SEC Filing | TELA Bio, Inc.

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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-37526

TELA Bio, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		45-5320061 (I.R.S. Employer Identification Number)

1 Great Valley Parkway, Suite 24 Malvern, Pennsylvania (Address of principal executive offices)		19355 (Zip Code)

(484) 320-2930
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☐ Yes ☒ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐			Accelerated filer ☐
			Smaller reporting company ☒
Non-accelerated filer ☒			Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of December 3, 2019, the registrant had 11,405,543 shares of Common Stock, $0.001 par value per share, outstanding.

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TABLE OF CONTENTS


PART I FINANCIAL INFORMATION

Item 1.	Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	29

PART II OTHER INFORMATION		29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Mine Safety Disclosures	30

Item 5.	Other Information	31

Item 6.	Exhibits	31

	Signatures	32

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements made in this Quarterly Report on Form 10-Q that are not statements of historical or current facts, such as those under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements discuss our business, operations and financial performance and conditions, as well as our plans, objectives and expectations for our business operations and financial performance and condition. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “positioned,” “potential,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. In addition, statements that “we believe” or similar statements reflect our beliefs and opinions on the relevant subject. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business.

You should understand that the following important factors could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

estimates regarding future results of operations, financial position, research and development costs, capital requirements and our needs for additional financing;

the commercial success and the degree of market acceptance of our products;

our ability to expand, manage and maintain our direct sales and marketing organization and to market and sell our products in the United States;

the performance of Aroa Biosurgery Ltd. (“Aroa”), in connection with the development and production of our products;

our ability to compete successfully with larger competitors in our highly competitive industry;

our ability to achieve and maintain adequate levels of coverage or reimbursement to our current and any future products we may seek to commercialize;

our ability to enhance our products, expand our indications and develop and commercialize additional products;

the development, regulatory approval, efficacy and commercialization of competing products;

our business model and strategic plans for our products, technologies and business, including our implementation thereof;

the size of the markets for our current and future products;

our ability to attract and retain senior management and other highly qualified personnel;

our ability to obtain additional capital to finance our planned operations;

our ability to commercialize or obtain regulatory approvals for our products, or the effect of delays in commercializing or obtaining regulatory approvals;

regulatory developments in the United States and internationally;

our ability to develop and maintain our corporate infrastructure, including our internal controls;

our ability to establish and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing the intellectual property rights of others;

our expectations regarding the use of proceeds from our initial public offering; and

other risks and uncertainties, including those listed under the caption “Risk Factors.”

These forward-looking statements are based on management's current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management's beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. In light of the significant uncertainties in these forward-looking statements, you should not rely upon forward-looking statements as predictions of future events. Although we believe the expectations reflected in the forward-looking statements are reasonable, the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements may not be achieved or occur at all. The factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form

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10-Q and in our prospectus dated November 7, 2019 (the “Prospectus”), as filed with the Securities and Exchange Commission (the “SEC”), pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”), relating to our Registration Statement on Form S-1 (File No. 333- 234217) and, in particular, the risks and uncertainties discussed therein under the caption “Risk Factors.” Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of any unanticipated events. Comparisons of results for current and any prior periods are not intended to express any future trends on indications of future performance, unless expressed as such, and should only be viewed as historical data.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TELA BIO, INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)


	September 30,		December 31,
	2019		2018
Assets
Current assets:
Cash and cash equivalents	$	10,701	$	17,278
Accounts receivable		2,278		1,298
Inventory		4,272		4,348
Prepaid expenses and other assets		365		330
Total current assets		17,616		23,254
Property and equipment, net		716		758
Intangible assets, net		2,987		3,215
Deferred offering costs		1,731		—
Total assets	$	23,050	$	27,227
Liabilities, redeemable convertible preferred stock, and stockholders’ deficit
Current liabilities:
Accounts payable	$	1,701	$	3,421
Accrued expenses		3,600		5,153
Other current liabilities		1,008		985
Total current liabilities		6,309		9,559
Long‑term debt with related party		30,108		29,733
Preferred stock warrant liability		1,644		1,640
Other long‑term liabilities		5		5
Total liabilities		38,066		40,937
Redeemable convertible preferred stock; $0.001 par value:
Series A preferred stock: 22,501,174 shares authorized, issued, and outstanding at September 30, 2019 and December 31, 2018; liquidation value of $34,458 at September 30, 2019		34,458		33,112
Series B preferred stock: 82,891,619 shares authorized,75,560,456 and 63,032,500 issued and outstanding at September 30, 2019 and December 31, 2018, respectively; liquidation value of $110,213 at September 30, 2019		110,926		91,038
Total redeemable convertible preferred stock		145,384		124,150
Stockholders’ deficit:
Common stock; $0.001 par value: 127,157,585 shares authorized; 298,992 and 296,629 shares issued and 298,117 and 295,717 shares outstanding at September 30, 2019 and December 31, 2018, respectively		—		—
Accumulated other comprehensive loss		(2)		—
Accumulated deficit		(160,398)		(137,860)
Total stockholders’ deficit		(160,400)		(137,860)
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit	$	23,050	$	27,227

See accompanying notes to unaudited interim consolidated financial statements.

