Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 001-37526
TELA Bio, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1 Great Valley Parkway, Suite 24
Malvern, Pennsylvania
(Address of principal executive offices)
45-5320061
(I.R.S. Employer
Identification Number)
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:
Common Stock, $0.001 par value per share
Trading Symbol
TELA
Name of each exchange on which registered:
The Nasdaq Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). ☒ Yes(cid:0)☐ No(cid:0)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☒
Accelerated filer ☐
Smaller reporting company ☒
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 ☒
The registrant was not a public company as of the last business day of its most recently completed second fiscal quarter and, therefore, cannot
calculate the aggregate market value of its common equity held by non-affiliates as of such date.
As of March 20, 2020, the registrant had 11,407,243 shares of Common Stock, $0.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with the U.S. Securities and Exchange Commission (the “SEC”) for TELA Bio’s annual
meeting of stockholders are incorporated by reference into Part III of this Form 10-K
Table of Contents
Item No.
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
TABLE OF CONTENTS
PART I
Page No.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
MARKET FOR REGISTRANTS’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
EXHIBIT INDEX
SIGNATURES
2
4
34
74
74
74
74
74
76
77
86
89
89
90
90
91
91
91
91
91
91
92
94
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Annual Report on Form 10-K that are not statements of historical or current facts, such as those
under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements discuss our business, operations and financial performance and conditions, as well as our plans, objectives and
expectations for our business operations and financial performance and condition. In some cases, you can identify forward-
looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,”
“design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “positioned,” “potential,”
“seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events
and future trends, or the negative of these terms or other comparable terminology. In addition, statements that “we believe”
or similar statements reflect our beliefs and opinions on the relevant subject. These forward-looking statements, which are
subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our
anticipated growth strategies and anticipated trends in our business.
You should understand that the following important factors could affect our future results and could cause those results or
other outcomes to differ materially from those expressed or implied in our forward-looking statements:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
estimates regarding future results of operations, financial position, research and development costs, capital
requirements and our needs for additional financing;
the commercial success and the degree of market acceptance of our products;
our ability to expand, manage and maintain our direct sales and marketing organization and to market and sell our
products in the U.S.;
the performance of Aroa Biosurgery Ltd. (“Aroa”), in connection with the development and production of our
products;
our ability to compete successfully with larger competitors in our highly competitive industry;
our ability to achieve and maintain adequate levels of coverage or reimbursement to our current and any future
products we may seek to commercialize;
our ability to enhance our products, expand our indications and develop and commercialize additional products;
the development, regulatory approval, efficacy and commercialization of competing products;
our business model and strategic plans for our products, technologies and business, including our implementation
thereof;
the size of the markets for our current and future products;
our ability to attract and retain senior management and other highly qualified personnel;
our ability to obtain additional capital to finance our planned operations;
our ability to commercialize or obtain regulatory approvals for our products, or the effect of delays in
commercializing or obtaining regulatory approvals;
regulatory developments in the U.S. and internationally;
the effect of events for which we have no control, including, global pandemics including the Coronavirus Disease
2019 (“COVID-19”) and economic uncertainty;
our ability to develop and maintain our corporate infrastructure, including our internal controls;
our ability to establish and maintain intellectual property protection for our products, as well as our ability to
operate our business without infringing the intellectual property rights of others;
our expectations regarding the use of proceeds from our initial public offering (“IPO”); and
other risks and uncertainties, including those listed under the caption “Risk Factors.”
These forward-looking statements are based on management's current expectations, estimates, forecasts and projections
about our business and the industry in which we operate, and management's beliefs and assumptions are not guarantees of
future performance or development and involve known and unknown risks, uncertainties and other factors that are in some
cases beyond our control. In light of the significant uncertainties in these forward-looking statements, you should not rely
upon forward-looking statements as predictions of future events. Although we believe the expectations reflected in the
forward-looking statements are reasonable, the future results, levels of activity, performance or events and circumstances
reflected in the forward-looking statements may not be achieved or occur at all. Except as required by law, we undertake no
obligation to publicly update any forward-looking statements, whether as a result of new
3
Table of Contents
information, future events or otherwise after the date of this Annual Report on Form 10-K 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.
ITEM 1.
BUSINESS
Overview
PART I
We are a commercial stage medical technology company focused on designing, developing and marketing a new category
of tissue reinforcement materials to address unmet needs in soft tissue reconstruction. We offer a portfolio of advanced
reinforced tissue matrices that improve clinical outcomes and reduce overall costs of care in hernia repair, abdominal wall
reconstruction and plastic and reconstructive surgery. Our products are an innovative solution that integrate multiple layers
of minimally-processed biologic material with interwoven polymers in a unique embroidered pattern, which we refer to as
a reinforced tissue matrices.
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, our exclusive manufacturer and
supplier, and have demonstrated safety and clinical effectiveness in our ongoing prospective, single arm, multicenter post-
market clinical study, which we refer to as our BRAVO study. To date, we have enrolled 91 patients. The first 32 patients
who have undergone surgery and completed the one-year follow-up visit have been evaluated in the BRAVO study and
experienced no ventral hernia recurrences, no explantations and no surgical site occurrences requiring follow-up surgery.
Our second portfolio of products, the OviTex PRS Reinforced Tissue Matrix (“OviTex PRS”) addresses unmet needs in
plastic and reconstructive surgery. In April 2019, our OviTex PRS products received 510(k) clearance from the FDA, which
clearance was obtained by Aroa and is currently held by us.
We began commercialization of our OviTex products in the U.S. in July 2016, and they are now sold to approximately 250
hospital accounts. Hernia repair is one of the most common surgeries performed in the U.S., representing approximately
1.2 million procedures annually. Our OviTex portfolio consists of multiple products that can be used for ventral 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 specifically for use in laparoscopic and robotic-assisted surgery called OviTex LPR, which we began
commercializing in November 2018. We subsequently expanded the OviTex LPR product line in December 2019.
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. Our OviTex PRS portfolio is supported by non-human
primate data that demonstrated more rapid tissue integration and tissue remodeling compared to the market leading biologic
matrix used in this indication. The current annual market for biologic matrices used for plastic and reconstructive surgery in
the U.S. is approximately $500 million. We commenced a limited launch in May 2019 and expect to continue
commercializing in a controlled manner to gradually expand our surgeon network throughout 2020. We will also evaluate
new generation products. We also intend to engage in discussions with the FDA regarding an Investigational Device
Exemption (“IDE”) protocol to study the safety and effectiveness of our OviTex PRS product for an indication in breast
reconstruction surgery.
We have a broad portfolio of intellectual property protecting our products, which we believe, when combined with our
proprietary manufacturing processes and know-how, provides significant barriers to entry. Our intellectual property applies
to our differentiated product construction and materials. In addition, we believe our exclusive manufacturing and long-term
supply and license agreement (the “Aroa License”) with Aroa creates a competitive advantage by allowing us to secure an
exclusive supply of ovine rumen at a low cost. Ovine rumen, the forestomach of a sheep, is the source of the
4
Table of Contents
biologic material used in our products. In manufacturing the product, we use biologic material from ovine rumen because
of its plentiful supply, optimal biomechanical profile and open collagen architecture that allows for rapid cellular
infiltration. We purchase product from Aroa at a fixed cost equal to 27% of our net sales of licensed products.
We market our products through a single direct sales force, predominantly in the U.S. We have invested in our direct sales
and marketing infrastructure in order to expand our presence and to promote awareness and adoption of our products. As of
December 31, 2019, we had 35 sales territories in the U.S. As part of our commercial strategy, we plan to continue to invest
in our commercial organization by hiring additional account managers, clinical development specialists, business managers
and administrative support staff in order to cover the highest potential of accounts for soft tissue reconstruction procedures.
We plan to continue to contract with group purchasing organizations (“GPOs”) and integrated delivery networks (“IDNs”)
to increase access to and penetration of hospital accounts. We plan to adjust our commercial expansion plan as appropriate
as we continue to better understand the effects of COVID-19 pandemic on our sales and marketing efforts.
Our revenue for the years ended December 31, 2019 and 2018 was $15.4 million and $8.3 million, respectively, which
represents an increase of $7.2 million, or 87%. Our net loss for the same time periods was $22.4 million and $21.1 million,
respectively. As of December 31, 2019, we had an accumulated deficit of $167.9 million. The vast majority of our revenue
to date has been generated from sales of our OviTex products in the U.S., with the remainder generated from sales of our
OviTex products in Europe and sales of our OviTex PRS products in the U.S.
In November 2019, we closed our IPO in which we issued and sold 4,398,700 shares of our common stock at a public
offering price of $13.00 per share, including 398,700 shares of our common stock sold pursuant to the underwriters’ option
to purchase additional shares. We received net proceeds of $50.6 million after deducting underwriting discounts,
commissions and other offering expenses. Our common stock is listed on the Nasdaq Global Market under the trading
symbol “TELA.”
Market Opportunity
OviTex
Hernia repair is one of the most common surgeries performed in the U.S. There are an estimated 1.2 million hernia repairs
annually in the U.S. including recurrences, which we categorize as approximately (i) 65,000 complex/moderate ventral
hernia repairs and abdominal wall reconstructions, (ii) 362,000 simple ventral hernia repairs and (iii) 789,900 inguinal
hernia repairs. We estimate that there are approximately 44,400 hiatal hernia repairs annually in the U.S. Approximately
90% of all hernia repairs are treated with a tissue reinforcement material.
The healthcare burden of hernia disease to patients, insurers and employers is significant. For the patient, a hernia may
cause an increasing level of pain when lifting, straining during urination or a bowel movement, or sitting or standing for
long periods of time. Increased pain from the hernia is the most common reason that a patient who is deferring surgical
hernia repair will ultimately elect repair surgery. Following surgical hernia repair, convalescence has a significant
socioeconomic impact. Absence from work during this period can range from approximately five to 14 days according to
one study. Pain is the most common cause of delay in returning to work, followed by wound problems. Long-term pain or
discomfort at the hernia repair site is one of the most serious complications of hernia surgery and may, in some cases,
persist for years.
In addition, for third-party payors, the costs related to hernia are significant. The number of annual physician office visits in
the U.S. related to hernia were approximately 2.5 million in 2016 according to the National Ambulatory Medical Care
Survey. Hernia repair and abdominal wall reconstruction inpatient per procedure costs in the U.S. ranged from
approximately $6,117 to $29,615 in 2018 according to the national average Medicare Severity Diagnosis Related Groups
(“MS-DRG”) rate which does not account for surgeon fees involved with such procedures. Hernias are prone to recurrence,
which often require multiple repair procedures and additional healthcare expenditures. In the U.S., the economic burden of
hernia repair accounts for approximately $48 billion of healthcare expenditures annually.
5
Table of Contents
Given the limitations of and lack of innovation in existing hernia repair products, we believe a significant market
opportunity exists for our portfolio of OviTex products. Based on the volume weighted average selling price of our OviTex
products, we estimate the annual U.S. total addressable market opportunity for our OviTex products to be approximately
$1.5 billion.
