TELA BIO, INC. 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 endedJune 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 endedDecember 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 endedDecember 31, 2021 (the "Annual Report") filed with theSecurities and Exchange Commission ("SEC") onMarch 23, 2022 . In addition to historical financial information, some of the information contained in the following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts, including statements regarding our future results of operations and financial position, business strategy, current and prospective products, product approvals, research and development costs, current and prospective collaborations, timing and likelihood of success, plans and objectives of management for future operations and future results of current and anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Overview
We are 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.
Our growing product portfolio is purposefully designed to leverage the patient's
natural healing response while minimizing long-term exposure to permanent
synthetic materials. We are committed to delivering our advanced technologies
with a strong economic value proposition to assist surgeons and institutions in
providing next-generation soft-tissue repair solutions to more patients
worldwide.
Our first portfolio of products, the OviTex Reinforced Tissue Matrix ("OviTex"),
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. Our OviTex products
have received 510(k) clearance from the U.S. Food and Drug Administration
("FDA"), which clearance was obtained and is currently held by Aroa Biosurgery
Ltd. ("Aroa"), our exclusive manufacturer and supplier of these products. We
recently announced 24-month results of our single arm, multicenter post-market
clinical study, which we refer to as our BRAVO study. The BRAVO study was
designed to evaluate the clinical performance of OviTex for primary or recurrent
ventral hernias in 92 enrolled patients. The recurrence rate at the 24-month
time point was 2.6%, and surgical site occurrences ("SSOs") were observed in 38%
of the study population. 78% of all enrolled patients were characterized as high
risk for experiencing an SSO based on at least one known risk factor, which
included obesity, active smoking, COPD, diabetes mellitus, coronary artery
disease, or advanced age (?75 years). The results also indicated that BRAVO
patients experienced clinically meaningful improvements in their quality of life
and perceived health. The 24-month results will be presented in a future
peer-reviewed publication, and the interim results measured at the 12-month time
point were previously published in November 2021 in the Journal of Clinical
Medicine .
Our second portfolio of products, the OviTex PRS Reinforced Tissue Matrix
("OviTex PRS"), addresses unmet needs in plastic and reconstructive surgery. In
We began commercialization of our OviTex products inthe United States inJuly 2016 . Our OviTex portfolio consists of multiple products for hernia repair and abdominal wall reconstruction, inguinal hernia repair and hiatal hernia repair. In addition, to address the significant increase in the number of robotic-assisted hernia repairs over the last several years, we have designed an OviTex product line for use in laparoscopic and robotic-assisted surgery ("OviTex LPR"), which we began commercializing inNovember 2018 . 19
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OviTex PRS is indicated for use in implantation to reinforce soft tissue where weakness exists in patients requiring soft tissue repair or reinforcement in plastic and reconstructive surgery. We commenced a limited launch inMay 2019 and gathered clinical feedback from our initial surgeon users. Based on this feedback, we expanded our commercial launch inJune 2020 and expect to continue to expand our surgeon network. We have also engaged in discussions with the FDA regarding an Investigational Device Exemption protocol to study the safety and effectiveness of our OviTex PRS product for an indication in breast reconstruction surgery. The FDA has stated that a premarket approval, rather than a 510(k) clearance, will be required for such an indication. We market our products through a single direct sales force, predominantly inthe United States augmented by a smaller number of sales representatives and distributors in certain European countries. We have invested in our direct sales and marketing infrastructure to expand our presence and to promote awareness and adoption of our products. As ofJune 30, 2022 , we had 61 sales territories inthe United States . As part of our commercial strategy, we plan to continue to invest in our commercial organization by hiring additional account managers, clinical development specialists and administrative support staff to support and service new accounts for soft tissue reconstruction procedures. Additionally, we believe we can enhance the productivity of our sales force by improving customer segmentation and targeting, leveraging digital channels to engage customers and utilizing engagement analytics to support development. We announced, inNovember 2021 , that we entered into a distribution agreement withNext Science Technologies Pty Limited ("Next Science"), a medical technology company, granting us the exclusive rights to sell and market Next Science's proprietary antimicrobial surgical wash with XBIO® technology across theU.S. plastic reconstructive market. We commenced private label marketing of the solution for plastic surgery in early 2022. Next Science's XBIO Technology delivers an advanced option for surgical infection control. We believe the infection control solution will expand our service offerings and diversify our supplier base as we continue to create a soft-tissue restoration portfolio. We are currently devoting research and development resources to develop