TELA Bio, Inc. 10-Q

Item 1. Financial Statements TELA Bio, Inc. Consolidated Balance Sheets (In thousands, except share and per share amounts) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ 2023 2022 Assets ​ ​ Current assets: ​ ​ Cash and cash equivalents ​ $ 58,202 ​ $ 42,019 Accounts receivable, net ​ 8,072 ​ 6,621 Inventory ​ 14,323 ​ 11,792 Prepaid expenses and other assets ​ 1,655 ​ 2,015 Total current assets ​ 82,252 ​ 62,447 Property and equipment, net ​ 1,749 ​ 1,682 Intangible assets, net ​ 2,214 ​ 2,499 Right-of-use assets ​ 1,102 ​ 1,227 Total assets ​ $ 87,317 ​ $ 67,855 ​ ​ ​ ​ ​ ​ ​ Liabilities and stockholders’ equity ​ ​ Current liabilities: ​ ​ Accounts payable ​ $ 3,091 ​ $ 1,534 Accrued expenses and other current liabilities ​ 12,243 ​ 10,869 Total current liabilities ​ 15,334 ​ 12,403 Long‑term debt ​ ​ 40,363 ​ ​ 39,916 Other long‑term liabilities ​ 1,068 ​ 1,231 Total liabilities ​ 56,765 ​ 53,550 ​ ​ ​ ​ ​ ​ ​ 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; 24,487,578 and 19,165,027 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively ​ 24 ​ 19 Additional paid-in capital ​ ​ 338,392 ​ ​ 288,361 Accumulated other comprehensive income ​ 135 ​ 150 Accumulated deficit ​ ( 307,999 ) ​ ( 274,225 ) Total stockholders’ equity ​ 30,552 ​ 14,305 Total liabilities and stockholders’ equity ​ $ 87,317 ​ $ 67,855 ​ See accompanying notes to unaudited interim consolidated financial statements. 4 Table of Contents 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, ​ ​ 2023 2022 2023 2022 Revenue ​ $ 15,052 ​ $ 11,159 ​ $ 41,455 ​ $ 29,796 Cost of revenue (excluding amortization of intangible assets) ​ 4,568 ​ 3,745 ​ 12,682 ​ 10,219 Amortization of intangible assets ​ 95 ​ 95 ​ 285 ​ 709 Gross profit ​ 10,389 ​ 7,319 ​ 28,488 ​ 18,868 Operating expenses: ​ ​ ​ ​ Sales and marketing ​ 14,474 ​ 11,172 ​ 42,517 ​ 31,605 General and administrative ​ 3,728 ​ 3,532 ​ 10,834 ​ 10,620 Research and development ​ 2,368 ​ 2,102 ​ 6,934 ​ 6,211 Total operating expenses ​ 20,570 ​ 16,806 ​ 60,285 ​ 48,436 Loss from operations ​ ( 10,181 ) ​ ( 9,487 ) ​ ( 31,797 ) ​ ( 29,568 ) Other expense: ​ ​ ​ ​ ​ Interest expense ​ ( 1,334 ) ​ ( 1,032 ) ​ ( 3,878 ) ​ ( 2,877 ) Loss on extinguishment of debt ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,228 ) Other income (expense) ​ 558 ​ ( 195 ) ​ 1,901 ​ ( 644 ) Total other expense ​ ( 776 ) ​ ( 1,227 ) ​ ( 1,977 ) ​ ( 4,749 ) Net loss ​ $ ( 10,957 ) ​ $ ( 10,714 ) ​ $ ( 33,774 ) ​ $ ( 34,317 ) Net loss per common share, basic and diluted ​ $ ( 0.45 ) ​ $ ( 0.64 ) ​ $ ( 1.51 ) ​ $ ( 2.24 ) Weighted average common shares outstanding, basic and diluted ​ 24,483,664 ​ 16,758,573 ​ 22,322,256 ​ 15,293,094 Comprehensive loss: ​ ​ ​ ​ Net loss ​ $ ( 10,957 ) ​ $ ( 10,714 ) ​ $ ( 33,774 ) ​ $ ( 34,317 ) Foreign currency translation adjustment ​ 51 ​ 133 ​ ( 15 ) ​ 314 Comprehensive loss ​ $ ( 10,906 ) ​ $ ( 10,581 ) ​ $ ( 33,789 ) ​ $ ( 34,003 ) ​ See accompanying notes to unaudited interim consolidated financial statements. ​ ​ 5 Table of Contents TELA Bio, Inc. Consolidated Statements of Stockholders’ Equity Three and Nine Months Ended September 30, 2023 (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, 2023 24,475,504 ​ $ 24 ​ $ 336,939 ​ $ 84 ​ $ ( 297,042 ) ​ $ 40,005 Vesting of share-based awards and exercise of stock options 2,002 ​ — ​ 1 ​ — ​ — ​ 1 Issuance of common stock under the employee stock purchase plan ​ 10,602 ​ ​ — ​ ​ 88 ​ ​ — ​ ​ — ​ ​ 88 Shares withheld for employee taxes ​ ( 530 ) ​ ​ — ​ ​ ( 5 ) ​ ​ — ​ ​ — ​ ​ ( 5 ) Foreign currency translation adjustment — ​ — ​ — ​ 51 ​ — ​ 51 Stock‑based compensation expense — ​ — ​ 1,369 ​ — ​ — ​ 1,369 Net loss — ​ — ​ — ​ — ​ ( 10,957 ) ​ ( 10,957 ) Balance at September 30, 2023 24,487,578 ​ $ 24 ​ $ 338,392 ​ $ 135 ​ $ ( 307,999 ) ​ $ 30,552 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ other ​ ​ ​ ​ ​ ​ ​ ​ Common stock ​ paid ‑ in ​ comprehensive ​ Accumulated ​ ​ ​ ​ Shares Amount capital income deficit Total Balance at January 1, 2023 ​ 19,165,027 ​ $ 19 ​ $ 288,361 ​ $ 150 ​ $ ( 274,225 ) ​ $ 14,305 Vesting of share-based awards and exercise of stock options 119,240 ​ — ​ 101 ​ — ​ — ​ 101 Issuance of common stock under the employee stock purchase plan ​ 10,602 ​ ​ — ​ ​ 88 ​ ​ — ​ ​ — ​ ​ 88 Shares withheld for employee taxes ​ ( 26,481 ) ​ ​ — ​ ​ ( 285 ) ​ ​ — ​ ​ — ​ ​ ( 285 ) Foreign currency translation adjustment — ​ — ​ — ​ ( 15 ) ​ — ​ ( 15 ) Stock‑based compensation expense — ​ — ​ 