Approximate
Number of
Annual
U.S. Hernia
Procedures
Using
Tissue
Reinforcement
Material
Estimated
Annual
U.S. Total
Addressable
Market
Opportunity
Traditional
Products
Utilized
58,000 $
350 million Biologic Matrices and Resorbable
326,000 $
711,000 $
40,000 $
Synthetic Mesh
500 million Permanent Synthetic Mesh
650 million Permanent Synthetic Mesh
40 million Biologic Matrices and Resorbable
Synthetic Mesh
1,135,000 $
1.5 billion
Complex/Moderate Ventral Repair /Abdominal
Wall Reconstruction
Simple Ventral Hernia Repair
Inguinal Hernia Repair
Hiatal Hernia Repair
Total
OviTex PRS
Modern advances in tissue engineering have transformed the plastic and reconstructive surgeon’s management strategies
across a wide variety of applications. Because biologic matrices incorporate into host tissues and enable revascularization
and functional tissue remodeling, surgeons have realized multiple applications for their use, with techniques tailored to the
specific requirements of the surgery. There is growing clinical literature validating the use of biologic matrices in head and
neck surgery and reconstructions of the chest wall, pelvic region, extremities and breast.
In head and neck surgery, biologic matrices are used for both aesthetic and reconstructive purposes that include: surgery of
the nose to change its shape or improve its function, referred to as rhinoplasty; lip augmentation; repair of perforations of
the cartilage and thin bone separating the nostrils referred to as the nasal septum; complex reconstruction of the oral and
oropharynx cavities after oncologic resection; cleft palate repair; upper and lower eyelid reconstruction; scalp defects and
defects of the fibrous membrane covering the brain and spinal cord referred to as dura. In chest wall reconstruction,
biologic matrices are used to repair defects from oncologic resections. In pelvic reconstruction, biologic matrices are
utilized as an adjunct in the reconstruction of acquired pelvic defects caused by resections for colorectal, gynecologic and
urologic malignancies. In extremities reconstruction, biologic matrices are used in the upper extremity for repair of the
donor site following the harvest of a radial forearm free flap, a procedure used to harvest tissue and replace it in the head
and neck after cancer has been resected. In breast reconstruction, biologic matrices are utilized for prosthetic based
reconstruction following the removal of cancerous breast tissue.
Breast reconstructions can be performed either using a sub-pectoral or pre-pectoral technique. In a sub-pectoral technique,
the upper portion of the breast implant is placed below the pectoralis muscle and a biologic matrix is placed around the
lower portion of the breast implant. In a pre-pectoral technique, the entire breast implant is placed above the pectoralis
muscle and the full top surface of the breast implant is covered. The pre-pectoral technique utilizes a larger biologic matrix
compared to that needed with the sub-pectoral technique. For patients who undergo autologous reconstruction, the donor
site of the autologous tissue, typically the abdomen, may require soft tissue reinforcement.
Based on the current sales of biologic matrices in the U.S. we estimate the annual U.S. current addressable market
opportunity for our OviTex PRS products to be approximately $500 million. This market continues to grow as surgeon and
patient preferences shift from sub-pectoral to pre-pectoral techniques.
Given the limitations of and lack of innovation in existing biologic matrices for plastic and reconstructive surgical
procedures, we believe a significant market opportunity exists for our OviTex PRS portfolio products.
6
Table of Contents
Current Materials Used in Hernia Repair and Abdominal Wall Reconstruction and Their Limitations
Hernia Repair and Abdominal Wall Reconstruction
The vast majority of hernias are treated with surgical repair. Surgical hernia repair is performed either through open repair,
which uses a single incision to open the abdomen or groin across the hernia, or minimally invasive repair, which involves
laparoscopic or robotic-assisted techniques. Laparoscopic surgery is a minimally invasive surgical technique performed in
the abdomen or groin through small incisions. Surgical instruments and devices, such as mesh products, are then delivered
to the surgical site through a trocar, which is an access port to the patient’s abdomen or groin. Robotic-assisted surgery is
also performed using small incisions in the patient’s abdomen or groin and a trocar, but the surgeon sits at a console in the
operating room and operates the robotic instruments remotely.
At the advent of hernia repair, all procedures were performed using an open surgical technique in which an incision is made
through the body to access and repair the hernia. Due to the amount of healthy soft tissue disruption required for an open
procedure, there is a high risk of wound-related complications and seroma formation. In the early 1990s, surgeons began
using a laparoscopic approach for hernia repair because it provided the benefits of lower wound complication rates, lower
patient morbidity and decreased length of stay for patients. Despite these benefits, laparoscopic surgery presents surgeons
with challenges, primarily due to restricted instrument dexterity that makes it difficult to achieve primary closure of the
hernia defect, in which the connective tissue layer is sutured close, and leads to a bridged repair. In a bridged repair, the
tissue reinforcement material spans a portion of the hernia defect without any connective tissue layer above it to provide
additional reinforcement. This leads to increased risk of bulging of the material or hernia recurrence. Robotic-assisted
hernia repair addresses this issue while still providing the benefits of a laparoscopic repair. In robotic-assisted repair, the
surgeon enjoys greater instrument dexterity and precision, and is able to achieve primary closure of the hernia defect. This
has contributed to a significant increase in the number of robotic-assisted hernia repair over the last several years.
It is estimated that about 90% of hernia repairs today use a form of reconstruction material to provide long-term support at
the repair site. Reconstruction materials include synthetic mesh, which can be either permanent or resorbable, and biologic
matrices made from tissue material.
Permanent Synthetic Mesh
Permanent synthetic mesh, the oldest category of hernia repair materials, is made of plastic materials that are also used in
industrial and consumer products. These products have gained popularity with surgeons because they are relatively inert,
can be readily sterilized, exhibit biomechanical strength and durability and are available at relatively low upfront cost.
Limitations of permanent synthetic mesh products may include:
·
·
·
·
·
·
significant persistent foreign body inflammatory response that can result in encapsulation of the implant by
fibrotic tissue or contraction of the mesh;
chronic post operative pain;
scar tissue formation and lack of regeneration of soft tissue;
permanent susceptibility to mesh infection;
significant cost associated with subsequent repairs or failed and infected mesh;
compromised abdominal wall anatomy due to damaged and eroded tissue rendering subsequent surgical
repairs challenging; and
· migration of the permanent synthetic mesh which can result in organ erosion or perforation.
7
Table of Contents
Many of these complications caused by permanent synthetic mesh require additional surgical intervention, including,
explantation of the mesh or repair of hernia recurrence or the abdominal wall. Based on longitudinal data from the Danish
Hernia Database, in an analysis of approximately 2,900 patients who received a mesh hernia repair, the observed rate of
surgical intervention due to either recurrence or mesh-related complications at five years post operatively was
approximately 17%. As a result of these complications and litigation involving these complications, the number of adverse
events reported to the FDA for permanent synthetic mesh hernia repairs has risen from 643 in 2016, 2,464 in 2017, to more
than 6,400 in 2018 through October. Synthetic mesh products have been the subject of more than 6,000 lawsuits in the U.S.
Biologic Matrices
The complications associated with permanent synthetic mesh prompted the development of biologic matrices as a second
category of hernia repair materials. Biologic matrices are derived from human or animal dermis, pericardium or intestinal
submucosa, which allows them to become replaced entirely by the patient’s own tissue over time, a process known as
remodeling. The goal behind these biologic materials was to lower the foreign body inflammatory response and
biomechanical requirements of the repair, while providing a matrix upon which tissue remodeling could occur. Compared
to permanent synthetic mesh, biologic matrices are less likely to induce this inflammatory response and become infected;
however, they may have the following limitations:
·
·
·
·
·
lack strength or durability as compared to synthetic mesh products;
prone to laxity and stretching;
difficult to handle, leading to longer operating times as compared to synthetic mesh products;
inability to be placed in a patient through a trocar in laparoscopic or robotic-assisted surgery; and
considerably more expensive upfront costs than permanent synthetic mesh, typically limiting their use to
complex hernia repairs or abdominal wall reconstructions.
Though hernia recurrence occurs with the use of all types of soft tissue reconstruction, biologic matrices have the highest
rates of recurrence, in part as a result of being commonly used in complex hernia repairs or abdominal wall reconstructions.
The RICH study, a multicenter, prospective study sponsored by LifeCell Corporation (“LifeCell”) that evaluated the
performance of Strattice, the current market-leading biologic matrix, in open ventral incisional hernia repair in
contaminated abdominal wall defects, demonstrated post operative hernia recurrence rates of 22% and 33% at 12‑months
and 24‑months follow-up, respectively.
Resorbable Synthetic Mesh
Resorbable synthetic mesh was introduced as a third category of hernia repair materials and as an alternative to permanent
synthetic mesh and biologic matrices. Resorbable synthetic mesh was designed with the intended benefits of full
degradation over several months, a moderately lower cost than biologic matrices and gradual transfer of strength from
synthetic mesh to native tissue over time. Resorbable synthetic mesh is polymer-based and does not include biologic
material to promote tissue remodeling and healing. Despite improvements compared to the use of permanent synthetic
mesh or biologic matrices, limitations of resorbable synthetic mesh may include:
·
·
significant foreign body inflammatory response that can result in encapsulation or contraction of the mesh
until resorbed;
scar tissue formation and lack of remodeling of soft tissue;
· mesh infection until resorbed;
8
Table of Contents
· migration of the mesh until resorbed which can result in organ erosion or perforation; and
·
lack of mid-term and long-term soft tissue reinforcement as resorption progresses.
Many of these complications can require additional surgical intervention including explantation of the resorbable synthetic
mesh or repair of hernia recurrence or the abdominal wall. Data from a recently published, multicenter, prospective study
sponsored by C.R. Bard, Inc. that evaluated the performance of Phasix, the current market-leading resorbable synthetic
mesh, in CDC Class I, high risk ventral and incisional hernia repair, showed a post operative hernia recurrence rate of 12%
at 18‑months follow-up.
Current Materials Used in Plastic and Reconstructive Surgery and Their Limitations
Biologic matrices are most commonly used in plastic and reconstructive surgery, including surgery of the nose to change its
shape or improve its function, referred to as rhinoplasty, lip augmentation, repair of perforations of cartilage and thin bone
separating the nostrils, complex reconstruction of the oral and oropharynx cavities after oncologic resection, cleft palate
repair, upper and lower eyelid reconstruction, scalp defects, and defects of the fibrous membrane covering the brain and
spinal cord, called the dura, because of their ability to define shape and position, improve tissue quality, reinforce existing
soft tissue and reduce the rate of complications associated with a foreign body inflammatory response, however they are
prone to excessive stretching over time and difficult for surgeons to handle. These limitations may lead to undesirable
results requiring additional surgical intervention. Additionally, biologic matrices are typically expensive to source.