additional versions of our OviTex hernia product lines, including self-adhering technology to further enhance product compatibility in robotic procedures, as well as additional versions of our OviTex PRS product lines. We are also working to develop new product features and designs for both our existing OviTex and OviTex PRS products. Additionally, we are exploring new packaging technology to increase the shelf life of our OviTex and OviTex PRS products. We intend to continue to make investments in research and development efforts to develop improvements and enhancements. We are also assessing strategic partnerships with medical device companies whereby we may enter into distribution, product development and/or licensing agreements for products complimentary to, or related to, existing and future products in our distribution channel, which could result in the payment of low single digit royalties or other product acquisition costs. Our products are manufactured by Aroa at their FDA registered and ISO 13485 compliant facility inAuckland, New Zealand . We maintain our Aroa License for the exclusive supply of ovine rumen and manufacture of our reinforced tissue matrices under which we purchase product from Aroa at a fixed cost equal to 27% of our net sales of licensed products. This revenue sharing arrangement allows us to competitively price our products and pass along cost savings to our customers. The vast majority of our revenue to date has been generated by the sale of our OviTex products. Our revenue increased by$2.8 million , or 38%, from$7.6 million for the three months endedJune 30, 2021 to$10.4 million for the three months endedJune 30, 2022 and by$5.2 million , or 39%, from$13.4 million for the six months endedJune 30, 2021 to$18.6 million for the six months endedJune 30, 2022 . Our net loss increased by$4.5 million , or 54%, from$8.3 million for the three months endedJune 30, 2021 to$12.7 million for the three months endedJune 30, 2022 and by$7.2 million , or 44%, from$16.4 million for the six months endedJune 30, 2021 to$23.6 million for the six months endedJune 30, 2022 . We have not been profitable since inception and as ofJune 30, 2022 , we had an accumulated deficit of$253.5 million . We expect to incur losses for the foreseeable future.
Business Update Regarding COVID-19
Our business, results of operations and commercial operations have been impacted
by the ongoing COVID-19 pandemic and the emergence of variants of COVID-19. We
continue to closely monitor developments related to the ongoing COVID-19
pandemic and our decisions will continue to be driven by the health and
well-being of our employees, our
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customers, and their patients while maintaining operations to support our customers and their patients in the near-term. These developments include:
Surgery Deferrals: We believe our revenue was impacted during the six months
ended
COVID-19 resurgences and lower surgical procedural volumes. The extent of
future elective surgery deferrals and the timing and extent of the economic
impact of the pandemic on us, and the pace at which the economy recovers
? therefrom, cannot be determined at this time, particularly in light of recent
surges and the continued emergence of new variants. Further, the reallocation
of hospital resources to treat COVID-19 may continue to cause a financial
strain on healthcare systems and reduce procedural volumes. We continue to work
closely with our hospital and physician customers and suppliers to navigate
through this unforeseen event while maintaining flexible operations to respond
to the changing environment.
Operations: Our sales, marketing and research and development efforts have
continued since the outbreak of the pandemic. As access to hospitals continues
to evolve throughout this pandemic and vary from hospital to hospital and state
to state, our sales team has continued to adapt to changing conditions within
their regions. Most of our sales professionals have used a virtual selling
program, which includes virtual sales calls with physicians, peer-to-peer
discussions with key opinion leaders, physician webinars and sales professional
? training to supplement our in-person sales and marketing programs. We expect to
continue to adapt our sales and marketing strategies as we continue to gain
better visibility into the effects of the ongoing COVID-19 pandemic on our
business. Since our contract manufacturer is located and headquartered in
effective, our manufacturing and supply chain has largely been uninterrupted.
However, it could be disrupted in the future due to staffing shortages, production slowdowns or stoppages, travel and shipping restrictions or disruptions in delivery systems related to COVID-19.
Product Development: We continue to evaluate the timing and scope of planned
? next generation product development and commercialization initiatives in light
of the ongoing COVID-19 pandemic, and we plan to continue to prioritize and
invest in our critical R&D and clinical programs.
First Half 2022 Results. During January and February, we experienced increased
volatility in demand for our products as COVID-19 cases and hospitalizations
increased. We saw improvement in our business during March and the three months
ended
? the recent emergence of the Omicron BA.4 and BA.5 variants on our results. The
timing, extent and continuation of any increase in procedures, any
corresponding increase in sales of our products, and whether there could be a
future decrease in the current level of procedures being performed, remain
uncertain and are subject to a variety of factors, including:
A material increase in COVID-19 cases in one or more locations, including as a
o result of the emergence of new variants of COVID-19, may result in an increase
in COVID-19 hospitalizations and a corresponding decrease in elective procedures in such impacted locations.
