SEC Filing | TELA Bio, Inc.

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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, 2022


☐	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: 001-39130

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:


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock, $0.001 par value per share	TELA	The Nasdaq Global Market

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 such files). ⌧ Yes ◻ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 November 1, 2022, the registrant had 19,159,145 shares of Common Stock, $0.001 par value per share, outstanding.

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PART I FINANCIAL INFORMATION

Item 1.	Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Mine Safety Disclosures	33

Item 5.	Other Information	33

Item 6.	Exhibits	34

	Signatures	35

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements made in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (“Quarterly Report”) 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:

●

the full extent of the impact on our business from the pandemic resulting from the coronavirus and the disease it causes, including variants thereof (“COVID-19”), is highly uncertain and difficult to predict and it may continue to impact our business, results of operations and financial condition, including our revenue (resulting from deferrals of elective procedures using our products), expenses, manufacturing capability, supply chain integrity, research and development activities, and employee-related matters, including compensation;

●

any future developments around COVID-19 and the uncertainty of COVID-19, including new information that may emerge, changes in the rate of COVID-19 transmission and infection, the emergence of new variants of COVID-19, the availability of vaccinations for COVID-19 and new variants thereof, changes in the level of restrictions imposed by governmental authorities (and the resulting impact on the frequency of surgical procedures using our products), access to hospitals, labor and hospital staffing shortages, and other actions taken to contain or treat COVID-19, as well as the economic impact on regional, national and international customers and markets;

●

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 European Union and the United Kingdom;

●

the performance of Aroa Biosurgery Ltd. (“Aroa”), our exclusive contract manufacturer, in connection with the production of our OviTex portfolio products and the development of future products within these product lines;

●

our ability to maintain our supply chain integrity and expand our supply chain to manage increased demand for 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 for our current products 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 maintain regulatory approval for our products;

●

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

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●

regulatory developments in the United States and internationally;

●

the potential impact of healthcare reform in the United States, including the Inflation Reduction Act of 2022, and measures being taken worldwide designed to reduce healthcare costs;

●

the volatility of capital markets and other adverse macroeconomic factors, including due to inflationary pressures, economic slowdown or recession, geopolitical tensions or the outbreak of hostilities or war;

●

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 public offering of common stock or future financings, if any;

●

the occurrence of adverse safety events, restrictions on use with our products or product liability claims; and

●

other risks and uncertainties, including those listed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “Annual Report”), our Quarterly Reports on Form 10-Q and the other documents we file with the Securities and Exchange Commission (the “SEC”).

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. 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,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	54,226	$	43,931
Accounts receivable, net		5,688		4,234
Inventory		12,138		7,658
Prepaid expenses and other assets		1,903		3,232
Total current assets		73,955		59,055
Property and equipment, net		1,748		1,186
Intangible assets, net		2,594		2,303
Right-of-use assets		1,266		—
Total assets	$	79,563	$	62,544

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	4,856	$	2,414
Accrued expenses and other current liabilities		10,358		8,161
Total current liabilities		15,214		10,575
Long‑term debt		39,766		—
Long‑term debt with related party		—		31,491
Other long‑term liabilities		1,282		380
Total liabilities		56,262		42,446

Stockholders’ equity:
Preferred stock; $0.001 par value: 10,000,000 shares authorized; no shares issued and outstanding		—		—
Common stock; $0.001 par value: 200,000,000 shares authorized; 19,159,145 and 14,529,606 shares issued and 19,159,145 and 14,529,577 shares outstanding at September 30, 2022 and December 31, 2021, respectively		19		15
Additional paid-in capital		287,266		250,064
Accumulated other comprehensive income (loss)		262		(52)
Accumulated deficit		(264,246)		(229,929)
Total stockholders’ equity		23,301		20,098
Total liabilities and stockholders’ equity	$	79,563	$	62,544