Our Solution
We have created a new category of tissue reinforcement materials that were purposefully designed in close collaboration
with more than 100 surgeons to address the unmet clinical needs in soft tissue reconstruction. Our portfolio of products,
designed with over 95% biologic material, combines the benefits of both biologic and polymer materials while addressing
their limitations by interweaving polymer fibers through layers of a minimally-processed biologic material. These products
are priced competitively, and designed for use with a range of surgical techniques, allowing the benefits of an advanced
biologic repair to be available to more patients.
The biologic material serves as the natural building block from which we can fabricate devices that meet specific clinical
and surgical handling requirements. This material consists of an intact, minimally-processed extracellular matrix derived
from ovine rumen, which is the forestomach of a sheep. Polymer fibers are interwoven through the layers of biologic
material in unique embroidered patterns and contribute to less than 5% of the overall device by mass. The interwoven
polymer utilized can be either permanent, made from polypropylene, or resorbable, made from polyglycolic acid (“PGA”).
The embroidering pattern varies between our OviTex and OviTex PRS portfolios to impart different biomechanical
properties tailored for their respective intended clinical applications. Our OviTex products are designed with a lockstitch
embroidery pattern that is sewn in a grid pattern to create a ripstop effect and minimize stretch. Our OviTex PRS products
are designed with a patented corner-lock stitch pattern designed to resist deformation and to control the degree and
direction of stretching of the product.
Our capabilities in polymer science, biologics, textile engineering and analytical testing enable us to quickly design,
manufacture and develop innovative products. These competencies also allow our technical team to tailor the degree of
stretch, direction of stretch, overall strength, handling properties, permeability, thickness, texture, size and shape of each
reinforced tissue matrix to suit the needs of particular clinical applications and surgical techniques. This expertise has been
utilized in the development of our OviTex and OviTex PRS products and is currently being leveraged in the development of
our pipeline products.
Our reinforced tissue matrices are designed to improve the outcomes of soft tissue reconstructions by reinforcing tissue
while allowing rapid tissue integration, revascularization and biomechanical control. In addition to overall strength, a key
property that we engineer into our products is the degree to which they stretch, known as compliance. Each of our products
is designed to exhibit a degree of compliance appropriate for its intended clinical application.
9
Table of Contents
The graphics below illustrate the key features of our OviTex and OviTex PRS products:
OviTex
OviTex PRS
We believe the principal benefits of our reinforced tissue matrices are:
·
Reduced foreign body inflammatory response. The biologic material utilized in our reinforced tissue
matrices acts to reduce the body’s inflammatory response to the device. Our unique embroidered patterns
create a macroporous grid within the biologic material. The biologic material largely surrounds the polymer
and helps attenuate and localize inflammation to zones immediately surrounding the polymer. In our non-
human primate comparative study in which we compared our OviTex products to several commercially
available synthetic mesh and biologic matrix products, our OviTex products demonstrated a minimal foreign
body inflammatory response, similar to biologic matrices, and less foreign body inflammatory response than
all of the synthetic mesh tested at 24 weeks.
10
Table of Contents
·
·
Enhanced remodeling of soft tissue and rate of healing. Our reinforced tissue matrices are constructed to
provide increased surface area and permeability, allowing for rapid absorption of wound fluids and blood
during implantation and enabling improved supply of oxygen, cellular infiltration, migration, and
repopulation for revascularization and functional tissue remodeling during healing. In our non-human primate
comparative study, at 24 weeks the pattern of collagen formation in our OviTex products was reminiscent of
connective tissue as opposed to the random fibers typical of scar tissue that were seen adjacent to the
synthetic mesh. By contrast, the synthetic mesh showed no signs of remodeling of soft tissue and exhibited a
high level of mesh contraction.
Ability to tolerate a contaminated wound environment. Our reinforced tissue matrices are engineered to
create hundreds of micro-channels to promote fluid exchange to allow host cells and new blood vessels to
penetrate the reinforced tissue matrix. In our non-human primate comparative study, at four weeks our
OviTex products had host cells between and within the layers of the reinforced tissue matrix. We believe this
early cell infiltration may reduce the potential for bacterial colonization and the risk for infection. In our
OviTex BRAVO study, there were no wound infections that required surgical intervention or device removal
in the first 32 patients who reached one year follow-up.
· Highly engineered biomechanical properties with durability of results. Our reinforced tissue matrices are
reinforced with interwoven polymer fibers to provide mid-term and long-term strength. The interwoven
polymer increases the strength of our OviTex products by approximately 25% compared to the biologic
material alone. When tensile forces are applied, this design allows for load sharing between the biologic
material and the polymer during the remodeling process. Data from our strength testing demonstrated that our
OviTex products meet or exceed that of published data from market-leading permanent and resorbable
synthetic mesh. In our BRAVO study, there were no hernia recurrences in the first 32 patients who reached
one year follow-up, despite 80% of these patients having one or more factors known to increase the risk of
recurrence. Based on this interim data, we believe that this 0% recurrence rate is the lowest reported rate in
any prospective study that includes either our biologic or resorbable synthetic mesh competitors. The addition
of polymer to our reinforced tissue matrices allows each product to maintain its physiologic compliance
properties, while resisting stretching and elongation. In our non-human primate comparative study, our
OviTex devices best preserved their original shape, experiencing less contraction compared to biologic and
synthetic mesh.
·
·
Enhanced surgeon handling and satisfaction. Each of our embroidery patterns was designed specifically to
allow the surgeon to trim and shape the product without the polymer unraveling. In addition, based upon our
survey of approximately 50 surgeons, our OviTex products conform readily to the contours of surgical sites
and are easy to handle, trim, suture and tack in all surgical approaches. In interim data presented from our
BRAVO study, of 26 subjects who received minimally invasive surgery, 100% of the surgeons who operated
on those subjects cited the product as being easy to place and the average surgeon satisfaction with the
product was 9.7/10 at both 30 and 90 days. In addition, we have designed an OviTex product for use in
laparoscopic and robotic-assisted surgery.
Lower upfront cost products. Our reinforced tissue matrices provide our customers with meaningful cost
savings over leading competitive products across a broad range of clinical uses so that more patients can
experience the benefits of an advanced biologic repair solution. We price our OviTex products competitively,
and on average, our customers realize 20% to 40% cost savings over leading biologic matrices and resorbable
synthetic mesh. Our OviTex PRS portfolio is priced below leading biologic matrices.
11
Table of Contents
Our Strengths
We are focused on developing and commercializing a new category of tissue reinforcement materials for surgeons and
patients that aim to address the shortcomings of existing products. We believe the following strengths will allow us to build
our business and potentially increase our market penetration:
·
·
·
·
·
·
Innovative and broad portfolio of products. Our OviTex and OviTex PRS products are the only FDA-
cleared products to incorporate polymer fibers interwoven through layers of biologic material in a lockstitch
pattern creating an embroidered construction. The biologic matrix is derived from ovine rumen and utilizes a
patented process to create a reinforced tissue matrix that is optimized for soft tissue reconstruction. Our
OviTex and OviTex PRS products are available in resorbable and permanent polymer versions in a variety of
configurations and sizes. For example, our OviTex devices are currently available in sizes ranging from 4 × 8
cm to 25 × 40 cm, and our OviTex LPR devices are designed with specific thickness, handling properties and
shapes optimized for use in laparoscopic and robotic-assisted surgery.
Disruptive technology supported by compelling clinical evidence. The safety, efficacy and durability of our
OviTex products are supported by compelling clinical evidence that includes studies in more than 200 non-
human primates, and our BRAVO study. Our non-human primate data demonstrated that use of our OviTex
products resulted in more rapid tissue integration and revascularization compared to biologic matrices and
lower inflammatory response and better functional tissue remodeling compared to permanent and resorbable
synthetic mesh. In our BRAVO study, the first 32 patients who reached one year at follow-up had
demonstrated no ventral hernia recurrence, no explantations and no surgical site occurrences requiring follow-
up surgery.
Long-term supply agreement that provides pricing flexibility. Our Aroa License provides for the exclusive
supply of ovine rumen and manufacture of our OviTex and OviTex PRS products, which gives us a low and
fixed cost of raw materials. We purchase product from Aroa at a fixed cost equal to 27% of our net sales of
licensed products.
Potential cost savings to healthcare systems and hospitals. Our pricing flexibility allows us to sell our
OviTex and OviTex PRS products to hospitals and healthcare systems at prices substantially below
competitive products based on national average competitive pricing. Our OviTex products are sold at prices
approximately 20% to 40% lower than other biologic matrices and resorbable synthetic mesh. We believe our
pricing flexibility will drive greater adoption of our products. Our OviTex PRS products are priced below
leading biologic matrices, and as we launch our OviTex PRS portfolio, we anticipate that our customers will
realize cost savings over biologic matrices based on national average competitive pricing. We believe that the
average selling prices across our products will provide financial benefits to our customers in addition to
improving clinical outcomes.
Established reimbursement pathway for hernia repair. The implantation of biologic matrices and synthetic
mesh for hernia repair is coded using an established fixed procedure payment system known as a MS-DRG
that consists of a lump sum payment rate that varies based on the degree of complications and comorbidities
of each hernia. In addition, surgeons receive payment for their services depending on the coding associated
with the procedure. The MS-DRG-based reimbursement system encourages hospitals to become more
efficient in treating patients due to its fixed per-patient reimbursement nature.
Broad intellectual property portfolio. Our products are covered by intellectual property that broadly covers
changing a biologic matrix’s biomechanical properties by interweaving a polymer thread through the biologic
matrix. Specifically, our patents claim the ability to tailor stretch resistance. The ability to predictably control
the biomechanical properties of a biologic matrix is the cornerstone of our product portfolio. Our intellectual
property also covers the development of extracellular matrix scaffolds derived from ovine rumen, methods for
isolating these scaffolds from ovine rumen, layering multiple sheets of these ovine rumen scaffolds together,
sewing in an anti-adhesive layer into a scaffold, and adding unique patterns sewn or embroidered into these
scaffolds using different polymers to impart reinforcing strength.
12
Table of Contents
Through the Aroa License and our issued or allowed patents and patent applications, we have a broad
portfolio of intellectual property that is leveraged in all of our reinforced tissue matrix products. In addition,
we believe that the trade secrets developed with Aroa create additional barriers to entry.
·
Industry leading executive team with proven track record. Our executive team consists of seasoned medical
device professionals with deep industry experience, and a broad network of relationships within the industry
and the medical community. Our executive team has led and managed companies through significant growth
and introduction and commercialization of multiple new products, including driving surgeon adoption of
biologic and biosurgery technologies. Members of our team have held leading positions with medical
technology companies such as Orthovita Inc., Stryker Corporation, Integra LifeSciences, LifeCell and
Medtronic plc. We believe this team is well-positioned to lead us through the commercial expansion of our
products and development and launch of future products.
Our Growth Strategy
Our goal is to become the leading provider of soft tissue reconstruction products. The key elements of our strategy include:
·
·
·
·
·
Expand our U.S. commercial organization to support our growth. We sell our products through a single
direct sales organization in the U.S. As of December 31, 2019, we had approximately 250 active hospital
accounts, which are supported by 60 employees in our U.S. based commercial organization. We plan to
continue to invest in our commercial organization by adding account managers, clinical development
specialists, business managers and administrative support staff in order to cover the highest potential of
accounts for soft tissue reconstruction procedures.