The perceived safety of COVID-19 vaccines and boosters, the speed of COVID-19
o vaccine distribution and administration, the timing and extent to which the
vaccination process will affect the progression of the virus, and the efficacy
of such vaccines against the new variants of the virus.
o Government vaccine mandates could affect our ability to retain or hire
employees.
Government restrictions on elective procedures may change over time and may
o vary in different geographic locations due to localized increases or decreases
in the number of COVID-19 cases.
Patients electing to defer or avoid treatment for elective procedures due to
o concerns about being exposed to COVID-19, loss of employer-sponsored health
insurance related to unemployment or other reasons.
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Hospitals may reserve increased space, personal protective equipment and staff
for potential COVID-19 patients, especially if the number of COVID-19 cases in
o a particular region spike or a new variant of COVID-19 emerges in such region,
limiting the space and resources allocated to inpatient and outpatient elective
procedures.
Hospitals may experience staffing shortages due to normal turnover and due to
o COVID-19, which could reduce the number of elective procedures that can be
performed at hospitals with staffing shortages.
Hospitals may continue to preserve cash and may not immediately replenish their
o inventories of our products, which would impact our future sales and revenues
and make it difficult to accurately predict our inventory requirements.
We continue to closely monitor local, regional and global COVID-19 surges as well as new variants of the virus for an impact on procedures during the third quarter of 2022 and beyond.
Outlook. There remains uncertainty and lack of visibility regarding our
near-term revenue growth prospects and product development plans due to the
rapidly evolving environment and continued uncertainties resulting from the
ongoing COVID-19 pandemic. While certain regions are now experiencing a
reduction in COVID-19 cases and a relaxing of governmental restrictions,
following the recent emergence and increased caseloads of the Omicron BA.4 and
? BA.5 subvariants, at this time, the full extent of the impact of the ongoing
COVID-19 pandemic on our business, financial condition and results of
operations is uncertain and cannot be predicted with reasonable accuracy and
will depend on future developments that are also uncertain, such as the
potential development of new variants of COVID-19, the efficacy of existing
vaccines against new variants of COVID-19, and the future geographic scope of
COVID-19.
Components of Our Results of Operations
Revenue
Substantially all of our revenue consists of direct sales of our products to hospital accounts inthe United States . Depending on the terms of our agreements with our customers, we recognize revenue related to product sales when control transfers, which generally occurs when the product is shipped to the customer, or when the product is utilized in a surgical procedure in the case of consignment agreements. Fees charged to customers for shipping are recognized as revenue. Recent revenue growth has been driven by increasing revenue from product sales due to our expanding customer base, although it is unclear at this point what long-term effect the ongoing COVID-19 pandemic will have on our ability to continue to generate revenue and expand our customer base.
Cost of Revenue (excluding amortization of intangible assets)
Cost of revenue primarily consists of the costs of licensed products, charges related to excess and obsolete inventory adjustments, current royalties and costs related to shipping. We purchase product from our contract manufacturer, Aroa, at a fixed cost equal to 27% of our net sales of licensed products. The initial term of our Aroa License terminates on the later of (i)August 3, 2022 , or (ii) the expiration of the last patent covering bovine and ovine products, with an option to extend for an additional ten-year period. We expect our cost of revenue to increase in absolute dollars as, and to the extent, our sales volume grows, although it is unclear at this point what long-term effect, if any, the ongoing COVID-19 pandemic will have on product demand which could lead to additional charges to excess and obsolete inventory.
Amortization of Intangible Assets
Amortization of intangible assets relates to the amortization of capitalized
milestone amounts paid or probable to be paid to Aroa related to license fees or
commercialization rights after future economic benefit has been established for
a product. These capitalized milestone amounts relate to regulatory clearances,
the receipt of certain supply quantities of product, and amounts based upon
aggregate net sales thresholds within a specified territory and are amortized
over the remaining useful life of the intellectual property.