3,791 ​ — ​ — ​ 3,791 Sale of common stock, net of underwriting discounts, commissions and offering costs ​ 5,219,190 ​ ​ 5 ​ ​ 46,336 ​ ​ — ​ ​ — ​ ​ 46,341 Net loss — ​ — ​ — ​ — ​ ( 33,774 ) ​ ( 33,774 ) Balance at September 30, 2023 24,487,578 ​ $ 24 ​ $ 338,392 ​ $ 135 ​ $ ( 307,999 ) ​ $ 30,552 ​ ​ See accompanying notes to unaudited interim consolidated financial statements. ​ ​ ​ ​ 6 Table of Contents TELA Bio, Inc. Consolidated Statements of Stockholders’ Equity (Deficit) 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. ​ 7 Table of Contents TELA Bio, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ 2023 ​ 2022 Cash flows from operating activities: ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 33,774 ) ​ $ ( 34,317 ) Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ ​ ​ ​ Depreciation expense ​ 362 ​ 271 Noncash interest expense ​ 447 ​ 507 Noncash loss on extinguishment of debt ​ ​ — ​ ​ 1,228 Amortization of intangible assets ​ 285 ​ 709 Net changes in operating lease ROU assets and liabilities ​ ​ ( 33 ) ​ ​ ( 26 ) Inventory excess and obsolescence charge ​ 992 ​ 1,809 Stock ‑ based compensation expense ​ 3,791 ​ 2,950 Change in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable, net ​ ( 1,456 ) ​ ( 1,531 ) Inventory ​ ( 3,503 ) ​ ( 6,540 ) Prepaid expenses and other current assets ​ 361 ​ 1,322 Accounts payable ​ 1,535 ​ 2,291 Accrued expenses and other current and long-term liabilities ​ 1,373 ​ 799 Foreign currency remeasurement (gain) loss ​ ​ ( 186 ) ​ ​ 763 Net cash used in operating activities ​ ( 29,806 ) ​ ( 29,765 ) Cash flows from investing activities: ​ ​ ​ ​ ​ ​ Purchase of property and equipment ​ ( 406 ) ​ ( 826 ) Net cash used in investing activities ​ ( 406 ) ​ ( 826 ) Cash flows from financing activities: ​ ​ ​ ​ ​ ​ Proceeds from sale of common stock, net of underwriting discounts, commissions and offering costs ​ ​ 46,341 ​ ​ 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 ​ 101 ​ 13 Payment of withholding taxes related to stock-based compensation to employees ​ ​ ( 285 ) ​ ​ ( 157 ) Proceeds from issuance of common stock under the employee stock purchase plan ​ ​ 88 ​ ​ — Net cash provided by financing activities ​ 46,245 ​ 41,071 Effect of exchange rate on cash and cash equivalents ​ 150 ​ ( 185 ) Net increase in cash and cash equivalents ​ 16,183 ​ 10,295 Cash and cash equivalents, beginning of period ​ 42,019 ​ 43,931 Cash and cash equivalents, end of period ​ $ 58,202 ​ $ 54,226 Supplemental disclosure of cash flow information: ​ ​ ​ ​ ​ ​ Cash paid during the period for interest ​ $ 3,431 ​ $ 2,370 Supplemental disclosures of noncash investing and financing activities: ​ ​ ​ ​ ​ ​ Property and equipment in accounts payable and accrued expenses and other current liabilities ​ $ 23 ​ $ 8 Offering costs in accounts payable and accrued expenses and other current liabilities ​ $ — ​ $ 275 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. ​ ​ 8 Table of Contents 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 directly impacted by the COVID-19 pandemic since the onset of the pandemic in 2020. 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 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 volatility in the frequency of surgical procedures using the Company’s products, including through labor and hospital staffing shortages and the allocation of hospital resources due to financial strain experienced during the COVID-19 pandemic. Although the Company continues to monitor developments related to hospital capacity and the volume of elective procedures, there is uncertainty regarding the pace to which surgical volumes will normalize to their pre-pandemic levels and the timing to address the backlog of deferred procedures. 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. (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 $ 308.0 million as of September 30, 2023. The Company anticipates incurring additional losses until such time, if ever, it can generate sufficient revenue from its products to cover its expenses. On April 21, 2023, the Company completed an underwritten public offering in which the Company sold 5,219,190 shares of its common stock (including 469,190 shares sold pursuant to the underwriters’ overallotment option on May 5, 2023) at a public offering price of $ 9.50 per share, receiving net proceeds of approximately $ 46.3 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 macroeconomic conditions, including the COVID-19 pandemic or other public health crises, general economic uncertainty, including as a result of inflationary pressures and the measures undertaken by various governments to address them, banking instability, geopolitical factors such as the ongoing war in Ukraine and the evolving events in Israel and Gaza, 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 for the year ended December 31, 2022. Any reference in these notes to applicable guidance is meant to refer to generally 9 Table of Contents TELA Bio, Inc. Notes to Unaudited Interim Consolidated Financial Statements (Continued) ​ accepted accounting principles (“GAAP”) in the U.S. 