Promote awareness of our products to drive surgeon use. We educate surgeons regarding the value
proposition of our products through presentations and exhibits at industry conferences, medical education
symposia, direct training and education, webinars and publishing additional clinical data demonstrating the
benefits of our products and establishing online peer-to-peer communities. We plan to continue to drive
awareness of our products through these programs, while expanding their geographic reach and increasing the
number of surgeon interactions.
Drive utilization through existing GPO and IDN contracts and secure additional contracts. We are focused
on partnering with our existing GPO- and IDN-contracted customers to promote implementation of our
contracts, increase our access to surgeon customers, broaden awareness of products and help drive utilization
of our products within associated hospitals and healthcare systems. In addition, we continue to pursue
contracts with additional GPOs and IDNs. GPO and IDN contracts enable greater access to geographies with
high procedural volumes and provide prioritized status within hospital procurement systems.
Continue to build upon clinical evidence of the effectiveness and safety of our products. We are committed
to evidence-based medicine and investing in clinical data to support the use of our products. We plan to
publish 90‑day, 12‑month and 24‑month follow-up data from our BRAVO study over the next several years.
In addition, we are tracking the health economic outcomes within our BRAVO study. We also plan to initiate
a post-market study of our OviTex products for robotic-assisted ventral hernia repair surgery in 2020. We also
intend to support independent investigator-led post-market clinical studies on the effectiveness and safety of
our OviTex PRS products.
Advance our portfolio of reinforced tissue matrices with the introduction of new product features and
designs. We plan to continue to expand our product offerings and the treatment capabilities of our products to
address a broader patient base within soft tissue reconstruction. New product features and designs that we
plan to introduce, subject to receiving any required regulatory approval or clearance, include:
— additional sizes and shapes of our OviTex LPR product line;
13
Table of Contents
— a self-grip technology designed to enhance the use of our OviTex products in robotic-assisted surgery for
inguinal and ventral hernia repair and enhancements to our OviTex PRS products to assist with surgical
placement and tissue integration;
— larger OviTex sizes in our resorbable product line; and
— the use of additional polymers, including for instance a longer-acting resorbable and high strength
permanent synthetic, to incorporate into our OviTex and OviTex PRS products.
Our Products
Our Technology Platform
Our advanced reinforced tissue matrix technology consists of multiple layers of minimally-processed, acellular
extracellular matrix derived from ovine rumen with interwoven polymer fibers in a unique embroidered pattern. The
extracellular matrix is the collagen component of the rumen that is retained following removal of the epithelium, muscle
and cellular content, and has an optimal biomechanical profile and open collagen architecture that allows for rapid cellular
infiltration. These thin, strong layers of ovine rumen are plentiful in supply and serve as building blocks from which we can
construct multilayered devices to customize products to adapt to clinical needs and surgeon preferences. The layers of
extracellular matrix provide a high degree of surface area for tissue remodeling. We strengthen these reinforced tissue
matrix layers with interwoven polymers, that are either permanent, polypropylene, or resorbable, PGA. These polymers
were selected because they are well characterized suture materials with a history of significant clinical use and recognized
safety profile. Polypropylene has a high tensile strength and a low inflammatory response in small quantities. PGA is the
fastest resorbing polymer and within three months it tends to be fully absorbed into the body.
Our highly specialized and customizable textile engineering capability allows us to tailor the degree and direction of
stretch, overall strength, handling properties, permeability, thickness, texture, size and shape of each reinforced tissue
matrix to suit the needs of particular clinical applications and surgical techniques. Our textile engineering utilizes a
computer-controlled fabrication method that is scalable, reproducible, efficient and customizable. This embroidery process
uses steel gauge needles to interweave the polymer while also creating hundreds of micro-channels to allow the multi-
directional passage of the patients’ native cells and fluids throughout the product. The interwoven polymers are
embroidered using a lockstitch pattern, which allows for the device to be trimmed without fraying, and we can use a
patented corner-lock pattern, which creates a stable polymer fabric within the biologic material. We manipulate the polymer
thread patterns to control the degree and stretch of our products. Denser grid patterns increase the amount of reinforcement
and less dense patterns of different geometry allow for greater stretch. We are also able to manufacture products with
smooth external layers that minimize the amount of exposed polymer to allow for direct contact with patients’ internal
organs.
OviTex Reinforced Tissue Matrix
Our OviTex Reinforced Tissue Matrix has received 510(k) clearance from the FDA, which clearance was obtained and is
currently held by Aroa, and is intended for use as a surgical mesh to reinforce and/or repair soft tissue where weakness
exists. Indications for use include the repair of hernias and/or abdominal wall defects that require the use of reinforcing or
bridging material to obtain the desired surgical outcome. Our OviTex products can be used in a variety of hernia repairs,
including simple and complex ventral, inguinal and hiatal hernias, as well as abdominal wall reconstructions.
Our OviTex products are sterile reinforced tissue matrices derived from ovine rumen with either polypropylene or PGA.
The product is provided in a dry and hydratable form and packaged in a double pouched configuration. The product can be
stored at room temperature and only needs five minutes from rehydration to use. To be used in surgery our OviTex product
is placed in a sterile dish, rehydrated with sterile saline for five minutes, trimmed to fit the site, if needed, and then
positioned to achieve maximum contact between the device and the surrounding tissue. The device may be sutured, stapled
or tacked into place to avoid excess tension.
All of our OviTex products were designed to minimize the amount of polymer material implanted in patients. The synthetic
material in our OviTex products comprise less than 5% of our final product. Depending on the configuration
14
Table of Contents
selected, the amount of polymer is approximately 75% less than the polymer content of the most widely implanted
permanent synthetic mesh, thereby reducing the patient’s foreign body inflammatory response to the polymer.
We market a variety of OviTex products in a range of sizes, thicknesses and degrees of reinforcement in order to suit
surgeon preference and desired surgical technique. Our OviTex portfolio is designed to allow surgeons to select a device
appropriate for any abdominal tissue plane. Generally, surgeons may place the reinforced tissue matrix in direct contact
with internal organs, known as intraperitoneal placement, or away from these internal organs in a variety of tissue planes,
known as pre-peritoneal placement. When selecting a product for intraperitoneal placement, surgeons require a surface that
minimizes the risk of tissue attachment, whereas when selecting a product for pre-peritoneal placement, surgeons are able
to use a product with polymer exposure on both sides. Surgeons may select the most appropriate product from our OviTex
portfolio based on the size of the defect, necessity or surgeon preference for internal organ contact, use of a minimally
invasive or open surgical technique and risk of infection.
OviTex Laparoscopic and Robotic Procedures
Our OviTex for Laparoscopic and Robotic Procedures (“OviTex LPR”) is a sterile reinforced tissue matrix derived from
ovine rumen with polypropylene fiber intended to be used in laparoscopic and robotic-assisted hernia surgical repairs.
OviTex LPR was designed for use with a trocar and requires the same rehydration and fixation as our other OviTex
products. This product includes design elements to improve surgical handling, including two extra embroidered lines of
blue colored polypropylene fibers to enhance endoscopic orientation and alignment. This product can be introduced into the
patient’s body through various sized trocar ports. Based on surgeon feedback, OviTex LPR was designed in an elliptical or
circular shape to minimize trimming.
OviTex
OviTex 1S
OviTex 2S
OviTex LPR
Size and Shape
Strength
Layers of Ovine
Rumen
Common
Procedures
Polymer
Shelf Life
Configuration
Commercial
Availability
4 × 8 cm to 25 × 40 cm*
(Rectangle or Square)
+
Four
4 × 8 cm to 25 × 40 cm*
(Rectangle or Square)
++
Six
4 × 8 cm to 25 × 40 cm*
(Rectangle or Square)
+++
Eight
12 × 18cm (Ellipse); 9 cm to
15 cm (Round)
+
Four
Moderate ventral hernia
(pre-peritoneal placement),
inguinal hernia, hiatal hernia
Moderate to complex ventral
hernia, can be placed
intraperitoneally
Resorbable (PGA) or
Permanent (Polypropylene)
Resorbable‑18 months
Permanent‑36 months
Exposed polymer on both
sides
(cid:0)
(cid:0)
U.S.
Europe (up to 20 × 20
cm)
Resorbable (PGA) or
Permanent (Polypropylene)
Resorbable‑18 months
Permanent‑36 months
Exposed polymer on one
side, and one smooth side
(cid:0)
(cid:0)
U.S.
Europe (up to 20 × 20
cm)
Complex ventral hernia and
abdominal wall
reconstruction and can be
used for bridging, can be
placed intraperitoneally
Resorbable (PGA) or
Permanent (Polypropylene)
Resorbable‑18 months
Permanent‑36 months
Two smooth sides
Laparoscopic or Robotic-
assisted surgery
Permanent (Polypropylene)
36 months
Exposed polymer on one
side, and one smooth side
(cid:0)
(cid:0)
U.S.
Europe (up to 20 × 20
cm)
U.S.
*
25 x 30 cm and 25 x 40 cm sizes currently only available with permanent (polypropylene) polymer.
+ Denotes relative level of strength
15
Table of Contents
OviTex LPR
OviTex Plastic and Reconstructive Surgery — OviTex PRS
OviTex PRS, has received 510(k) clearance from the FDA, which clearance was obtained by Aroa and is held by us, and 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. Our OviTex PRS product can be stored at room temperature and comes
in the same packaging and requires the same rehydration and fixation as our OviTex products.
Our OviTex PRS product is a sterile reconstructive reinforced tissue matrix composed of three layers of ovine rumen joined
by a patented corner-lock embroidered diamond patterned polymer (PGA or polypropylene) that allows the product to
stretch while also maintaining its shape. Machine punched regularly spaced fenestrations, or holes, and die-cut slits in the
product facilitate fluid management, allow for rapid cellular infiltration and create a directional bias to the stretch. Our
OviTex PRS product is available in arced rectangle, half-moon and oval shapes in a range of sizes (8 × 15 cm through
20 × 25 cm) to suit surgeon preference and nature of the soft tissue repair in plastic and reconstructive surgery. The device
may be trimmed to a desired shape to further accommodate individual anatomy. The shelf life of permanent OviTex PRS is
24 months and the shelf life of resorbable OviTex PRS is 12 months.
OviTex PRS
Product Pipeline and Research and Development
We continue to expand our product pipeline and the treatment capabilities of our products through innovation, which we
believe will expand the patient population that can benefit from our products to maximize their utility across surgical
16
Table of Contents
techniques and clinical applications for soft tissue reinforcement. New product features and designs that we plan to
introduce, subject to receiving any required regulatory approval or clearance, include:
·
·
·
·
additional sizes and shapes of our OviTex LPR product line;
a self-grip technology designed to enhance the use of our OviTex products in robotic-assisted surgery for
inguinal and ventral hernia repair and enhancements to our OviTex PRS products to assist with surgical
placement and tissue integration of our OviTex PRS products;
larger OviTex sizes in our resorbable product line; and
the use of additional polymers, including for instance a longer-acting resorbable and high strength permanent
synthetic, to incorporate into our OviTex and OviTex PRS products.