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Gross Profit and Gross Margin
Our gross profit is calculated by subtracting our cost of revenue and amortization of intangible assets from our revenue. We calculate our gross margin percentage as our gross profit divided by our revenue. Our gross profit has been, and we expect it will continue to be, affected by a variety of factors, including sales volume, current and potential royalties and excess and inventory obsolescence costs. Our gross profit may increase to the extent our revenue grows.
Sales and Marketing Expenses
Sales and marketing expenses consist of market research and commercial activities related to the sale of OviTex and OviTex PRS, along with the salaries and related benefits, including sales commissions and stock-based compensation for employees focused on these efforts. Other significant sales and marketing expenses include costs incurred with post-market clinical studies, conferences and trade shows, promotional and marketing activities, as well as travel and training expenses. Over time we expect our sales and marketing expenses to increase in absolute dollars as we continue to expand our commercial organization to both drive and support our planned growth in revenue. It is unclear at this point, however, what long-term effect, if any, the ongoing COVID-19 pandemic will have on these expansion plans. We expect our sales and marketing expenses to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, for personnel in executive, finance, information technology and administrative functions. General and administrative expenses also include professional service fees for legal, accounting, consulting, investor and public relations, insurance costs and direct and allocated facility-related costs.
We expect that our general and administrative expenses will increase in absolute dollars as we execute our growth initiatives and expand our business and headcount to support these initiatives. It is unclear at this point, however, what long-term effect, if any, the ongoing COVID-19 pandemic will have on these expansion plans. We expect our general and administrative expenses to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows.
Research and Development Expenses
Research and development expenses consist primarily of product research, engineering, product development, regulatory compliance and clinical development. These expenses include salaries and related benefits, including stock-based compensation, for employees focused on these efforts, consulting services, costs associated with our preclinical studies, costs incurred with our manufacturing partner under development agreements related to technology transfer, laboratory materials and supplies and an allocation of related facilities costs. We expense research and development costs as they are incurred. We expect that our research and development expenses in absolute dollars will increase in the future as we develop new products and enhance existing products although it is unclear at this point what long-term effect, if any, the ongoing COVID-19 pandemic will have on these development plans. We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing of new product development initiatives.
Interest Expense
Interest expense consists of cash interest related to our credit facilities,
non-cash interest attributable to the amortization of final payment fees and the
amortization of deferred financing costs related to our indebtedness.
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Loss on Extinguishment of Debt
Loss on extinguishment of debt consists of the excess consideration paid over the net carrying value of our debt at the time of extinguishment.
Other Expense
Other expense consists primarily of miscellaneous tax expenses and foreign currency exchange gains and losses offset by income earned on our cash and cash equivalents.
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Results of Operations
Comparison of the Three Months Ended
Three months ended June 30, Change
2022 2021 Dollar Percentage
(in thousands, except percentages)
Revenue $ 10,406 $ 7,558 $ 2,848 38 %
Cost of revenue (excluding amortization of
intangible assets) 3,318 2,395 923 39
Amortization of intangible assets 538
76 462 608
Gross profit 6,550 5,087 1,463 29
Gross margin 63 % 67 %
Operating expenses:
Sales and marketing 11,055 7,502 3,553 47
General and administrative 3,630 2,966 664 22
Research and development 2,102 1,930 172 9
Total operating expenses 16,787 12,398 4,389 35
Loss from operations (10,237) (7,311) (2,926) 40
Other expense:
Interest expense (934) (864) (70) 8Loss on extinguishment of debt (1,228)
- (1,228) -
Other expense (342) (80) (262) 328
Total other expense (2,504) (944) (1,560) 165
Net loss $ (12,741) $ (8,255) $ (4,486) 54 %
Revenue
Revenue increased by $2.8 million , or 38%, to $10.4 million for the three months
ended June 30, 2022 from $7.6 million for the three months ended June 30, 2021 .
The increase in revenue was primarily driven by an increase in unit sales of our
products due to the expansion of our commercial organization, increased
penetration within existing customer accounts and stronger international sales.
During the three months ended June 30, 2022 , we sold 2,423 units of OviTex as
compared to 1,864 units of OviTex during the three months ended June 30, 2021 , a
30% increase in unit sales volume. Additionally, we sold 644 units of OviTex PRS
during the three months ended June 30, 2022 as compared to 337 units during the
three months ended June 30, 2021 , a 91% increase in unit sales volume.
Cost of Revenue
Cost of revenue (excluding amortization of intangible assets) increased by$0.9 million , or 39%, to$3.3 million for the three months endedJune 30, 2022 from$2.4 million for the three months endedJune 30, 2021 . The increase in cost of revenue for the three months endedJune 30, 2022 was primarily the result of an increase in products purchased to support our higher unit sales.
