the first nine months, $2.95 million of stock-based compensation expense and $1.23 million of noncash loss on debt extinguishment.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Investor Verification Checklist
- Verify whether revenue growth and unit-volume gains continue despite COVID-19-related procedure volatility and hospital staffing constraints.
- Assess whether sales and marketing investments can produce operating leverage before cash resources decline materially.
- Review the MidCap facility’s minimum-revenue covenants, interest-rate exposure, security package and eligibility conditions for the additional $10.0 million tranche.
- Monitor operating cash burn, inventory growth and excess-obsolescence charges relative to revenue growth.
- Evaluate future financing needs and potential dilution under the existing $50.0 million at-the-market program or other equity or debt financings.
- Confirm the commercial, regulatory and clinical trajectory of OviTex PRS, including the potential need for a premarket approval application for a breast-reconstruction indication.
- Review dependence on Aroa for manufacturing, supply and regulatory support, as well as the economic terms of the license and product supply agreement.