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 September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Revenue	$	11,159	$	7,654	$	29,796	$	21,089
Cost of revenue (excluding amortization of intangible assets)		3,745		2,976		10,219		7,707
Amortization of intangible assets		95		76		709		228
Gross profit		7,319		4,602		18,868		13,154
Operating expenses:
Sales and marketing		11,172		6,948		31,605		20,749
General and administrative		3,532		3,462		10,620		9,184
Research and development		2,102		1,409		6,211		5,018
Total operating expenses		16,806		11,819		48,436		34,951
Loss from operations		(9,487)		(7,217)		(29,568)		(21,797)
Other expense:
Interest expense		(1,032)		(922)		(2,877)		(2,675)
Loss on extinguishment of debt		—		—		(1,228)		—
Other expense		(195)		(127)		(644)		(185)
Total other expense		(1,227)		(1,049)		(4,749)		(2,860)
Net loss	$	(10,714)	$	(8,266)	$	(34,317)	$	(24,657)
Net loss per common share, basic and diluted	$	(0.64)	$	(0.57)	$	(2.24)	$	(1.71)
Weighted average common shares outstanding, basic and diluted		16,758,573		14,485,688		15,293,094		14,461,174
Comprehensive loss:
Net loss	$	(10,714)	$	(8,266)	$	(34,317)	$	(24,657)
Foreign currency translation adjustment		133		38		314		28
Comprehensive loss	$	(10,581)	$	(8,228)	$	(34,003)	$	(24,629)

See accompanying notes to unaudited interim consolidated financial statements.

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TELA Bio, Inc.

Consolidated Statements of Stockholders’ Equity

Three and Nine Months Ended September 30, 2022

(In thousands, except share amounts)

(Unaudited)


						Accumulated
				Additional		other
	Common stock			paid‑in		comprehensive		Accumulated
	Shares	Amount		capital		income		deficit		Total
Balance at July 1, 2022	14,557,560	$	15	$	251,846	$	129	$	(253,532)	$	(1,542)
Vesting of share-based awards and exercise of stock options	2,115		—		1		—		—		1
Shares withheld for employee taxes	(530)		—		(4)		—		—		(4)
Foreign currency translation adjustment	—		—		—		133		—		133
Stock‑based compensation expense	—		—		1,027		—		—		1,027
Sale of common stock, net of underwriting discounts, commissions and offering costs	4,600,000		4		34,396		—		—		34,400
Net loss	—		—		—		—		(10,714)		(10,714)
Balance at September 30, 2022	19,159,145	$	19	$	287,266	$	262	$	(264,246)	$	23,301


						Accumulated
				Additional		other
	Common stock			paid‑in		comprehensive		Accumulated
	Shares	Amount		capital		income (loss)		deficit		Total
Balance at January 1, 2022	14,529,577	$	15	$	250,064	$	(52)	$	(229,929)	$	20,098
Vesting of common stock previously subject to repurchase	29		—		—		—		—		—
Vesting of share-based awards and exercise of stock options	42,987		—		13		—		—		13
Shares withheld for employee taxes	(13,448)		—		(157)		—		—		(157)
Foreign currency translation adjustment	—		—		—		314		—		314
Stock‑based compensation expense	—		—		2,950		—		—		2,950
Sale of common stock, net of underwriting discounts, commissions and offering costs	4,600,000		4		34,396		—		—		34,400
Net loss	—		—		—		—		(34,317)		(34,317)
Balance at September 30, 2022	19,159,145	$	19	$	287,266	$	262	$	(264,246)	$	23,301

See accompanying notes to unaudited interim consolidated financial statements.

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TELA Bio, Inc.

Consolidated Statements of Stockholders’ Equity

Three and Nine Months Ended September 30, 2021

(In thousands, except share amounts)

(Unaudited)



						Accumulated
				Additional		other
	Common stock			paid‑in		comprehensive		Accumulated
	Shares	Amount		capital		income (loss)		deficit		Total
Balance at July 1, 2021	14,471,774	$	14	$	248,076	$	(81)	$	(213,044)	$	34,965
Vesting of common stock previously subject to repurchase	36		—		—		—		—		—
Exercise of stock options	31,708		1		258		—		—		259
Foreign currency translation adjustment	—		—		—		38		—		38
Stock‑based compensation expense	—		—		733		—		—		733
Net loss	—		—		—		—		(8,266)		(8,266)
Balance at September 30, 2021	14,503,518	$	15	$	249,067	$	(43)	$	(221,310)	$	27,729