Amortization of Intangible Assets
Amortization of intangible assets increased by$0.5 million , or 608% to$0.5 million for the three months endedJune 30, 2022 from$76,000 for the three months endedJune 30, 2021 . InJune 2022 , we determined that our final milestone target under our licensing agreement with Aroa was probable of being met and recorded the payment obligation as an intangible asset, resulting in a cumulative amortization charge of$0.5 million .
Gross Margin
Gross margin decreased to 63% for the three months endedJune 30, 2022 from 67% for the three months endedJune 30, 2021 . The decrease was primarily due to the cumulative amortization charge recorded during the three months ended June
30,
2022.
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Sales and Marketing
Sales and marketing expenses increased by $3.6 million , or 47%, to $11.1 million
for the three months ended June 30, 2022 from $7.5 million for the three months
ended June 30, 2021 . The increase was primarily due to higher salaries, benefits
and commission costs as a result of an expansion of our commercialization
activities, higher travel and consulting expenses and additional
employee-related costs due to the increase in headcount.
General and Administrative
General and administrative expenses increased by$0.7 million , or 22%, to$3.6 million for the three months endedJune 30, 2022 from$3.0 million for the three months endedJune 30, 2021 . The increase was primarily due to higher salaries and benefits and increased professional, consulting and legal expenses.
Research and Development
Research and development expenses increased by$0.2 million , or 9%, to$2.1 million for the three months endedJune 30, 2022 from$1.9 million for the three months endedJune 30, 2021 . The increase was primarily due to higher salaries and benefits. Interest Expense
Interest expense increased by$70,000 , or 8%, to$0.9 million for both the three months endedJune 30, 2022 and 2021 as the term loan amount borrowed increased under the MidCap Credit Agreement which offset the lower interest rate.
Loss on Extinguishment of Debt
We recorded a loss on the extinguishment of debt of$1.2 million during the three months endedJune 30, 2022 related to the repayment of borrowings of our credit facilities with OrbiMed in May. The losses were primarily comprised of the write-off of unamortized debt discounts and prepayment penalties at
the time of extinguishment. Other Expense
Other expense increased
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Comparison of the Six Months Ended
Six Months Ended June 30, Change
2022 2021 Dollar Percentage
(in thousands, except percentages)
Revenue $ 18,637 $ 13,435 $ 5,202 39 %
Cost of revenue (excluding amortization of
intangible assets) 6,474 4,731 1,743 37
Amortization of intangible assets 614 152 462 304
Gross profit 11,549 8,552 2,997 35
Gross margin 62 % 64 %
Operating expenses:
Sales and marketing 20,433 13,801 6,632 48
General and administrative 7,088 5,722 1,366 24
Research and development 4,109 3,609 500 14
Total operating expenses 31,630 23,132 8,498 37
Loss from operations (20,081) (14,580) (5,501) 38
Other (expense) income:
Interest expense (1,845) (1,753) (92) 5Loss on extinguishment of debt (1,228)
- (1,228) - Other expense (449) (58) (391) 674 Total other expense (3,522) (1,811) (1,711) 94 Net loss$ (23,603) $ (16,391) $ (7,212) 44 % Revenue Revenue increased by$5.2 million , or 39%, to$18.6 million for the six months endedJune 30, 2022 from$13.4 million for the six months endedJune 30, 2021 . The increase in revenue was primarily driven by an increase in unit sales of our products due to the expansion of our commercial organization, increased penetration within existing customer accounts and stronger international sales. During the six months endedJune 30, 2022 , we sold 4,465 units of OviTex as compared to 3,350 units of OviTex during the six months endedJune 30, 2021 , a 33% increase in unit sales volume. Additionally, we sold 1,115 units of OviTex PRS during the six months endedJune 30, 2022 as compared to 607 units during the six months endedJune 30, 2021 , a 84% increase in unit sales volume.
Cost of Revenue
Cost of revenue (excluding amortization of intangible assets) increased by$1.7 million , or 37%, to$6.5 million for the six months endedJune 30, 2022 from$4.7 million for the six months endedJune 30, 2021 . The increase in cost of revenue for the six months endedJune 30, 2022 was primarily the result of an increase in products purchased to support our higher unit sales and an increase in our excess and obsolete inventory adjustments.