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TELA BIO, INC.

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenue	$	3,973	$	2,212	$	10,582	$	5,847
Cost of revenue (excluding amortization of intangible assets)		1,293		769		4,045		3,224
Amortization of intangible assets		76		76		228		709
Gross profit		2,604		1,367		6,309		1,914
Operating expenses:
Sales and marketing		4,736		3,608		12,678		9,630
General and administrative		1,208		1,399		3,737		3,366
Research and development		516		1,044		3,230		3,362
Gain on litigation settlement		—		(2,160)		—		(2,160)
Total operating expenses		6,460		3,891		19,645		14,198
Loss from operations		(3,856)		(2,524)		(13,336)		(12,284)
Other (expense) income:
Interest expense		(899)		(309)		(2,725)		(1,037)
Loss on extinguishment of debt		—		—		—		(615)
Change in fair value of preferred stock warrant liability		34		17		(4)		191
Other income		55		10		172		44
Total other (expense) income		(810)		(282)		(2,557)		(1,417)
Net loss		(4,666)		(2,806)		(15,893)		(13,701)
Accretion of redeemable convertible preferred stock to redemption value		(2,058)		(1,871)		(6,843)		(6,848)
Net loss attributable to common stockholders	$	(6,724)	$	(4,677)	$	(22,736)	$	(20,549)
Net loss per common share, basic and diluted	$	(22.58)	$	(15.84)	$	(76.62)	$	(69.70)
Weighted average common shares outstanding, basic and diluted		297,750		295,228		296,743		294,823
Comprehensive loss:
Net loss	$	(4,666)	$	(2,806)	$	(15,893)	$	(13,701)
Foreign currency translation adjustment		1		—		(2)		—
Comprehensive loss	$	(4,665)	$	(2,806)	$	(15,895)	$	(13,701)

See accompanying notes to unaudited interim consolidated financial statements.

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TELA BIO, INC.

Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

Three and Nine Months Ended September 30, 2019

(In thousands, except share amounts)

(Unaudited)


	Redeemable convertible preferred stock						Stockholders’ deficit
												Accumulated
										Additional		other
	Series A			Series B			Common stock			paid‑in		comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Shares	Amount		capital		loss		deficit		Total
Balance at June 30, 2019	22,501,174	$	34,005	73,587,014	$	107,058	297,502	$	—	$	—	$	(3)	$	(153,744)	$	(153,747)
Vesting of common stock previously subject to repurchase	—		—	—		—	202		—		2		—		—		2
Exercise of stock options	—		—	—		—	413		—		4		—		—		4
Sale of Series B redeemable convertible preferred stock, net of stock issue costs of $26	—		—	1,973,442		2,263	—		—		—		—		—		—
Foreign currency translation adjustment	—		—	—		—	—		—		—		1		—		1
Stock‑based compensation expense	—		—	—		—	—		—		64		—		—		64
Accretion of redeemable convertible preferred stock to redemption value	—		453	—		1,605	—		—		(70)		—		(1,988)		(2,058)
Net loss	—		—	—		—	—		—		—		—		(4,666)		(4,666)
Balance at September 30, 2019	22,501,174	$	34,458	75,560,456	$	110,926	298,117	$	—	$	—	$	(2)	$	(160,398)	$	(160,400)


	Redeemable convertible preferred stock						Stockholders’ deficit
												Accumulated
										Additional		other
	Series A			Series B			Common stock			paid‑in		comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Shares	Amount		capital		loss		deficit		Total
Balance at January 1, 2019	22,501,174	$	33,112	63,032,500	$	91,038	295,717	$	—	$	—	$	—	$	(137,860)	$	(137,860)
Vesting of common stock previously subject to repurchase	—		—	—		—	508		—		3		—		—		3
Exercise of stock options	—		—	—		—	1,892		—		12		—		—		12
Sale of Series B redeemable convertible preferred stock, net of stock issue costs of $141	—		—	12,527,956		14,391	—		—		—		—		—		—
Foreign currency translation adjustment	—		—	—		—	—		—		—		(2)		—		(2)
Stock‑based compensation expense	—		—	—		—	—		—		183		—		—		183
Accretion of redeemable convertible preferred stock to redemption value	—		1,346	—		5,497	—		—		(198)		—		(6,645)		(6,843)
Net loss	—		—	—		—	—		—		—		—		(15,893)		(15,893)
Balance at September 30, 2019	22,501,174	$	34,458	75,560,456	$	110,926	298,117	$	—	$	—	$	(2)	$	(160,398)	$	(160,400)

See accompanying notes to unaudited interim consolidated financial statements.