						Accumulated
				Additional		other
	Common stock			paid‑in		comprehensive		Accumulated
	Shares	Amount		capital		income (loss)		deficit		Total
Balance at January 1, 2021	14,437,107	$	14	$	245,736	$	(71)	$	(196,653)	$	49,026
Vesting of common stock previously subject to repurchase	118		—		—		—		—		—
Exercise of stock options	54,293		1		410		—		—		411
Foreign currency translation adjustment	—		—		—		28		—		28
Stock‑based compensation expense	12,000		—		2,839		—		—		2,839
Reclassification of liability-classified stock-based compensation awards	—		—		82		—		—		82
Net loss	—		—		—		—		(24,657)		(24,657)
Balance at September 30, 2021	14,503,518	$	15	$	249,067	$	(43)	$	(221,310)	$	27,729

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,
	2022		2021
Cash flows from operating activities:
Net loss	$	(34,317)	$	(24,657)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		271		170
Noncash interest expense		507		488
Noncash loss on extinguishment of debt		1,228		—
Amortization of intangible assets		709		228
Net changes in operating lease ROU assets and liabilities		(26)		—
Inventory excess and obsolescence charge		1,809		1,334
Stock‑based compensation expense		2,950		2,839
Change in operating assets and liabilities:
Accounts receivable, net		(1,531)		(896)
Inventory		(6,540)		(3,701)
Prepaid expenses and other assets		1,322		180
Accounts payable		2,291		1,586
Accrued expenses and other current and long-term liabilities		799		1,561
Foreign currency remeasurement loss		763		24
Net cash used in operating activities		(29,765)		(20,844)
Cash flows from investing activities:
Purchase of property and equipment		(826)		(338)
Net cash used in investing activities		(826)		(338)
Cash flows from financing activities:
Proceeds from sale of common stock, net of underwriting discounts, commissions and offering costs		34,675		—
Proceeds from issuance of long‑term debt		40,000		—
Repayment of long‑term debt		(30,000)		—
Payment of debt financing costs		(3,460)		—
Proceeds from exercise of stock options		13		411
Payment of withholding taxes related to stock-based compensation to employees		(157)		—
Net cash provided by financing activities		41,071		411
Effect of exchange rate on cash and cash equivalents		(185)		13
Net increase (decrease) in cash and cash equivalents		10,295		(20,758)
Cash and cash equivalents, beginning of period		43,931		74,394
Cash and cash equivalents, end of period	$	54,226	$	53,636
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	2,370	$	2,187
Supplemental disclosures of noncash investing and financing activities:
Property and equipment in accounts payable and accrued expenses and other current liabilities	$	8	$	97
Offering costs in accounts payable and accrued expenses and other current liabilities	$	275	$	—
Reclassification of liability-classified stock-based compensation awards to equity-classified	$	—	$	82
Intangible asset in accrued expenses and other liabilities	$	1,000	$	—
Operating lease ROU asset exchanged for operating lease liabilities	$	1,376	$	—
Tenant improvement and deferred rent reclassified to operating lease liabilities	$	380	$	—
Operating lease liabilities assumed for operating lease ROU assets	$	1,756	$	—

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 a commercial-stage medical technology company focused on providing innovative soft-tissue reconstruction solutions that optimize clinical outcomes by prioritizing the preservation and restoration of the patient’s own anatomy. OviTex Reinforced Tissue Matrix (“OviTex”), the Company’s first portfolio of products, addresses unmet needs in hernia repair and abdominal wall reconstruction by combining the benefits of biologic matrices and polymer materials while minimizing their shortcomings, at a cost-effective price. OviTex PRS Reinforced Tissue Matrix (“OviTex PRS”), the Company’s second portfolio of products, addresses unmet needs in plastic and reconstructive surgery. The Company’s principal corporate office and research facility is located in Malvern, Pennsylvania.

The Company has been impacted by the pandemic resulting from the coronavirus and the disease it causes, including variants thereof (“COVID-19”). To date, among other impacts on the Company’s business related to the pandemic, physicians and their patients have been required by state mandates, or have chosen or are still choosing to, defer elective surgery procedures in which the Company’s products otherwise would be used. There remains uncertainty and lack of visibility regarding the Company’s near-term revenue growth prospects and product development plans due to the rapidly evolving environment and continued uncertainties resulting from the COVID-19 pandemic and its effects on the frequency of surgical procedures using the Company’s products, including through reduced patient access to hospitals, labor and hospital staffing shortages, and other similar actions taken to address COVID-19. Although the Company continues to monitor developments related to COVID-19, the full extent of the impact of the COVID-19 pandemic on the Company’s business, results of operations and financial condition, including revenue, expenses, manufacturing capability, supply chain integrity, staffing availability, research and development costs and employee-related compensation, will depend on future developments that are highly uncertain. This includes new information that may emerge concerning COVID-19, the actions taken to mitigate the spread of or treat COVID-19, or to address challenges related to or arising from the COVID-19 pandemic, the emergence of new variants of COVID-19, as well as the economic impact on local, regional, national and international customers and markets.