Amortization of Intangible Assets
Amortization of intangible assets increased by$0.5 million , or 304%, to$0.6 million for the six months endedJune 30, 2022 from$0.2 million for the six months endedJune 30, 2021 . InJune 2022 , we determined that our final milestone target under our licensing agreement with Aroa was probable of being met and recorded the payment obligation as an intangible asset, resulting in a cumulative amortization charge of$0.5 million .
Gross Margin
Gross margin decreased to 62% for the six months endedJune 30, 2022 from 64% for the six months endedJune 30, 2021 . The decrease was primarily due to the cumulative amortization charge recorded during the six months endedJune 30, 2022 . 27 Table of Contents Sales and Marketing Sales and marketing expenses increased by$6.6 million , or 48%, to$20.4 million for the six months endedJune 30, 2022 from$13.8 million for the six months endedJune 30, 2021 . The increase was primarily due to higher salaries, benefits and commission costs as a result of an expansion of our commercialization activities, higher travel and consulting expenses and additional employee-related costs due to the increase in headcount.
General and Administrative
General and administrative expenses increased by$1.4 million , or 24%, to$7.1 million for the six months endedJune 30, 2022 from$5.7 million for the six months endedJune 30, 2021 . The increase was primarily due to higher salaries and benefits and increased professional, consulting and legal expenses.
Research and Development
Research and development expenses increased by$0.5 million , or 14%, to$4.1 million for the six months endedJune 30, 2022 from$3.6 million for the six months endedJune 30, 2021 . The increase was primarily due to higher salaries and benefits. Interest Expense
Interest expense increased by$92,000 , or 5%, to$1.8 million for both the six months endedJune 30, 2022 and 2021 as the term loan amount borrowed increased under our MidCap Credit Agreement which offset the lower interest rate.
Loss on Extinguishment of Debt
We recorded a loss on the extinguishment of debt of$1.2 million during the three months endedJune 30, 2022 related to the repayment of borrowings of our credit facilities with OrbiMed in May. The losses were primarily comprised of the write-off of unamortized debt discounts and prepayment penalties at
the time of extinguishment. Other Expense
Other expense increased
Liquidity and Capital Resources
Overview
As ofJune 30, 2022 , we had cash and cash equivalents of$27.7 million , working capital of$33.7 million and an accumulated deficit of$253.5 million . As ofDecember 31, 2021 , we had cash and cash equivalents of$43.9 million , working capital of$48.5 million and an accumulated deficit of$229.9 million . We have incurred operating losses since our inception, and we anticipate that our operating losses will continue in the near term as we seek to invest in our sales and marketing initiatives to support our growth in existing and new markets and in additional research and development activities. As ofJune 30, 2022 , we had$40.0 million of borrowings outstanding under our Credit and Security Agreement (the "MidCap Credit Agreement") withMidCap Financial Trust , as agent and certain lender parties thereto. The MidCap Credit Agreement matures inMay 2027 and 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, we borrowed$40.0 million of Tranche 1 and used a portion of the proceeds to repay borrowings under the OrbiMed Credit Facility and intends to use the remaining proceeds to fund operations and other general corporate purposes. We will be eligible to borrow Tranche 2 at our option upon meeting 28
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certain conditions, including, but not limited to, reaching
Based on our current business plan, we believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months from the issuance of this Quarterly Report. If these sources are insufficient to satisfy our liquidity requirements, we may seek to sell common or preferred equity or debt securities or enter into a new credit facility. InDecember 2020 , we entered into an Equity Distribution Agreement (the "Equity Agreement") withPiper Sandler & Co (the "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 our common stock, from time to time through the Agent as sales agent. No sales were made under the Equity Agreement during the six months endedJune 30, 2022 . If we raise additional funds by issuing equity or equity-linked securities, our stockholders would experience dilution and any new equity securities could have rights, preferences and privileges superior to those of holders of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. We cannot be assured that additional equity, equity-linked or debt financing will be available on terms favorable to us or our stockholders, or at all, including as a result of market volatility following the COVID-19 pandemic or other factors. If we are unable to obtain adequate financing, we may be required to delay the development, commercialization and marketing of our products.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Six Months Ended June 30,
(in thousands) 2022 2021
Cash used in operating activities $ (22,116) $ (14,214)
Cash used in investing activities (536) (47)
Cash provided by financing activities 6,502 152
Effect of exchange rate on cash (56) 7
Net decrease in cash and cash equivalents $ (16,206) $ (14,102) Operating Activities
During the six months endedJune 30, 2022 , we used$22.1 million of cash in operating activities, resulting from our net loss of$23.6 million and the change in operating assets and liabilities of$4.0 million , offset by non-cash charges of$5.5 million . Our non-cash charges were comprised of stock-based compensation expense of$1.9 million , a loss on debt extinguishment of$1.2 million , our excess and obsolete inventory charge of$1.2 million , depreciation and amortization expense of$0.8 million and noncash interest expense of$0.4 million . The change in our operating assets and liabilities was primarily related to an increase in our inventory and accounts receivable. During the six months endedJune 30, 2021 , we used$14.2 million of cash in operating activities, resulting from our net loss of$16.4 million and the change in operating assets and liabilities of$1.2 million , offset by non-cash charges of$3.4 million . Our non-cash charges were comprised of stock-based compensation expense of$2.1 million , our excess and obsolete inventory charge of$0.7 million , noncash interest expense of$0.3 million and depreciation and amortization expense of$0.3 million . The change in our operating assets was primarily related to increases in our inventory and accounts receivable and decreases in accounts payable and accrued expenses and other current liabilities.