Clinical Results and Studies
Overview of Preclinical and Clinical Programs
One of our key strategies is to continuously obtain evidence to support the safety and effectiveness of our products, which
we believe will differentiate us from our competitors. As part of our strategy to gather and analyze high-quality data, we
seek to ensure rigorous and reliable data collection and reporting. The data from our preclinical and clinical studies
strengthens our ability to raise surgeon awareness and drive adoption of our products as a new category of soft tissue
reconstruction products. We expect our clinical evidence will provide surgeons with safety and efficacy data on the
appropriate use of our products and we plan to obtain further clinical evidence to support additional regulatory clearances
or approvals of our reinforced tissue matrices for additional indications for use in the future.
We believe we have completed the largest non-human primate preclinical studies conducted in soft tissue reconstruction
surgery. Non-human primates are considered the most suitable animal model to predict the human immune and
inflammatory response to a soft tissue reconstruction device. Although not required for FDA clearance of our reinforced
tissue matrices, we completed these preclinical studies prior to implantation of our products in human patients. In these
studies, we compared our OviTex and OviTex PRS products to market leading competitive materials. In these studies, our
reinforced tissue matrices exhibited a minimal inflammatory response, rapid cellular infiltration and revascularization and
allowed for earlier and complete remodeling into functional tissue.
We are currently sponsoring our BRAVO study. An analysis of the first 32 patients who underwent surgery and completed
the twelve-month follow-up visit showed a 0% rate of hernia recurrence, no device explantations and no predefined
surgical site complications or wound-related events requiring surgical intervention. This clinical study included patients
with a range of comorbidities, prior hernia repairs and history of surgical infections, predisposing them to complications.
These patients were treated using either an open or minimally invasive surgical approach. These findings are generally
corroborated by similar clinical data from multiple published retrospective studies in a variety of hernia repairs utilizing our
OviTex products.
Our OviTex PRS products, designed for plastic and reconstructive surgery, utilize the same ovine rumen biologic material
and interwoven polymer fibers as our OviTex products, but differ in their overall design. Our OviTex PRS reinforced tissue
matrices have also been evaluated in a non-human primate model and demonstrated less inflammation and earlier
remodeling into functional tissue than the leading biologic matrix used in plastic and reconstructive surgical procedures.
Surgeons are beginning to utilize our OviTex PRS reinforced tissue matrices in their surgeries and we plan to continuously
collect, analyze and support the presentation of clinical data to characterize the performance of our reconstructive
reinforced tissue matrices. We also intend to support independent investigator-led post-market clinical studies on the
effectiveness and safety of our OviTex PRS products.
17
Table of Contents
Our BRAVO Study
We are sponsoring our BRAVO study, a prospective, single arm, multicenter study evaluating the clinical outcomes of 91
patients with simple and complex ventral hernias repaired with our OviTex 1S with permanent polymer. The study
completed enrollment of 91 adult patients who underwent open, laparoscopic or robotic-assisted ventral hernia repair at
seven centers in the U.S. between April 2017 and June 2019. The study was designed to test the hypothesis that the strong
preclinical biologic performance and predictable biomechanics of our OviTex reinforced tissue matrices would translate
into better clinical performance than that of biologic or synthetic devices for hernia repair. No study center contributed
more than 19% of patients enrolled.
The primary endpoints of this study are the incidence of early postoperative surgical site occurrences or wound-related
events noted at the hernia repair site and the incidence of other postoperative complications, in each case occurring within
the first three months of the ventral hernia repair. These include deep or superficial wound infection, seroma, hematoma,
wound dehiscence, skin necrosis and fistulas. Hernia recurrence is evaluated at each follow-up visit. In the case of a clinical
suspicion by the surgeon of a recurrence, imaging studies are performed. Patients enrolled in the study are evaluated at
30 days, three months, 12 months and 24 months, with interim analysis of patients being conducted for each 25 patient
cohort that reaches the three- and twelve-month follow-up period after implantation of our OviTex product. Patients
presenting with a primary or recurrent ventral hernia were eligible for the study, with the exception of those with a Body
Mass Index, or BMI, of over 40 kg/m , a Center for Disease Control, or CDC, Class IV/Dirty-Infected wound, or defects
requiring devices larger than 20 × 20 cm or 18 × 22 cm, and other typical exclusion criteria. The secondary endpoints of
this study are incidence of late postoperative surgical site occurrences or wound-related events noted at the hernia repair
site and occurring more than three months after surgery, incidence of other late postoperative complications occurring more
than three months after surgery or true hernia recurrence at the site of surgery at three months, 12 months or 24 months
after the hernia repair.
2
The first 32 patients who have undergone surgery and completed the one-year follow-up visit have been evaluated.
Excluded were two patients who withdrew from the study, one patient who is still active but has missed their one-year visit,
and three subjects who died within three weeks of surgery due to causes unrelated to our OviTex product or the study
procedure.
While many factors can influence surgical wound healing and postoperative infection, bacterial burden is the most
significant risk factor. The CDC wound class is a surgical wound classification system designed by the CDC to help
clinicians preemptively identify patients at risk of surgical site infection and assess the degree of bacterial contamination of
a surgical wound at the time of operation. The CDC identifies four surgical wound classification categories: Class I/Clean;
Class II/Clean-Contaminated; Class III/Contaminated; and Class IV/Dirty-Infected. The Ventral Hernia Working Group
(“VHWG”) grade is a hernia grading system based on risk factor characteristics of the patient and the wound that helps
surgeons develop patient assessment strategies, including the selection of appropriate repair material, the appropriate
surgical technique and overall clinical approach based on each patient’s risk for developing a surgical site occurrence and
postoperative complications. This surgical site occurrence-risk grading system consists of four grades: Grade 1/Low Risk;
Grade 2/Co-Morbid; Grade 3/Potentially Contaminated; and Grade 4/Infected. This grading system represents salient
points along a continuum of risk from low risk (healthy patients with uncomplicated wounds) to high-risk (patients with
multiple comorbidities and uncontrolled infection). The demographics of the 32 patients, as well as the number of previous
hernia repairs, history of surgical infection, wound status, VHWG classification, obesity classification approach and self-
reported patient and surgeon satisfaction are presented in the table below.
18
Table of Contents
Comorbidities
Diabetes Mellitus
Hypertension
Previous Ventral Hernia Repair
Obesity
COPD/Asthma
Smoking History
Prior Hernia Repairs
Yes
No
History of Surgical Infection
Yes
No
Wound Status
Class I
Class II
Class III
VHWG Grade
Grade 1
Grade 2
Grade 3
Obesity Classification
Not Obese
Obese
Morbidly Obese
Approach
Open
Robotic-assisted
Laparoscopic
BRAVO Study Data
(1)
N
%
6
16
14
21
4
9
14
18
6
26
27
3
2
5
21
6
11
15
6
24
6
2
18.8 %
50.0 %
43.8 %
65.6 %
12.5 %
28.1 %
43.8 %
56.3 %
18.8 %
81.3 %
84.4 %
9.4 %
6.3 %
15.6 %
65.6 %
18.8 %
34.4 %
46.9 %
18.8 %
75.0 %
18.8 %
6.3 %
(1) Represents the number of patients out of the first 32 patients
Satisfaction
Patient
Surgeon
Month 12
Average
Range
9.3 (n=27)
9.8 (n=32)
2‑10
8‑10
19
Table of Contents
The table below presents publicly available recurrence data for other biological matrix and resorbable synthetic mesh
products in prospective clinical studies in ventral hernia repair presented in published clinical literature and conference
presentations. Recurrence rates are calculated as the number of hernia recurrence at the time of follow-up divided by the
number of patients who completed follow-up at the same time period.
(1) Hernia Recurrence Rate based on number of hernia recurrences reported in patients who completed follow up and
patients who reported recurrent hernia before the specified follow up period. Clinical literature and conference
presentations included hernia recurrence rates based on number of hernia recurrences in patients who comprised the
initial intent-to-treat population (including those who did not complete the follow up period and did not report a hernia
recurrence).
The table below presents the recurrence rate for the first 32 patients who reached 12‑month follow-up in our BRAVO study.
Product
Name
OviTex
Tissue
Reinforcement
Material
Reinforced Tissue Matrix
Hernia
Recurrence
Rate
Number of
Hernia
Recurrence
— %
—
Number of
Patients who
Completed
Follow-up
32
Follow-up
Period in
Months
12
None of the first 32 patients who reached the one-year follow-up period had experienced a recurrence at that time (0 of 32;
0%). In this study, nine patients experienced surgical site occurrences, of which five were considered possibly related to the
device (5 of 32; 15.6%). Of these five surgical site occurrences, four were infections (abdominal wall abscesses), and one
was a seroma. None of the surgical site occurrences required further surgery or removal of the device, and all surgical site
occurrences had resolved by the time of the 90‑day follow-up visit. All nine patients had comorbidities that are known to
increase the risks of surgical site occurrences, including obesity in seven, diabetes mellitus in one, chronic obstructive
pulmonary disease in one, hypertension in five, one to five previous ventral hernia repairs in seven (average of 2.7 prior
ventral hernia repairs) and previous surgical infections in three. Patient satisfaction for the completed patients was 9.3 out
of 10 at the one-year follow-up and surgeon satisfaction at that time was 9.8 out of 10. Our OviTex product was considered
easy or very easy to use in all cases, whether open or minimally invasive.
The first planned 12‑month analysis of this study showed no device failures requiring explantation, reoperation or
recurrences, thereby demonstrating the strong biologic and biomechanical performance of our OviTex reinforced tissue
matrices. Our 0% 12‑month recurrence rate compares favorably to the reported 12‑month recurrence rates in published
20
Table of Contents
prospective studies for Phasix, and Strattice, which were 5.0%, and 22%, respectively. We believe that our OviTex
reinforced tissue matrices better tolerate an infected environment as demonstrated by our 0% explantation rate.
As the BRAVO data continues to mature, we have recently conducted analysis on the first patient cohort at 24-months and
expanded cohorts at 12-months and 90-days. We have submitted these data to upcoming medical conferences for
presentation.
Preclinical In Vivo Evaluation of our OviTex Product in Non-Human Primates
We evaluated the biologic performance of two configurations of our OviTex reinforced tissue matrices in comparison to
five currently available reconstruction materials and two other reconstruction materials that are no longer commercially
available, including permanent synthetic mesh, resorbable synthetic mesh and biologic matrices in non-human primate
studies, with 73 non-human primates. We selected the African Green monkeys for use in this study because this primate is
closely related to and shares greater than 98% of their genetic code with humans. This non-human primate model has been
used extensively to evaluate clinical and immune responses to pathogens, vaccines, and pharmaceuticals, and to predict
xenograft biocompatibility for abdominal wall repair.
