TELA Bio, Inc. 2021 Q2 Form 10-Q Summary
Business context and reporting period
TELA Bio is a commercial-stage medical technology company focused on tissue reinforcement materials for soft-tissue reconstruction. Its primary products are OviTex for hernia and abdominal wall repair and OviTex PRS for plastic and reconstructive surgery. Products are manufactured and supplied exclusively by Aroa Biosurgery Ltd. The filing covers the quarter and six months ended June 30, 2021; financial statements are unaudited and presented in thousands except per-share and share amounts.
As of June 30, 2021, the company had 45 U.S. sales territories and products in more than 374 hospital accounts. As of August 3, 2021, 14,472,095 common shares were outstanding.
Financial performance and liquidity
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $7.6 million | $3.5 million | $13.4 million | $7.2 million |
| Gross profit | $5.1 million | $2.1 million | $8.6 million | $4.3 million |
| Gross margin | 67% | 59% | 64% | 59% |
| Operating loss | $7.3 million | $5.2 million | $14.6 million | $11.7 million |
| Net loss | $8.3 million | $6.1 million | $16.4 million | $13.3 million |
| Net loss per share | $0.57 | $0.53 | $1.13 | $1.16 |
| Cash used in operating activities | Not separately provided | Not separately provided | $14.2 million | $13.7 million |
Revenue consisted primarily of OviTex and OviTex PRS. Second-quarter revenue was $5.8 million from OviTex and $1.8 million from OviTex PRS. Six-month revenue was $10.4 million from OviTex and $3.0 million from OviTex PRS.
At June 30, 2021, cash and cash equivalents were $60.3 million, down from $74.4 million at December 31, 2020. Working capital was $63.4 million, compared with $76.6 million at year-end 2020. Total assets were $73.8 million and stockholders’ equity was $35.0 million. The accumulated deficit was $213.0 million.
Operating expenses for the quarter were $12.4 million, comprising sales and marketing of $7.5 million, general and administrative expenses of $3.0 million, and research and development expenses of $1.9 million. Six-month operating expenses were $23.1 million. Stock-based compensation was $1.4 million in the quarter and $2.1 million for the six months.
Debt and capital structure
The company had $30.0 million of principal outstanding under its related-party OrbiMed term loan, with a carrying value of $31.1 million including the end-of-term charge and unamortized issuance costs. The loan matures November 16, 2023, bears interest at 7.75% plus the greater of one-month LIBOR or 2.0%, and had an interest rate of 9.75% at June 30, 2021. Principal is due at maturity, and the facility requires a minimum cash balance of $2.0 million.
The credit facility is secured by substantially all company assets other than intellectual property and contains customary covenants and events of default. A default could accelerate outstanding principal and interest and increase the applicable rate by 3%. The company also has a $50.0 million at-the-market equity offering program; no shares were sold under the program during the first six months of 2021.
Material changes versus the prior comparable period
- Second-quarter revenue increased 116% to $7.6 million; six-month revenue increased 86% to $13.4 million.
- OviTex second-quarter unit sales increased to 1,864 from 869; OviTex PRS unit sales increased to 337 from 115. For the six months, OviTex units increased 72% to 3,350, while OviTex PRS units increased to 607 from 216.
- Gross margin improved to 67% in the quarter and 64% for the six months, primarily because excess and obsolete inventory charges represented a smaller percentage of revenue.
- Second-quarter sales and marketing expense increased 82%, general and administrative expense increased 38%, and research and development expense increased 97%. Six-month increases were 47%, 23%, and 91%, respectively.
- Net loss increased 36% in the quarter and 23% for the six months as expense growth exceeded gross-profit growth.
- Operating cash use increased to $14.2 million from $13.7 million for the comparable six-month period. Unlike 2020, there were no proceeds from a follow-on offering or short-term investment maturities during the period.
- Research and development expense included approximately $0.7 million of noncash stock-based compensation related to amendments to certain equity awards following the death of the company’s co-founder and former Chief Medical Officer.
Guidance, outlook, risks and unusual items
The company did not provide specific quantitative revenue or earnings guidance. Management expects operating losses to continue for the foreseeable future while it invests in sales and marketing, product development, research and development, and expansion of its commercial organization. Based on its current business plan, management believes existing cash resources are sufficient to fund operations for at least the next 12 months from the filing date.
COVID-19 and related variants, including the Delta variant, caused demand volatility and some surgical deferrals, particularly in January 2021. Management reported improvement during the second half of the first quarter and the second quarter, but stated that future elective procedure volumes and revenue growth remain uncertain. Potential effects include hospital resource constraints, reduced procedures, customer inventory conservation, supply-chain disruption, staffing issues, and delays to product development.
Additional key risks include dependence on Aroa for manufacturing and supply, competition from larger medical-device companies, market acceptance and reimbursement, regulatory and clinical development requirements, intellectual-property protection, product liability and safety events, the need for additional financing, and continued operating losses. The Aroa license requires product purchases at a fixed cost equal to 27% of net sales of licensed products and initially terminates on the later of August 3, 2022 or expiration of the last applicable patent, subject to a potential extension.
The company reported no material legal proceedings, no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2021.
Important facts for investors to verify
- Whether revenue growth and improved gross margins continue after the COVID-19-related procedure volatility subsides.
- Whether sales and marketing and research and development spending produce operating leverage or continue to widen losses.
- The company’s cash-burn rate, projected runway, and ability to refinance or repay the $30.0 million OrbiMed principal maturity in November 2023.
- Compliance with the OrbiMed minimum cash covenant and other secured-credit-facility covenants.
- Continuity of Aroa manufacturing, supply capacity, and the economic and renewal terms of the Aroa license.
- Adoption, reimbursement, and clinical outcomes for OviTex and OviTex PRS, including the potential requirements for a future breast-reconstruction indication.
- The impact of COVID-19 variants and hospital capacity on elective procedures and customer inventory levels.
- Potential dilution from the $50.0 million at-the-market program and approximately 1.8 million antidilutive options, restricted stock units, and warrants outstanding at June 30, 2021.