(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 $264.2 million as of September 30, 2022. The Company anticipates incurring additional losses until such time, if ever, it can generate sufficient revenue from its products to cover its expenses.

In August 2022, the Company completed an underwritten public offering in which the Company issued and sold 4,600,000 shares of its common stock at a public offering price of $8.00 per share. The Company received net proceeds of $34.4 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, the uncertainty of product development, the impact of COVID-19 and the emergence of any variants thereof on the business, ongoing economic uncertainty, including as a result of inflationary pressures and the measures undertaken by various governments to address them, geopolitical factors such as the conflict between Russia and Ukraine, 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 consolidated financial statements included in the Company’s Annual Report on Form 10-K

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TELA Bio, Inc.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

for the year ended December 31, 2021. 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, stockholders’ equity 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. The unaudited interim results of operations and cash flows are not necessarily indicative of the results that may be expected for the full year. The unaudited interim consolidated financial statements and footnotes should be read in conjunction with the consolidated financial statements and footnotes included in the Annual Report on Form 10-K for the year ended December 31, 2021.

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 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.

Revenue Recognition

Under ASC Topic 606, Revenue from Contracts with Customers, an entity recognizes revenue when its customer obtains control of the promised good, in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods. The Company performs the following five steps to recognize revenue under ASC Topic 606: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only recognizes revenue when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer.

A significant portion of the Company’s revenue is generated from product shipped to a customer or from consigned inventory maintained at hospitals. Revenue from the sale of consigned products is recognized when control is transferred to the customer, which occurs at the time the product is used in a surgical procedure. For product that is not held on consignment, the Company recognizes revenue when control transfers to the customer, which occurs at the time the product is shipped or delivered. For all of the Company’s customer contracts, the only identified performance obligation is providing the product to the customer.

Revenue is recognized at the estimated net sales price which includes estimates of variable consideration. The Company enters into contracts with certain third-party payors for the payment of rebates with respect to the utilization of its products. These rebates are based on contractual percentages. The Company estimates and records these rebates in the same period the related revenue is recognized, resulting in a reduction of product revenue.

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TELA Bio, Inc.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

Payment terms with customers do not exceed one year and, therefore, the Company does not account for a financing component in these arrangements. There are no incremental costs of obtaining a contract that would rise to or enhance an asset other than product costs, which are a component of inventory. The Company expenses incremental costs of obtaining a contract with a customer (e.g., sales commissions) when incurred as the period of benefit is less than one year. Fees charged to customers for shipping are recognized as revenue.

The following table presents revenue disaggregated by our portfolio of products (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
OviTex	$	7,839	$	6,072	$	20,528	$	16,500
OviTex PRS		3,287		1,582		9,188		4,589
Other		33		—		80		—
Total revenue	$	11,159	$	7,654	$	29,796	$	21,089

Sales outside of the United States were immaterial for the three and nine months ended September 30, 2022 and 2021.

Fair value of financial instruments

Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction among market participants. Fair value determination in accordance with applicable accounting guidance requires that a number of significant judgments are made. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or as required for disclosure purposes by applicable accounting guidance on disclosures about fair value of financial instruments. Depending on the nature of the assets and liabilities, various valuation techniques and assumptions are used when estimating fair value. The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, other assets, and accounts payable are shown at cost, which approximates fair value due to the short-term nature of these instruments. Due to the related-party relationship of the credit facility (the “OrbiMed Credit Facility”) with OrbiMed Royalty Opportunities II, LP (“OrbiMed”) (Note 6), it was impractical to determine the fair value of the debt.