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 Securities and Exchange Commission (“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, 2022. 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 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 , (“ASC 606”), 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 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 customers or from consigned inventory maintained at hospitals or other surgical facilities. 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. 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 10 Table of Contents TELA Bio, Inc. Notes to Unaudited Interim Consolidated Financial Statements (Continued) ​ 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 the Company’s portfolio of products (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ ​ 2023 ​ 2022 ​ 2023 ​ 2022 OviTex ​ $ 10,159 ​ $ 7,839 ​ $ 28,240 ​ $ 20,528 OviTex PRS ​ ​ 4,812 ​ ​ 3,287 ​ ​ 13,063 ​ ​ 9,188 Other ​ ​ 81 ​ ​ 33 ​ ​ 152 ​ ​ 80 Total revenue ​ $ 15,052 ​ $ 11,159 ​ $ 41,455 ​ $ 29,796 ​ Sales outside of the U.S. were $ 1.7 million and $ 4.2 million for the three and nine months ended September 30, 2023, respectively, and immaterial for the three and nine months ended September 30, 2022. 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. The carrying amounts of the Company’s current Credit and Security Agreement approximated its fair value due to its variable interest rate. 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). 11 Table of Contents 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, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash equivalents – money market fund ​ $ 55,385 ​ $ — ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash equivalents – money market fund ​ $ 39,010 ​ $ — ​ $ — ​ 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. In periods in which the Company reports a net loss, diluted net loss per share is the same as basic net loss per share since dilutive shares are not assumed to have been issued if their effect is antidilutive. Therefore, the weighted-average shares used to calculate both basic and diluted net loss per 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, ​ ​ 2023 ​ 2022 Stock options (including shares subject to repurchase) ​ 2,202,264 2,009,189 Unvested restricted stock units ​ 864,427 ​ 306,722 Common stock warrants ​ 88,556 ​ 88,556 Total 3,155,247 2,404,467 ​ 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 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 was effective for the Company beginning January 1, 2023, and the adoption of this guidance did not have a significant impact on the consolidated financial statements and related disclosures. ​ In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity’s Own Equity (“ ASU 2020-06”) . ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts 12 Table of Contents TELA Bio, Inc. Notes to Unaudited Interim Consolidated Financial Statements (Continued) ​ in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. The new guidance also modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those annual periods. 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 October 2023, as described in Note 9 “Subsequent Events,” to extend the term of the lease from May 2028 to May 2030. 