In accordance with the study protocol, the animals were anesthetized and a 7 × 3 cm full thickness “window” defect was
created in the midline of the abdominal wall. The defect was then repaired with a reconstruction material of equal size,
which was sutured in place to repair the defect and the skin was then sutured closed. Next the animals were euthanized at
four, 12 or 24 weeks and the skin of the abdomen was dissected back to expose the site of the device. The graft site was
evaluated for signs of herniation, inflammation, adhesions, contractions or other abnormalities. Then the length and width
of the grafts were measured and the entire grafts and surrounding tissues were removed and photographed. Samples of the
grafts were then prepared for analysis by an independent histopathologist. The most relevant data from this study came
from the 24 week analysis.
Test Articles, Material Classification, Source Materials and Explant Time Points
Material
OviTex PGA 1S
TELA Bio
Manufacturer
Classification
Source Materials
Reinforced
Biologic
Reinforced
Biologic
Biologic
Ovine rumen embroidered with
polyglycolic acid
Ovine rumen embroidered with
4, 12, 24
polypropylene
Porcine dermis
4, 12, 24
Explant Time
Point (weeks)
4, 12, 24
OviTex PP 1S
TELA Bio
Strattice Firm
LifeCell Corporation
(now Allergan)
Phasix
C.R. Bard, Inc. (now BD) Resorbable
Poly-4-hydroxybutyrate (P4HB)
4, 12, 24
Synthetic
C.R. Bard, Inc. (now BD) Permanent
Synthetic
Polypropylene with hydrogel
4, 12, 24
barrier
Ventralight ST
OviTex
At 24 weeks, our OviTex reinforced tissue matrices best preserved their original geometry and exhibited limited
contraction, had minimal inflammation, had rapid cellular infiltration and vascularization, and the grafts fully remodeled
into host tissue (fastest rate of remodeling) with a higher degree of organized collagen than synthetics and biologics (on
average).
Biologic Matrices
At 24 weeks, the biologics significantly contracted in length and expanded in width, had minimal inflammation, slow
cellular infiltration and vascularization, and the grafts fully remodeled into host tissue (slower rate of remodeling than our
OviTex product) and exhibited varying degrees of organized remodeled collagen.
21
Table of Contents
Resorbable Synthetics
At 24 weeks, the resorbable synthetic material exhibited significant contraction, had mild to moderate inflammation (which
persisted at elevated levels throughout the study), showed a substantial layer of early amorphous inflamed tissue adjacent to
the device, and given that they contain no biologic material that can be remodeled, the scar-like collagen formed adjacent to
the persistent synthetic mesh material, separated by a layer of loose connective and adipose tissue, which was also present
between the mesh fibers.
Permanent Synthetics
At 24 weeks, the permanent synthetics exhibited a high degree of contraction in length and width, had mild to moderate
inflammation (which persisted at elevated levels throughout the study), showed substantial layers of early amorphous tissue
formed next to the device, and given that they have no biologic that can be remodeled, they exhibited disorganized and
scar-like collagen surrounding the persistent synthetic mesh material.
Other Clinical Studies Using Our OviTex Products
A growing body of clinical evidence supports the safety, durability and effectiveness of our OviTex products for use in a
range of hernia repair procedures including hiatal, inguinal and ventral hernia repairs and abdominal wall reconstruction.
Preclinical Animal Testing of OviTex PRS
Our resorbable and permanent OviTex PRS products were evaluated in a non-human primate study, in which our OviTex
PRS product was compared to AlloDerm at two, four, 12 and 24 weeks for differences in healing kinetics, as evidenced
through inflammatory response, cellular infiltration, and the morphological quality of the newly remodeled tissue
associated with each device. The inflammatory response for both the OviTex PRS groups and AlloDerm was minimal,
though when comparing the two the response was slightly lower in our resorbable OviTex PRS product at all time points,
including the last 24 weeks. At four weeks, the highly permeable nature of our OviTex PRS product design enhanced fluid
exchange evidenced by more effective and rapid infiltration of host cells in the collagen network. In comparison, the
collagen network of AlloDerm developed a superficial layer of fibroblasts, covering the device, which macroscopically
appeared white and largely inert. The earlier infiltration and faster recruitment of fibroblasts and host cells in our OviTex
PRS product helped “jump start” the remodeling process into host tissue. At 12 weeks, our OviTex PRS product was fully
remodeled and the maturation of the product was slightly ahead of that of AlloDerm at all time points. At 24 weeks,
significant contraction was seen in all AlloDerm devices, as well as calcifications. The collagen in the AlloDerm specimens
showed signs of maturation, much like our OviTex PRS products, which remodeled into mature collagen, consistent of
compact lamellar bundles of low cellularity, occupying the entire defect site with functional tissue. After 24 weeks our
OviTex PRS product was associated with a favorable tissue response, demonstrating rapid infiltration, earlier and more
rapid tissue integration and slightly more advanced tissue remodeling in comparison to AlloDerm.
Intellectual Property
Our success depends in part on our ability to obtain, maintain, protect and enforce our proprietary technology and
intellectual property rights, in particular, our patent and trademark rights, preserving the confidentiality of our trade secrets,
and operating without infringing the valid and enforceable patents and other proprietary rights of third parties. We rely on a
combination of patent, trademark, trade secret and other intellectual property rights and measures to protect the intellectual
property rights that we consider important to our business. We also rely on know-how and continuing technological
innovation to develop and maintain our competitive position.
Aroa License
In August 2012, we entered into the Aroa License, which was amended and restated in July 2015, pursuant to which we
obtained an exclusive license to certain patents and know-how to develop, commercialize and sell bovine and ovine
extracellular matrix products for hernia repair, abdominal wall and breast reconstruction in North America and Europe,
22
Table of Contents
which we refer to as the Licensed Territory. In addition, under the Aroa License, Aroa is our exclusive manufacturer and
supplier for the development of our products.
Pursuant to the terms of the Aroa License, we made upfront payments to Aroa totaling $2.3 million and granted Aroa
74,316 newly issued shares of our restricted common stock. We have made additional payments in the aggregate of
$2.0 million to Aroa following the achievement of certain regulatory and operational milestones, including FDA
510(k) clearance of our OviTex products, which clearance was obtained and is currently held by Aroa, for use in surgical
soft tissue reinforcement and the receipt of the first CE mark for sale of our products in the European Economic Area for
use in abdominal wall reconstruction and hernia repair and our acceptance of certain supply quantities manufactured by
Aroa for our commercial launch in Europe. In addition, we paid Aroa $3.0 million in revenue-based milestone payments
upon our achievement of certain net sales thresholds for sales of our products within the Licensed Territory. An additional
$1.0 million payment will be made to Aroa when cumulative product net sales of our products in the European territory
reach certain amounts.
We are responsible for marketing the products manufactured for us by Aroa. We pay Aroa for the supply and
manufacturing of our products through a revenue sharing agreement. Pursuant to the Aroa License, we retain 73% of the
net sales of all of our products and pay Aroa the remaining 27%. If at any point during the term of the Aroa License we and
Aroa determine that our anticipated product needs exceed Aroa’s manufacturing capabilities, we and Aroa will mutually
approve an expansion and equally share the cost of such expansion. Our share of such expansion costs may be offset by us
against future revenue share payments.
The initial term of the Aroa License terminates on the later of (i) August 3, 2022, or (ii) the expiration of the last patent
covering bovine and ovine products currently July 30, 2029, with an option to extend for an additional ten year period.
Either party may terminate the Aroa License upon the other party’s material breach, subject to a ninety-day notice and cure
period or upon thirty-days written notice in the event of bankruptcy. We may terminate manufacture and production of a
specific product upon thirty-days prior written notice upon (i) a reasonable determination that such product infringes the
intellectual property rights of a third party, (ii) an uncured supply failure by Aroa or (iii) such product proves unfeasible,
and immediately upon written notice from a regulatory authority that such product must be withdrawn from the market. If
we materially breach the Aroa License in one of the Licensed Territories, Aroa may terminate the Aroa License solely with
respect to the Licensed Territory in which the breach occurred. Upon termination of the Aroa License, we have the right to
purchase all or any part of the unsold portion of any completed products from Aroa and the right to continue to sell all
products remaining in our inventory.
The Aroa License also contains customary representations and warranties, confidentiality, insurance, audit, indemnification
and non-competition provisions.
Patents
As of December 31, 2019, we exclusively license two issued U.S. patents that will expire in 2029 and 2031. We own seven
U.S. issued or allowed patents which will expire between 2035 and 2037 and six pending U.S. patent applications, which
subject to issuance, are projected to expire between 2035 and 2040, without taking into account potential patent term
extensions or adjustments. In addition to our U.S. intellectual property, we also own four non-U.S. patent applications,
which, subject to issuance, would be projected to expire between 2036 and 2037 and have exclusively licensed issued
patents in Europe and Canada that will expire in 2029.
Our patents and patent applications cover, among other things, our corner-lock embroidery pattern, the use of adhesion
barriers sewn into soft tissue and compliance associated with stretching.
Although the term of individual patents varies depending upon the country in which they were granted, in most countries,
including the U.S., the patent term is 20 years from the earliest claimed filing date of a non-provisional patent application
in the applicable country. In the U.S., a patent’s term may, in certain cases, be lengthened by patent term adjustment, which
compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in examining and granting a
patent, or may be shortened if a patent is terminally disclaimed over a commonly owned patent or a patent naming a
common inventor and having an earlier expiration date.
23
Table of Contents
We cannot be sure that our pending patent applications that we have filed or may file in the future will result in issued
patents, and we can give no assurance that any patents that have issued or might issue in the future will protect our current
or future products, will provide us with any competitive advantage, and will not be challenged, invalidated, or
circumvented.
Trade Secrets
We seek to protect our proprietary rights through a variety of methods, including confidentiality agreements and proprietary
information agreements with suppliers, employees, consultants and others who may have access to our proprietary
information. However, trade secrets and proprietary information can be difficult to protect. While we have confidence in
the measures we take to protect and preserve our trade secrets and proprietary information, such measures can be breached,
and we may not have adequate remedies for any such breach. In addition, our trade secrets and proprietary information may
otherwise become known or be independently discovered by competitors.
Trademarks
We also rely on trademarks and trade designs to develop and maintain our competitive position. TELA Bio , OviTex and
OviTex PRS are registered trademarks of ours in the U.S.
®
®
®
For more information regarding the risks related to our intellectual property, please see the section titled “Risk Factors —
Risks Related to Our Intellectual Property Matters.”
Research and Development
We invest in research and development to advance our reinforced tissue matrix products with the goal of improving upon
and supplementing our existing product offerings. We believe our ability to rapidly develop, manufacture and obtain
regulatory approval or clearance of our products is attributable to the dynamic product innovation process that we have
implemented, the versatility and leveragability of our core technology and the management philosophy behind that process.
We have recruited and retained engineers and scientists with significant experience in the development of polymer science,
biologics, textile engineering and analytical testing. We have a number of design improvements for our reinforced tissue
matrices in various stages of development that are expected to enhance our current products and increase surgeon adoption
of our products. In addition, we intend to engage in discussions with the FDA regarding an IDE protocol to study the safety
and effectiveness of our OviTex PRS portfolio for an indication in breast reconstruction surgery. Our research and
development efforts are based at our facility in Malvern, Pennsylvania.