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TELA BIO, INC.

Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

Three and Nine Months Ended September 30, 2018

(In thousands, except share amounts)

(Unaudited)


	Redeemable convertible preferred stock						Stockholders’ deficit

										Additional
	Series A			Series B			Common stock			paid‑in		Accumulated
	Shares	Amount		Shares	Amount		Shares	Amount		capital		deficit		Total
Balance at June 30, 2018	22,501,174	$	32,205	60,719,500	$	85,470	295,125	$	—	$	—	$	(123,928)	$	(123,928)
Vesting of common stock previously subject to repurchase	—		—	—		—	126		—		1		—		1
Exercise of stock options	—		—	—		—	145		—		1		—		1
Stock‑based compensation expense	—		—	—		—	—		—		61		—		61
Accretion of redeemable convertible preferred stock to redemption value	—		453	—		1,418	—		—		(63)		(1,808)		(1,871)
Net loss	—		—	—		—	—		—		—		(2,806)		(2,806)
Balance at September 30, 2018	22,501,174	$	32,658	60,719,500	$	86,888	295,396	$	—	$	—	$	(128,542)	$	(128,542)


	Redeemable convertible preferred stock						Stockholders’ deficit

										Additional
	Series A			Series B			Common stock			paid‑in		Accumulated
	Shares	Amount		Shares	Amount		Shares	Amount		capital		deficit		Total
Balance at January 1, 2018	22,501,174	$	30,940	59,425,431	$	80,409	293,791	$	—	$	—	$	(108,171)	$	(108,171)
Vesting of common stock previously subject to repurchase	—		—	—		—	448		—		3		—		3
Exercise of stock options	—		—	—		—	1,157		—		6		—		6
Sale of Series B redeemable convertible preferred stock, net of stock issue costs of $151	—		—	1,294,069		1,349	—		—		—		—		—
Stock‑based compensation expense	—		—	—		—	—		—		169		—		169
Accretion of redeemable convertible preferred stock to redemption value	—		1,718	—		5,130	—		—		(178)		(6,670)		(6,848)
Net loss	—		—	—		—	—		—		—		(13,701)		(13,701)
Balance at September 30, 2018	22,501,174	$	32,658	60,719,500	$	86,888	295,396	$	—	$	—	$	(128,542)	$	(128,542)

See accompanying notes to unaudited interim consolidated financial statements.

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TELA BIO, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine months ended
	September 30,
	2019		2018
Cash flows from operating activities:
Net loss	$	(15,893)	$	(13,701)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		206		393
Noncash loss on extinguishment of debt		—		513
Noncash interest expense		395		398
Amortization of intangible assets		228		709
Inventory excess and obsolescence charge		1,093		1,550
Change in fair value of warrants		4		(191)
Stock‑based compensation expense		183		169
Changes in operating assets and liabilities:
Accounts receivable		(983)		(475)
Inventory		(1,023)		(3,287)
Prepaid expenses and other assets		(35)		125
Accounts payable		(2,470)		1,178
Accrued expenses and other liabilities		(44)		(1,541)
Net cash used in operating activities		(18,339)		(14,160)
Cash flows from investing activities:
Payment for intangible asset		(2,500)		—
Purchases of property and equipment		(164)		(42)
Net cash used in investing activities		(2,664)		(42)
Cash flows from financing activities:
Proceeds from issuance of long‑term debt and preferred stock warrants		—		8,000
Repayment of long‑term debt		—		(5,000)
Borrowings under revolving credit facility		—		4,912
Repayments of revolving credit facility		—		(3,668)
Proceeds from issuance of Series B redeemable preferred stock, net		14,415		1,349
Payment of deferred financing costs		—		(830)
Proceeds from exercise of stock options		12		6
Net cash provided by financing activities		14,427		4,769
Effect of exchange rate on cash		(1)		—
Net decrease in cash and cash equivalents		(6,577)		(9,433)
Cash and cash equivalents, beginning of period		17,278		11,346
Cash and cash equivalents, end of period	$	10,701	$	1,913
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	2,330	$	639
Cash paid on loss on extinguishment of debt	$	—	$	102
Supplemental disclosures of noncash investing and financing activities:
Fair value of warrants issued in connection with equity and debt financing	$	—	$	187
Accretion of redeemable preferred stock to redemption value	$	6,843	$	6,848
Intangible assets in accrued expenses and other liabilities	$	—	$	4,000
Deferred Series B equity costs in accounts payable and accrued expenses	$	24	$	—
Deferred offering costs in accounts payable and accrued expenses	$	1,731	$	—
Issuance of common stock for early exercised stock options	$	3	$	3

See accompanying notes to unaudited interim consolidated financial statements.