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. ​ 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. ​ The Company recognized $ 0.1 million and $ 0.2 million of lease cost during both the three and nine months ended September 30, 2023 and 2022, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $ 0.1 million and $ 0.3 million for both the three and nine months ended September 30, 2023 and 2022, respectively, and these amounts are included in operating activities in the consolidated statements of cash flows. As of September 30, 2023, the remaining lease term for the Malvern Lease was 4.7 years. ​ 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, 2023 (in thousands): ​ ​ ​ ​ Remainder of 2023 $ 90 2024 366 2025 ​ 375 2026 ​ 383 2027 ​ 392 Thereafter ​ 165 Total undiscounted future minimum lease payments $ 1,771 Less imputed interest ​ ( 358 ) Total operating lease liabilities $ 1,413 ​ As of September 30, 2023, $ 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 $ 1.1 million representing the long-term portion of operating lease liabilities is included in other long-term liabilities in the consolidated balance sheets. ​ 13 Table of Contents TELA Bio, Inc. Notes to Unaudited Interim Consolidated Financial Statements (Continued) ​ (5) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ 2023 2022 Compensation and related benefits ​ $ 7,088 ​ $ 6,420 Third-party and professional fees ​ 2,535 ​ 2,563 Amounts due to contract manufacturer ​ ​ 1,780 ​ ​ 1,263 Current portion of operating lease liabilities ​ ​ 345 ​ ​ 340 Research and development expenses ​ ​ 217 ​ ​ 137 Other ​ 278 ​ 146 Total accrued expenses and other current liabilities ​ $ 12,243 ​ $ 10,869 ​ ​ (6) Long-term Debt Long-term debt consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ 2023 2022 MidCap Term Loan ​ $ 40,000 ​ $ 40,000 End of term charge ​ 2,000 ​ 2,000 Unamortized end of term charge and issuance costs ​ ( 1,637 ) ​ ( 2,084 ) Long-term debt ​ $ 40,363 ​ $ 39,916 ​ 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, 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 if certain conditions are met, 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 %. ​ 14 Table of Contents TELA Bio, Inc. Notes to Unaudited Interim Consolidated Financial Statements (Continued) ​ 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 of principal being prepaid). Interest expense associated with the MidCap Credit Facility recorded for the three and nine months ended September 30, 2023 was $ 1.3 million and $ 3.9 million, respectively, of which $ 0.2 million and $ 0.4 million, respectively, was related to the amortization of debt issuance costs. 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 a senior secured term loan facility with OrbiMed (the “OrbiMed Credit Facility”), 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. ​ (7) Stockholders’ Equity In December 2020, the Company entered into an Equity Distribution Agreement (the “2020 Equity Agreement”) with Piper Sandler & Co, (the “Sales Agent”) in connection with the establishment of an at-the-market offering program under which the Company 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, 2023. The 2020 Equity Agreement was subsequently terminated on November 13, 2023. 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 approximately $ 34.4 million after deducting underwriting discounts, commissions and other offering expenses. ​ In April 2023, the Company completed an underwritten public offering in which the Company issued and sold 5,219,190 shares of its common stock (including 469,190 shares sold pursuant to the underwriters’ overallotment option in May 2023) at a public offering price of $ 9.50 per share. The Company received net proceeds of approximately $ 46.3 million after deducting underwriting discounts, commissions and other offering expenses. 15 Table of Contents TELA Bio, Inc. Notes to Unaudited Interim Consolidated Financial Statements (Continued) ​ ​ Warrants The Company had the following warrants outstanding to purchase common stock at September 30, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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, 2023, 660,643 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 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, ​ 2023 2022 ​ 2023 ​ 2022 Sales and marketing ​ $ 507 ​ $ 353 ​ $ 1,375 ​ $ 1,000 General and administrative ​ ​ 670 ​ 522 ​ 1,861 ​ 1,521 Research and development ​ 192 ​ 152 ​ 555 ​ 429 Total stock‑based compensation ​ $ 1,369 ​ $ 1,027 ​ $ 3,791 ​ $ 2,950 ​ 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 . ​ 16 Table of Contents TELA Bio, Inc. Notes to Unaudited Interim Consolidated Financial Statements (Continued) ​ 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, 2023 ​ 2,071,848 ​ $ 11.49 ​ ​ Granted ​ 212,960 ​ ​ 10.50 ​ ​ Exercised ​ ( 19,556 ) ​ ​ 5.17 ​ ​ Canceled/forfeited ​ ( 62,988 ) ​ ​ 11.18 ​ ​ Outstanding at September 30, 2023 ​ 2,202,264 ​ $ 11.46 ​ 6.68 Vested and expected to vest at September 30, 2023 2,163,822 ​ $ 11.46 