Commercial Strategy
Our commercial efforts are predominantly focused on the U.S. market where we have established strong relationships with
key constituencies, including hospitals, ambulatory surgery centers, GPOs, IDN, third-party payors and other key clinical
and economic decision makers by offering a unique high quality, cost-effective product. As part of our overall commercial
strategy, we intend to contract with GPOs and IDNs to increase access and penetration with hospital accounts. We have
invested in our direct sales and marketing infrastructure in order to expand our presence to promote awareness and
adoption of our products. There are currently more than 250 active hospital accounts in the U.S. that have incorporated our
products into their practices.
We market our products to hospitals, ambulatory surgery centers, surgeons, GPOs, IDNs and medical device supply chain
participants primarily through our direct sales force. Our sales representatives and sales managers have substantial medical
device experience. As of December 31, 2019, we had 60 employees in our U.S. based commercial organization in 35 sales
territories, which includes account managers and administrative support staff. We plan to continue to invest in our
commercial organization by adding account managers, clinical development specialists, business managers and
administrative support staff in order to cover the highest potential of accounts for soft tissue reconstruction procedures.
24
Table of Contents
Manufacturing
All of our raw materials are sourced through and manufactured by Aroa in their Auckland, New Zealand facility under the
terms of the Aroa License. Aroa’s facility is approximately 25,000 square feet of which approximately 10,000 square feet is
dedicated to manufacturing. This facility is currently undergoing a short-term expansion to increase capacity with
additional process equipment and work shifts, and a further intermediate-term expansion is planned, with approximately
15,000 square feet of additional manufacturing space available. Expansions are mutually agreed between us and Aroa, and
under the terms of the Aroa License we share 50% of the expansion cost, which we may later offset against our revenue
share payment to Aroa. The Auckland facility is FDA registered and ISO 13485 certified. We believe that Aroa will be
capable of providing sufficient quantities of our products to meet anticipated customer demands. In the event of an uncured
supply failure by Aroa, we have the right to, directly or through a third-party, step in and operate the Aroa Auckland
facility to manufacture our products on behalf of Aroa.
The proprietary ovine rumen used in the manufacturing of our products is obtained from sheep raised for human
consumption in New Zealand and is currently sourced by Aroa from two abattoirs, or slaughterhouses. Although only two
abattoirs are currently used, there are more than 30 additional abattoirs in New Zealand that could be used to source the
ovine rumen. New Zealand cattle and sheep are considered by the USDA to be free of prion disease (progressive
neurodegenerative disorders, including scrapie). The sheep receive veterinary inspection prior to slaughter and then each
carcass is inspected post-mortem for the presence of disease according to USDA approved standards. Only sheep which
pass full inspection can be used as a raw tissue source for our products and all of the ovine rumen is processed in
compliance with the FDA’s regulations for Medical Devices Containing Materials Derived from Animal Sources. Once the
ovine rumen is procured, our reinforced tissue matrix products are then manufactured by Aroa at its facility in Auckland,
New Zealand.
Distribution
All of our products are shipped directly from Auckland, New Zealand to our headquarters in Malvern, Pennsylvania. We
sell our products directly to our customers, which are hospitals and ambulatory surgery centers. Except for our stocking
distributors in Europe, we do not use distributors to sell our products.
Competition
The medical device industry is intensely competitive, subject to change and significantly affected by new product
introductions and other market activities of industry participants.
In the hernia repair market our primary competitors are Davol Inc., a subsidiary of C.R. Bard, Inc., which produces Phasix
and Ventralight ST, and LifeCell, a subsidiary of Allergan, which produces Strattice. In the plastic and reconstructive
surgery market, our primary competitor is LifeCell, a subsidiary of Allergan, which produces AlloDerm.
Many of these competitors are large, well-capitalized companies with significantly greater market share and resources than
we have. As a consequence, they are able to spend more on product development, marketing, sales and other product
initiatives than we can. We also compete with smaller medical device companies that have single products or a limited
range of products. Some of our competitors have:
·
·
significantly greater name recognition;
broader or deeper relations with healthcare professionals, customers and third-party payors;
· more established distribution networks;
·
greater experience in conducting research and development, manufacturing, clinical trials, marketing and
obtaining regulatory clearance or approval for products; and
25
Table of Contents
·
greater financial and human resources for product development, sales and marketing and patent prosecution.
We believe that our continued ability to compete favorably depends on:
·
·
·
successfully expanding our commercial operations;
continuing to innovate and maintain scientifically-advanced technology;
attracting and retaining skilled personnel;
· maintaining and obtaining intellectual property protection for our products; and
·
conducting clinical studies and obtaining and maintaining regulatory approvals.
Government Regulation
Our products and operations are subject to extensive and rigorous regulation by the FDA and other federal, state and local
authorities, as well as foreign regulatory authorities. The FDA regulates, among other things, the research, development,
testing, design, manufacturing, approval, labeling, storage, recordkeeping, advertising, promotion and marketing,
distribution, post approval monitoring and reporting and import and export of medical devices in the U.S. to assure the
safety and effectiveness of medical products for their intended use. The Federal Trade Commission also regulates the
advertising of our products in the U.S. Further, we are subject to laws directed at preventing fraud and abuse, which subject
our sales and marketing, training and other practices to government scrutiny.
Regulatory System for Medical Devices in the U.S.
All of our medical devices sold in the U.S. are subject to the Federal Food, Drug, and Cosmetic Act (“FDCA”) as
implemented and enforced by the FDA.
Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the
U.S. will require either a premarket notification to the FDA requesting permission for commercial distribution under
Section 510(k) of the FDCA also referred to as a 510(k) clearance, or approval from the FDA of a Premarket Approval
application (“PMA”). Both the 510(k) clearance and PMA processes can be resource intensive, expensive, and lengthy, and
require payment of significant user fees, unless an exemption is available.
Device Classification
Under the FDCA, medical devices are classified into one of three classes — Class I, Class II or Class III — depending on
the degree of risk associated with each medical device and the extent of control needed to provide reasonable assurances
with respect to safety and effectiveness.
510(k) Clearance Pathway
Our current products are subject to premarket notification and clearance under section 510(k) of the FDCA.
When a 510(k) clearance is required, we must submit a pre-market notification to the FDA demonstrating that our proposed
device is substantially equivalent to a predicate device, which is a previously cleared and legally marketed 510(k) device or
a device that was in commercial distribution before May 28, 1976 (pre-amendments device) and for which a PMA is not
required, a device that has been reclassified from Class III to Class II or I, or a device that was found substantially
equivalent through the 510(k) process. By regulation, a pre-market notification must be submitted to the FDA at least
90 days before we intend to distribute a device. As a practical matter, clearance often takes nine to twelve months, but may
take significantly longer. To demonstrate substantial equivalence, the manufacturer must show
26
Table of Contents
that the proposed device has the same intended use as the predicate device, and it either has the same technological
characteristics, or different technological characteristics and the information in the pre-market notification demonstrates
that the device is equally safe and effective and does not raise different questions of safety and effectiveness. The FDA may
require further information, including clinical data, to make a determination regarding substantial equivalence.
If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant
510(k) clearance to commercially market the device. If the FDA determines that the device is “not substantially equivalent”
to a previously cleared device, the device is automatically designated as a Class III device. The device sponsor must then
fulfill more rigorous PMA requirements, or can request a risk-based classification determination for the device in
accordance with the de novo classification procedure, which is a route to market for novel medical devices that are low to
moderate risk and are not substantially equivalent to a predicate device.
After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or
effectiveness, or that would constitute a major change or modification in its intended use, will require a new
510(k) marketing clearance or, depending on the modification, a de novo classification or PMA approval. The FDA
requires each manufacturer to determine whether the proposed change requires submission of a 510(k) or a PMA in the first
instance, but the FDA can review any such decision and disagree with a manufacturer’s determination.
Many minor modifications today are accomplished by a manufacturer documenting the change in an internal letter-to-file.
The letter-to-file is in lieu of submitting a new 510(k) to obtain clearance for every change. The FDA can always review
these letters-to-file in an inspection. If the FDA disagrees with a manufacturer’s determination, the FDA can require the
manufacturer to cease marketing and/or request the recall of the modified device until 510(k) marketing clearance or PMA
approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.
The FDA is currently considering proposals to reform its 510(k) marketing clearance process, and such proposals could
include increased requirements for clinical data and a longer review period. In November 2018, FDA officials announced
forthcoming steps that the FDA intends to take to modernize the premarket notification pathway under Section 510(k) of
the FDCA. Among other things, the FDA announced that it plans to develop proposals to drive manufacturers using the
510(k) pathway toward the use of newer predicates. These proposals include plans to potentially sunset certain older
devices that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of devices that
have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old.
The FDA also announced that it intends to finalize guidance to establish a premarket review pathway for “manufacturers of
certain well-understood device types” as an alternative to the 510(k) clearance pathway and that such premarket review
pathway would allow manufacturers to rely on objective safety and performance criteria recognized by the FDA to
demonstrate substantial equivalence, obviating the need for manufacturers to compare the safety and performance of their
medical devices to specific predicate devices in the clearance process. These proposals have not yet been finalized or
adopted, and the FDA announced that it would seek public feedback prior to publication of any such proposals, and may
work with Congress to implement such proposals through legislation.
Pervasive and Continuing FDA Regulation
After the FDA permits a device to enter commercial distribution, numerous and pervasive regulatory requirements continue
to apply to our business operations, products and technologies. These include:
·
·
the FDA’s Quality Systems Regulations (“QSR”), which requires manufacturers, including third party
manufacturers, to follow stringent design, testing, production, control, supplier/contractor selection,
complaint handling, documentation and other quality assurance procedures during all aspects of the
manufacturing process;
labeling and marketing regulations which require that promotion is truthful, not misleading, fairly balanced
and provide adequate directions for use and that all claims are substantiated;
27
Table of Contents
·
·
·
·
·
complying with new requirements for Unique Device Identifiers on devices and also requiring the submission
of certain information about each device to the FDA’s Global Unique Device Identification Database;
advertising and promotion requirements, including FDA prohibitions against the promotion of products for
uncleared, unapproved or off-label uses and FDA guidance on off-label dissemination of information and
responding to unsolicited requests for information;
restrictions on sale, distribution or use of a device;
device establishment, registration and listing requirements and annual reporting requirements;
approval or clearance of modifications to 510(k)-cleared devices that could significantly affect safety or
effectiveness or that would constitute a major change in intended use of one of our cleared devices;
· medical device reporting regulations, which require that manufacturers report to the FDA if their device may
have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or
contribute to a death or serious injury if the malfunction were to recur;
· medical device correction, removal and recall reporting regulations, which require that manufacturers report
to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by
the device or to remedy a violation of the FDCA that may present a risk to health;
·
·
·
·
recall requirements, including a mandatory recall if there is a reasonable probability that the device would
cause serious adverse health consequences or death;
an order of repair, replacement or refund;
device tracking requirements; and
post-market surveillance activities and regulations, which apply when necessary to protect the public health
or to provide additional safety and effectiveness data for the device.