The Company follows the provisions of FASB ASC Topic 820, Fair Value Measurement, for financial assets and liabilities measured on a recurring basis. The guidance requires fair value measurements be classified and disclosed in one of the following three categories:

●

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

●

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liabilities.

●

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

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TELA Bio, Inc.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liabilities measured at fair value on a recurring basis (in thousands):


	Fair value measurement at reporting date using
	Quoted prices in
	active markets		Significant other		Significant
	for identical		observable		unobservable
	assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)
September 30, 2022:
Cash equivalents – money market fund	$	50,677	$	—	$	—

December 31, 2021:
Cash equivalents – money market fund	$	41,396	$	—	$	—

Net loss per common share

Basic and diluted net loss per common share is determined by dividing net loss by the weighted-average shares of common stock outstanding during the reporting period. A net loss cannot be diluted, so when the Company is in a net loss position, basic and diluted net loss per common share are the same.

The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares outstanding for the periods presented, as they would be antidilutive.


	Three and nine months ended September 30,
	2022	2021
Stock options (including shares subject to repurchase)	2,009,189	1,708,601
Unvested restricted stock units	306,722	163,978
Common stock warrants	88,556	88,556
Total	2,404,467	1,961,135

Recently Issued Accounting Pronouncements

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

In February 2016, the FASB issued ASU No. 2016-02, Leases, (“ASU 2016-02”) which requires a lessee to record a right-of-use (“ROU”) asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the consolidated financial statements as its date of initial application. The Company adopted ASU 2016-02 on January 1, 2022 using the modified retrospective transition method and elected the transition practical expedients to not reassess lease identification, lease classification and initial indirect costs related to those leases entered into prior to the date of application.

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TELA Bio, Inc.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which provides guidance for recognizing credit losses on financial instruments based on an estimate of current expected credit losses model. The standard is effective for the Company beginning January 1, 2023, and the adoption of this guidance is not expected to have a significant impact on the consolidated financial statements and related disclosures.

(4) Leases

The Company leases office and laboratory space in Malvern, Pennsylvania under a noncancelable lease (the “Malvern Lease”). The Malvern Lease, which was concluded to be an operating lease, was amended in December 2020 to extend the term of the lease from May 2021 to May 2028. The Malvern Lease has annual scheduled payment increases and provides the Company a renewal option for an additional term of 60 months at the end of the lease term. The Company evaluates renewal options at lease inception and on an ongoing basis and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. As the Company is not reasonably certain to exercise the renewal option, the additional 60-month term has been excluded.

On January 1, 2022 and upon adoption of ASU 2016-02, the Company recorded an operating lease liability of $1.8 million and an operating lease ROU asset of $1.4 million related to the Malvern Lease. The Company also eliminated approximately $0.4 million of deferred rent and tenant allowance liabilities as of January 1, 2022 as these components are reflected in the operating lease ROU asset.

Operating lease leasehold improvements are depreciated over the lesser of the useful lives of the leasehold improvements or the lease term. The tenant allowance was historically amortized over the initial, non-cancelable term of the Malvern Lease.

The Company's lease does not provide an implicit rate, and therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company used an incremental borrowing rate of 9.75% to discount the Malvern Lease payments included in the operating lease liabilities recognized upon adoption of ASU 2016-02.

The Company recognized $0.1 million and $0.2 million of lease cost during the three and nine months ended September 30, 2022. Cash paid for amounts included in the measurement of operating lease liabilities was $0.1 million and $0.3 million for the three and nine months ended September 30, 2022, and this amount is included in operating activities in the consolidated statements of cash flows. As of September 30, 2022, the remaining lease term for the Malvern Lease is 5.7 years.

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TELA Bio, Inc.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

The following table reconciles the undiscounted future minimum lease payments (displayed in aggregate by year) under non-cancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on the consolidated balance sheets as of September 30, 2022 (in thousands):


Remainder of 2022	$	88
2023		358
2024		366
2025		375
2026		383
2027		392
Thereafter		165
Total undiscounted future minimum lease payments	$	2,127
Less imputed interest		(507)
Total operating lease liabilities	$	1,620

At December 31, 2021, the Company’s future minimum lease payments under non-cancelable operating leases for the five years ending December 31, 2022 through 2026 and thereafter were as follows: $0.3 million, $0.4 million, $0.4 million, $0.4 million, $0.4 million and $0.5 million, respectively.