Investing Activities
During the six months ended
During the six months ended
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Financing Activities
During the six months ended June 30, 2022 , cash provided by financing activities
was $6.5 million , consisting primarily of $40.0 million in proceeds received
from the issuance of long-term debt offset by $30.0 million in repayments of
long-term debt and $3.4 million in payments of issuance costs.
During the six months ended June 30, 2021 , cash provided by financing activities
was $0.2 million , consisting of proceeds received from the exercise of stock
options.
Indebtedness
On May 26, 2022 , we entered into the MidCap Credit Agreement with MidCap
Financial Trust , as agent and certain lender parties thereto. The MidCap Credit
Agreement provides for up to $50.0 million in MidCap Term Loans, consisting of a
$40.0 million Tranche 1 and a $10.0 million Tranche 2. Upon closing, we borrowed
$40.0 million of Tranche 1 and used a portion of the proceeds to repay
borrowings under the OrbiMed Credit Facility and intend to use the remaining
proceeds to fund operations and other general corporate purposes. We will be
eligible to borrow Tranche 2 at our 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, we provided a first priority security
interest in all existing and future acquired assets, including intellectual
property, owned by us. The MidCap Credit Agreement contains certain covenants
that limit our ability to engage in certain transactions that may be in our
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, we must maintain minimum net revenue levels tested quarterly. In
the event of default under the MidCap Credit Agreement, we 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%. We are required to make 36 monthly interest payments
beginning on June 1, 2022 (the "Interest-Only Period"). If we are in covenant
compliance at the end of the Interest-Only Period, we 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 we are not in covenant compliance at the end of the
Interest-Only Period, we are 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. We are also
required to pay an exit fee at the time of maturity or prepayment event equal to
5% of all principal borrowings (or in the event of a prepayment event, the
amount of principal being prepaid).
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Table of Contents
Contractual Obligations and Commitments
OnMay 26, 2022 , we entered into the MidCap Credit Agreement. The following table summarizes our contractual obligations as ofJune 30, 2022 and the effects that such obligations are expected to have on our liquidity and cash flows
in
future periods:
Payments due by Period
Remainder
(in thousands) Total of 2022 2023-2024 2025-2026 ThereafterPrincipal payments on long-term debt$ 40,000 $ - $ - $ -$ 40,000 Interest and end of term charge on long-term debt(1) 16,292 1,479 5,916 5,916 2,981 Operating lease commitments(2) 2,215 176 724 758 557 Purchase commitments 11,512 287 3,140 2,310 5,775 Milestone payment deemed probable(3) 1,000 -
1,000 - - Total$ 71,019 $ 1,942 $ 10,780 $ 8,984 $ 49,313
(1) Interest payable reflects the rate in effect as of
interest rate on borrowings under the MidCap Credit Facility is variable and
resets monthly. End of term fee reflects final payment fee due at maturity.
(2) Reflects payments due for our lease of office and laboratory space in
2028.
(3) Consists of a milestone payment due to Aroa when certain sales milestones are
met that we deemed probable in the three months ended
Critical Accounting Policies and Significant Judgments and Estimates
The Critical Accounting Policies and Significant Judgements and Estimates included in our Annual Report have not materially changed.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC .
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