6.64 Exercisable at September 30, 2023 1,547,113 ​ $ 11.43 5.87 ​ Included in outstanding options at September 30, 2023 were 357,425 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, 2023, the aggregate intrinsic value of both outstanding options and exercisable options was $ 0.8 million. The weighted average grant-date fair value per share of options granted was $ 7.19 during the nine months ended September 30, 2023. The aggregate intrinsic value of options exercised was immaterial and $ 0.1 million for the three and nine months ended September 30, 2023, respectively. At September 30, 2023, the total unrecognized compensation expense related to unvested employee and nonemployee stock option awards was $ 4.2 million, which is expected to be recognized in expense over a weighted-average period of approximately 2.3 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 SEC. The simplified method calculates the expected term as the average time to vesting and the contractual term 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, as well as the Company’s, 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. 17 Table of Contents TELA Bio, Inc. Notes to Unaudited Interim Consolidated Financial Statements (Continued) ​ 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, 2023 Expected dividend yield — ​ Expected volatility 74.3 % Risk‑free interest rate 3.99 % Expected term (in years) 6.15 ​ ​ Restricted Stock Units The Company has issued service-based and performance-based restricted stock units (“RSUs”). During the nine months ended September 30, 2023, the Company granted 415,110 service-based awards at a weighted average grant-date fair value of $ 10.55 per RSU. Vesting of the service-based RSUs is based on the terms in each award agreement and is generally over four years . During the nine months ended September 30, 2023, the Company granted 250,149 performance-based RSUs at a weighted average grant-date fair value of $ 10.95 per RSU. Vesting of these performance-based RSUs is subject to continued service through 2026 and the achievement of certain performance milestones for fiscal year 2026. The amount of RSUs that will vest can range from 0 % to 110 % of the original number of RSUs granted. Expense for the performance-based RSUs is not recognized until the performance conditions are deemed probable of achievement. The Company did not record any expense related to the performance-based RSUs during the nine months ended September 30, 2023. The following table summarizes RSUs for the Plan: ​ ​ ​ ​ ​ ​ Number of ​ shares Unvested balance at January 1, 2023 ​ 311,991 Granted ​ 665,259 Vested ​ ( 99,684 ) Canceled/forfeited ​ ( 13,139 ) Outstanding at September 30, 2023 ​ 864,427 ​ Included in outstanding RSUs at September 30, 2023 were 66,750 RSUs 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). The aggregate intrinsic value of RSUs outstanding was $ 6.9 million at September 30, 2023. The total unrecognized compensation expense at September 30, 2023 related to RSUs was $ 5.1 million, which is expected to be recognized in expense over a weighted-average period of approximately 3.0 years. ​ (9) Subsequent Events On October 18, 2023, the Company amended its Malvern lease to extend the term of the lease from May 31, 2028 to May 31, 2030 (the “Lease Amendment”). Pursuant to the Lease Amendment, the Company has also leased an additional 15,881 square feet at the Company’s corporate headquarters commencing on December 1, 2023 (the “Expansion Premises”) and will relinquish 4,652 square feet of non-contiguous space currently subject to the lease agreement on June 30, 2025 (the “Relinquished Space”). The Expansion Premises will increase the Company’s total leased square footage in the building from 24,725 square feet to 40,606 square feet, which will be subsequently reduced to 35,954 square feet as of June 30, 2025 following removal of the Relinquished Space. The Lease Amendment also required the Company to pay an additional security deposit of $ 0.3 million. ​ On November 13, 2023, the Company entered into a new Equity Distribution Agreement (the “2023 Equity Agreement”) with Piper Sandler & Co. as Sales Agent in connection with the establishment of an at-the-market offering program under which the Company may sell shares of the Company’s common stock, from time to time through the Sales Agent. The Company terminated the previous 2020 Equity Agreement in connection with its entry into the 2023 Equity Agreement. ​ 18 Table of Contents