As of September 30, 2022, $0.3 million representing the current portion of operating lease liabilities is included in accrued expenses and other current liabilities in the consolidated balance sheets and $1.3 million representing the long-term portion of operating lease liabilities is included in other long-term liabilities in the consolidated balance sheets.

(5) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	September 30,		December 31,
	2022		2021
Compensation and related benefits	$	5,126	$	4,976
Third-party and professional fees		2,431		2,233
Amounts due to contract manufacturer		2,248		842
Current portion of operating lease liabilities		338		—
Research and development expenses		90		31
Other		125		79
Total accrued expenses and other current liabilities	$	10,358	$	8,161

The Company has a License, Product Development, and Supplier Agreement with its contract manufacturer which requires payments upon the achievement of certain cumulative product sales. In June 2022, it became probable that the Company would achieve the sales milestones in the European territory, and as such, the Company recorded a liability of $1.0 million included in amounts due to contract manufacturer above and a corresponding developed technology right intangible asset.

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TELA Bio, Inc.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

(6) Long-term Debt

Long-term debt consisted of the following (in thousands):


	September 30,		December 31,
	2022		2021
MidCap Term Loan	$	40,000	$	—
OrbiMed Term Loan (related party)		—		30,000
End of term charge		2,000		3,000
Unamortized end of term charge and issuance costs		(2,234)		(1,509)
Long-term debt	$	39,766	$	31,491

MidCap Term Loan

On May 26, 2022, the Company entered into the Credit and Security Agreement (the “MidCap Credit Agreement”) with MidCap Financial Trust, as agent (the “Agent”), and certain lender parties thereto. The MidCap Credit Agreement provides for up to $50.0 million in term loans (the “MidCap Term Loans”), consisting of a $40.0 million Tranche 1 (“Tranche 1”) and a $10.0 million Tranche 2 (“Tranche 2”). Upon closing, the Company borrowed $40.0 million of Tranche 1 and used a portion of the proceeds to repay borrowings under the OrbiMed Credit Facility (described below) and intends to use the remaining proceeds to fund operations and other general corporate purposes. The Company will be eligible to borrow Tranche 2 at the Company’s option upon meeting certain conditions, including, but not limited to, reaching $65.0 million of net product revenue over the preceding four quarters by fiscal year end 2023.

Pursuant to the MidCap Credit Agreement, the Company provided a first priority security interest in all existing and future acquired assets, including intellectual property, owned by the Company. The MidCap Credit Agreement contains certain covenants that limit the Company’s ability to engage in certain transactions that may be in the Company’s long-term best interests, including the incurrence of additional indebtedness, effecting certain corporate changes, making certain investments, acquisitions or dispositions and paying dividends.

The MidCap Credit Agreement also contains customary indemnification obligations and customary events of default, including, among other things, (i) non-payment, (ii) breach of warranty, (iii) non-performance of covenants and obligations, (iv) default on other indebtedness, (v) judgments, (vi) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) key permit events, (x) termination of a pension plan, (xi) regulatory matters, (xii) material adverse effect and (xiii) breach of material contracts.

In addition, the Company must maintain minimum net revenue levels tested quarterly. In the event of default under the MidCap Credit Agreement, the Company would be required to pay interest on principal and all other due and unpaid obligations at the current rate in effect plus 2%.

The MidCap Term Loans mature on May 1, 2027 and bear interest at a rate equal to 6.25% plus the greater of one-month Term SOFR (as defined in the MidCap Credit Agreement) or 1.0%. The Company is required to make 36 monthly interest payments beginning on June 1, 2022 (the “Interest-Only Period”). If the Company is in covenant compliance at the end of the Interest-Only Period, the Company will have the option to extend the Interest-Only Period by 12 months to 48 monthly interest payments, followed by 12 months of straight-line amortization, with the entire principal payment due at maturity. If the Company is not in covenant compliance at the end of the Interest-Only Period, the Company is required to make 24 months of straight-line amortization payments, with the entire principal amount due at maturity.