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TELA BIO, INC.

Notes to Unaudited Interim Consolidated Financial Statements

(1) Background

TELA Bio, Inc. (the “Company”) was incorporated in the state of Delaware on April 17, 2012 and wholly owns TELA Bio Limited, a company incorporated in the United Kingdom. The Company is focused on the commercialization and sale of OviTex Reinforced Tissue Matrix, which utilizes surgical reconstruction medical device technology licensed from a strategic partner and on the research and development of additional medical devices with this strategic partner and on other internally developed technologies. In April 2019, the Company received 510(k) clearance from the United States Food and Drug Administration (“FDA”) for OviTex PRS Reinforced Tissue Matrix (“OviTex PRS”), which addresses unmet needs in plastic and reconstructive surgery. The Company’s principal corporate office and research facility is located in Malvern, Pennsylvania.

(2) Risks and Liquidity

The Company’s operations to date have focused on commercializing products, developing and acquiring technology and assets, business planning, raising capital and organization and staffing. The Company has incurred recurring losses and negative cash flows from operations since inception and has an accumulated deficit of $160.4 million as of September 30, 2019. The Company anticipates incurring additional losses until such time, if ever, it can generate sufficient revenue from its products to cover its expenses and has limited resources available to fund current commercialization and research and development activities.

In November 2019, the Company closed its initial public offering (“IPO”) in which the Company issued and sold 4,398,700 shares of its common stock at a public offering price of $13.00 per share, including 398,700 shares of the Company’s common stock sold pursuant to the underwriters’ option to purchase additional shares. The Company received net proceeds of $50.7 million after deducting underwriting discounts, commissions and other offering expenses.

The operations of the Company are subject to certain risks and uncertainties including, among others, uncertainty of product development, technological uncertainty, commercial acceptance of any developed products, alternative competing technologies, dependence on collaborative partners, uncertainty regarding patents and proprietary rights, comprehensive government regulations, and dependence on key personnel.

(3) Summary of Significant Accounting Policies

The Company’s complete summary of significant accounting policies can be found in “Note 3, Summary of Significant Accounting Policies” in the audited consolidated financial statements included in the Company’s Prospectus dated November 7, 2019 filed with the SEC. Any reference in these notes to applicable guidance is meant to refer to generally accepted accounting principles (“GAAP”) in the United States as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”).

Interim Financial Statements

The accompanying unaudited interim consolidated financial statements have been prepared from the books and records of the Company in accordance with GAAP for interim financial information and Rule 10‑01 of Regulation S‑X promulgated by the SEC, which permits reduced disclosures for interim periods. All adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the accompanying consolidated balance sheets and statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ deficit, and cash flows have been made. Although these interim consolidated financial statements do not include all of the information and footnotes required for complete annual consolidated financial statements, management believes the disclosures are adequate to make the information presented not misleading. Unaudited interim results of operations and cash flows are not necessarily indicative of the results that may be expected for the full year. Unaudited interim consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements and footnotes included in the Prospectus.

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TELA BIO, INC.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

Reverse Stock Split

The Company effected a one-for-24.69 reverse stock split of its common stock on October 28, 2019. The reverse stock split combined approximately 25 shares of the Company's issued and outstanding common stock into one share of common stock and correspondingly adjusted the conversion price of its redeemable convertible preferred stock. No fractional shares were issued in connection with the reverse stock split. Any fractional share resulting from the reverse stock split was rounded down to the nearest whole share, and in lieu of any fractional shares, the Company will pay in cash to the holders of such fractional shares an amount equal to the fair value, as determined by the board of directors, of such fractional shares. All common stock, per share and related information presented in the unaudited interim consolidated financial statements and accompanying notes have been retroactively adjusted to reflect the reverse stock split.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant judgments are employed in estimates used to determine the fair value of redeemable convertible preferred stock, preferred stock warrant liability and stock‑based awards issued, and recoverability of the carrying value of the Company’s inventory. As future events and their effects cannot be determined with precision, actual results may differ significantly from these estimates.

Deferred Offering Costs

The Company capitalizes certain legal, accounting, and other third‑party fees that are directly associated with in‑process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs will be recorded as a reduction of additional paid‑in capital generated as a result of the offering. Should the equity financing no longer be considered probable of being consummated, all deferred offering costs would be charged to operating expenses in the consolidated statement of operations. Deferr