Subject to certain limitations, the MidCap Term Loans have a prepayment fee equal to 3.0% of the prepaid principal amount for the first year following the closing date of the MidCap Term Loans, 2.0% of the prepaid principal amount for the second year following the closing date and 1.0% of the prepaid principal amount for the third year following the closing date and thereafter. The Company is also required to pay an exit fee at the time of maturity or prepayment event equal to 5% of all principal borrowings (the “End of Term Charge”) (or in the event of a prepayment event, the amount

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TELA Bio, Inc.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

of principal being prepaid). Interest expense associated with the MidCap Credit Facility recorded for the nine months ended September 30, 2022 was $1.4 million, of which $0.2 million was related to the amortization of debt issuance costs.

OrbiMed Term Loan (Related Party)

In November 2018, the Company entered into the OrbiMed Credit Facility with OrbiMed, a related party as the lender is affiliated with a stockholder of the Company, which consisted of up to $35.0 million in term loans (the “OrbiMed Term Loans”). The OrbiMed Term Loans consisted of two tranches, a $30.0 million Tranche 1 (“First Tranche”) and a $5.0 million Tranche 2 (“Second Tranche”). In November 2018, the Company borrowed $30.0 million of the First Tranche. The Company elected not to borrow the Second Tranche prior to its expiration on December 31, 2019. On May 26, 2022, the Company entered into the MidCap Credit Agreement and upon closing used a portion of the proceeds to repay all borrowings under the OrbiMed Credit Facility.

The OrbiMed Term Loan bore interest at a rate equal to 7.75% plus the greater of one-month LIBOR or 2.0% until the aggregate principal, interest and End of Term Charge of $3.0 million were paid with part of the proceeds received from the MidCap Credit Agreement. As a result of these payments, a $1.2 million loss on extinguishment was recorded during the nine months ended September 30, 2022. Interest expense associated with the OrbiMed Credit Facility recorded for the nine months ended September 30, 2022, was $1.5 million, of which $0.3 million was related to the amortization of debt issuance costs. Interest expense associated with the OrbiMed Credit Facility recorded for the nine months ended September 30, 2021, was $2.7 million, of which $0.5 million was related to the amortization of debt issuance costs.

(7) Stockholders’ Equity

In December 2020, the Company entered into an Equity Distribution Agreement (the “Equity Agreement”) with Piper Sandler & Co (the “Sales Agent”) in connection with the establishment of an at-the-market offering program under which it may sell up to an aggregate of $50.0 million of shares of the Company’s common stock, from time to time through the Sales Agent. No sales were made under the Equity Agreement during the nine months ended September 30, 2022.

Warrants

The Company had the following warrants outstanding to purchase common stock at September 30, 2022:


			Exercise	Expiration
	Outstanding		price	dates
Common stock warrants	8,379	$	28.65	2028
Common stock warrants	80,177		28.65	2027
	88,556

(8) Stock-Based Compensation

The Company has two equity incentive plans: the 2012 Stock Incentive Plan and the Amended and Restated 2019 Equity Incentive Plan. New awards can only be granted under the Amended and Restated 2019 Equity Incentive Plan (the “Plan”). At September 30, 2022, 989,491 shares of common stock were available for future issuances under the Plan. The Plan is subject to an annual increase, subject to prior approval by the Company’s board of directors, equal to the lesser of (i) 432,442 shares, (ii) 4% of the shares outstanding on the last day of the immediately preceding fiscal year and (iii) such smaller number of shares as determined by the board of directors. The Plan provides for the grant of incentive

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TELA Bio, Inc.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

stock options, nonqualified stock options, restricted stock awards, restricted stock units and/or stock appreciation rights to employees, directors, and other persons, as determined by the Company’s board of directors. The Company estimates forfeitures that it expects will occur and adjusts expense for actual forfeitures in the periods they occur.

The Company measures employee and nonemployee stock-based awards at grant-date fair value and records compensation expense ratably over the vesting period of the award. The Company recorded stock-based compensation expense in the following expense categories of the accompanying consolidated statements of operations and comprehensive loss (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Sales and marketing	$	353	$	257	$	1,000	$	694
General and administrative		522		359		1,521		1,110
Research and development		152		117		429		1,035
Total stock‑based compensation	$	1,027	$	733	$	2,950	$	2,839

Stock Options

The Company’s stock options vest based on the terms in each award agreement and generally vest over four years and have a term of 10 years. The following table summarizes stock option activity:


				Weighted
				average
		Weighted		remaining
	Number of	average exercise		contractual term
	shares	price per share		(years)
Outstanding at January 1, 2022	1,706,409	$	11.88
Granted	380,360		10.44
Exercised	(2,204)		6.08
Canceled/forfeited	(75,376)		13.30
Outstanding at September 30, 2022	2,009,189	$	11.57	7.32
Vested and expected to vest at September 30, 2022	1,956,285	$	11.55	7.27
Exercisable at September 30, 2022	1,167,504	$	10.99	6.32

Included in outstanding options at September 30, 2022, were 312,075 stock options granted outside of the Plan. These grants were made pursuant to the Nasdaq inducement grant exception in accordance with Nasdaq listing rule 5635(c)(4). At September 30, 2022, the aggregate intrinsic value of both outstanding options and exercisable options was $1.2 million.

The 2012 Stock Incentive Plan provided the holders of stock options an election to early exercise prior to vesting. The Company had the right, but not the obligation, to repurchase early exercised options without transferring any appreciation to the employee if the employee terminates employment before the end of the original vesting period. The repurchase price was the lesser of the original exercise price or the then fair value of the common stock.

The following table summarizes activity relating to early exercise of stock options:


		Number of
		shares
Unvested balance at January 1, 2022		29
Vested		(29)
Unvested balance at September 30, 2022		—

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TELA Bio, Inc.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

The weighted average grant-date fair value per share of options granted was $6.61 during the nine months ended September 30, 2022. The aggregate intrinsic value of options exercised was $1,000 and $11,000 for the three and nine months ended September 30, 2022, respectively. At September 30, 2022, the total unrecognized compensation expense related to unvested employee and nonemployee stock option awards was $5.4 million, which is expected to be recognized in expense over a weighted-average period of approximately 2.5 years.

Estimating Fair Value of Stock Options

The fair value of each grant of stock options was determined by the Company using the methods and assumptions discussed below. Certain of these inputs are subjective and generally require judgment to determine.

Expected term – The expected term of stock options represents the weighted-average period the stock options are expected to be outstanding. The Company uses the simplified method for estimating the expected term as provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average time to vesting and the contractual life of the options.

Expected volatility – Due to the Company’s limited operating history and lack of sufficient company-specific historical or implied volatility, the expected volatility assumption was determined by examining the historical volatilities of a group of industry peers, including the Company, whose share prices are publicly available.

Risk-free interest rate – The risk-free rate assumption is based on U.S. Treasury instruments, the terms of which were consistent with the expected term of the Company’s stock options.

Expected dividend – The Company has not paid and does not intend to pay dividends.

The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model and the weighted average assumptions in the table below:


	Nine months ended
	September 30, 2022
Expected dividend yield	—
Expected volatility	68.9	%
Risk‑free interest rate	2.28	%
Expected term (in years)	6.19

Restricted Stock Units

The Company’s restricted stock units (“RSUs”) vest based on the terms in each award agreement and generally vest over four years. The following table summarizes restricted stock units for the Plan:


		Number of
		shares
Outstanding at January 1, 2022		163,043
Granted		190,450
Vested		(40,783)
Canceled/forfeited		(5,988)
Outstanding at September 30, 2022		306,722

The weighted average grant-date fair value per RSU granted was $11.30 during the nine months ended September 30, 2022. The aggregate intrinsic value of RSUs outstanding was $2.6 million at September 30, 2022. The total unrecognized compensation expense at September 30, 2022 related to RSUs was $2.8 million, which is expected to be recognized in expense over a weighted-average period of approximately 2.9 years.

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TELA Bio, Inc.

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

(9) Related-Party Transactions

On November 16, 2018, the Company entered into a senior secured term loan facility with OrbiMed, an entity affiliated with an owner of a material amount of the Company’s outstanding voting securities. The terms of the debt and related components are described in more detail in Note 6. On May 26, 2022, the Company entered into the MidCap Credit Agreement and upon closing used a portion of the proceeds to repay all borrowings under the OrbiMed Credit Facility, and terminated the OrbiMed Credit Facility.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as other sections in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (the “Quarterly Report”), should be read in conjunction with our unaudited interim consolidated financial statements and related notes thereto included elsewhere herein and the consolidated financial statements and notes thereto for the year ended December 31, 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operation, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 23, 2022. In addition to historical financial information, some