The FDA has broad post-market and regulatory enforcement powers. Medical device manufacturers are subject to
unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the
QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers.
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include
any of the following sanctions:
·
·
·
·
·
warning letters, untitled letters, Form 483s, fines, injunctions, consent decrees and civil penalties;
recall or seizure of products;
operating restrictions, partial suspension or total shutdown of production;
the FDA’s refusal of requests for 510(k) clearance or premarket approval of new products, new intended uses
or modifications to existing products;
the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other
countries;
28
Table of Contents
·
·
withdrawing 510(k) clearance or premarket approvals that have already been granted; and
criminal prosecution.
Regulatory System for Medical Devices in Europe
The European Union (“EU”) and the European Economic Area (“EEA”) (which is comprised of the 27 Member States of
the EU plus Norway, Liechtenstein and Iceland and, until 2021, the United Kingdom) has a coordinated system for the
authorization of medical devices. The European Union Medical Devices Directive (“MDD”) sets out the basic regulatory
framework for medical devices in the EU. This directive has been separately enacted in more detail in the national
legislation of the individual member states of the EU.
The system of regulating medical devices operates by way of a certification for each medical device. Each certificated
device is marked with a CE mark which shows that the device has a Certificat de Conformité, also referred to as a
Certificate of Conformance. There are national bodies known as Competent Authorities in each member state which
oversee the implementation of the MDD within their jurisdiction. The means for achieving the requirements for CE mark
varies according to the nature of the device. Devices are classified in accordance with their perceived risks, similarly to the
U.S. system. The class of a product determines the requirements to be fulfilled before a CE mark can be placed on a
product, known as a conformity assessment. Conformity assessments for products are carried out as required by the MDD.
Except for low-risk medical devices (Class I non-sterile, non-measuring devices), where the manufacturer can self-certify
compliance with the MDD based on a self-assessment of the conformity of its products with the essential requirements of
the EU Medical Devices Directive, a conformity assessment procedure requires the intervention of an organization
accredited by a member state of the EEA to conduct conformity assessments, or a Notified Body. If a Notified Body of one
member state has issued a Certificat de Conformité, the device can be sold throughout the EU without further conformance
tests being required in other member states.
On April 5, 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals
and replaces the MDD and the Active Implantable Medical Devices Directive. The Medical Devices Regulation will
become applicable in May 2020. Once applicable, the new regulations will among other things:
·
·
·
·
·
strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance
and safety of devices placed on the market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient through a
unique identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive
information on products available in the EU; and
strengthen rules for the assessment of certain high-risk devices, such as implants, which may have to undergo
an additional check by experts before they are placed on the market.
Privacy and Security Laws
There are numerous U.S. federal and state laws and regulations related to the privacy and security of personal information,
including health information. Among others, the federal Health Insurance Portability and Accountability Act of 1996, as
amended by the Health Information Technology for Economic and Clinical Health Act and their implementing regulations
(collectively referred to as “HIPAA”) establish privacy and security standards that limit the use and disclosure of protected
health information, or PHI, and require covered entities and business associates to implement administrative, physical, and
technical safeguards to ensure the confidentiality, integrity and availability of individually identifiable health information in
electronic form, among other requirements.
29
Table of Contents
Violations of HIPAA may result in civil and criminal penalties. Companies subject to HIPAA must also comply with
HIPAA’s breach notification rule which requires notification of affected patients and the U.S. Department of Health and
Human Services (“HHS”) and in certain cases of media outlets, in the case of a breach of unsecured PHI. The regulations
also require business associates of covered entities to notify the covered entity of breaches by the business associate. State
attorneys general also have the right to prosecute HIPAA violations committed against residents of their states, and HIPAA
standards have been used as the basis for the duty of care in state civil suits, such as those for negligence or recklessness in
misusing personal information. In addition, HIPAA mandates that HHS conduct periodic compliance audits of HIPAA
covered entities and their business associates for compliance.
Many states have laws that protect the privacy and security of sensitive and personal information, including health
information, to which we are subject. These laws may be similar to or even more protective than HIPAA and other federal
privacy laws. For example, California enacted the California Consumer Privacy Act (“CCPA”) which creates individual
privacy rights for California consumers and increases the privacy and security obligations of entities handling certain
personal data. The CCPA went into effect on January 1, 2020, and the California Attorney General may bring enforcement
actions for violations beginning July 1, 2020. The CCPA has been amended from time to time, and it remains unclear what,
if any, further modifications will be made to this legislation or how it will be interpreted.
We may be subject to other state and federal privacy laws, including laws that prohibit unfair privacy and security practices
and deceptive statements about privacy and security, laws that place specific requirements on certain types of activities,
such as data security and texting, and laws requiring holders of personal information to maintain safeguards and to take
certain actions in response to a data breach.
EU member states, the United Kingdom, Switzerland and other jurisdictions have also adopted data protection laws and
regulations, which impose significant compliance obligations. In the EEA and the United Kingdom, the collection and use
of personal data, including clinical trial data, is governed by the provisions of the General Data Protection Regulation
(“GDPR”). The GDPR became effective on May 25, 2018, repealing its predecessor directive and increasing responsibility
and liability of pharmaceutical and medical device companies in relation to the processing of personal data of EU data
subjects. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United
Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect,
analyze and transfer personal data, including health data from clinical trials and adverse event reporting. In particular, these
obligations and restrictions concern the consent of the individuals to whom the personal data relates, the information
provided to the individuals, the transfer of personal data out of the EEA or the United Kingdom, security breach
notifications, security and confidentiality of the personal data and imposition of substantial potential fines for breaches of
the data protection obligations. European data protection authorities may interpret the GDPR and national laws differently
and impose additional requirements, which add to the complexity of processing personal data in or from the EEA or United
Kingdom. Guidance on implementation and compliance practices are often updated or otherwise revised.
Anti-Kickback Statutes
The federal Anti-Kickback Statute prohibits persons from (among other things) knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce the referral of an
individual, or the recommending, furnishing or arranging for a good or service, for which payment may be made under a
federal healthcare program such as Medicare or Medicaid.
Courts have interpreted the Anti-Kickback Statute quite broadly, holding that the statute will be violated if even one
purpose of a payment — though not its sole or primary purpose — is to induce an act prohibited by the statute with a
willful intent to act improperly. The statute prohibits many arrangements and practices that are otherwise lawful in
businesses outside of the healthcare industry. A person or entity does not need to have actual knowledge of the statute or
specific intent to violate it in order to have committed a violation. Prosecutors may infer intent from the surrounding
circumstances and, because courts have interpreted the statute to be violated if even one purpose of a payment is to induce
the purchase of items or services paid for by federal healthcare programs, prosecutors have broad discretion in choosing
arrangements to prosecute under the statute. There are statutory exceptions and regulatory “safe harbors” available to
protect certain appropriately structured arrangements that otherwise would implicate the Anti-Kickback
30
Table of Contents
Statute and those who structure their business arrangements to satisfy all of the criteria of a safe harbor are protected from
liability under the statute. Our business is subject to these laws.
Many states have adopted anti-kickback and self-referral laws similar to the Anti-Kickback Statute; however, some of these
state prohibitions are broader in scope and apply to arrangements involving healthcare items or services reimbursed by any
source, and not only by Medicare, Medicaid or another federal healthcare program. These state laws do not always have the
same exceptions or safe harbors as the federal Anti-Kickback Statute.
False Claims Laws
The federal False Claims Act imposes liability on any individual or entity that, among other things, knowingly presents, or
causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam or
“whistleblower” provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal
government alleging that the defendant has violated the False Claims Act and to share in any monetary recovery. In
recent years, the number of lawsuits brought against healthcare industry participants by private individuals has increased
dramatically.
There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity
knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government, but also may
arise when an entity knowingly makes a false statement material to an obligation to pay or transmit money or property to
the federal government or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or
transmit money or property to the federal government. Various states have also enacted false claims and insurance fraud
laws that are analogous to the federal False Claims Act. Many of these state laws apply to claims submitted to any third-
party payor and are not limited to claims submitted to a federal healthcare program. The scope of these laws and the
interpretations of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad
discretion. A determination of liability under such laws could result in fines and penalties and restrictions on a company’s
ability to operate in these jurisdictions.
Transparency Laws
The federal Physician Payment Sunshine Act (“Sunshine Act”) which was enacted as part of the Patient Protection and
Affordable Care Act (“PPACA”) generally requires certain manufacturers of a drug, device, biologic or other medical
supply that is covered by Medicare, Medicaid or the Children’s Health Insurance Program and applicable GPOs to report
on an annual basis: (i) certain payments and other transfers of value given to certain healthcare professionals and teaching
hospitals and (ii) any ownership or investment interest that certain healthcare professionals, or their immediate family
members, have in their company. The payments required to be reported include the cost of meals provided to a healthcare
professional, travel reimbursements and other transfers of value, including those provided as part of contracted services
such as speaker programs, advisory boards, consultation services and clinical trial services. Under the statute, the federal
government makes reported information available to the public. Failure to comply with the reporting requirements can
result in significant civil monetary penalties or criminal penalties if an entity intentionally makes false statements in the
reports.
There has been a recent trend of separate state regulation of payments and transfers of value by manufacturers of medical
devices to healthcare professionals and entities, however, and some state transparency laws apply more broadly than the
federal Sunshine Act. There are also an increasing number of analogous state laws that require manufacturers to file reports
with states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply
with the laws. For example, several states have enacted legislation requiring manufacturers to, among other things,
establish and implement commercial compliance programs, file periodic reports with the state, make periodic public
disclosures on sales, marketing, pricing, clinical trials and other activities and/or register their sales representatives. Certain
state laws also regulate manufacturers’ use of physician and patient identifiable data. These laws may affect our sales,
marketing and other promotional activities by imposing administrative and compliance burdens. In addition, given the lack
of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty
provisions of the pertinent state and federal authorities. All of our activities are also potentially subject to federal and state
consumer protection and unfair competition.
31
Table of Contents
Other Federal Healthcare Fraud and Abuse Laws
We may also be subject to other federal healthcare fraud and abuse laws, including provisions of HIPAA, which prohibit
knowingly and recklessly executing a scheme or artifice to defraud any healthcare benefit program, including private
payors, as well as knowingly and willfully falsifying, concealing or covering up a material fact by any trick, scheme or
device or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for
healthcare benefits, items or services. A violation of this statute is a felony and may result in fines, imprisonment or
exclusion from government-sponsored programs. Similar to the federal Anti-Kickback Statute, a person or entity no longer
needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation.
Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act (“FCPA”) prohibits U.S. businesses and their representatives from offering to pay,
paying, promising to pay or authorizing the payment of money or anything of value to a foreign official in order to
influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage
in order to obtain or retain business. The FCPA also obligates companies whose securities are listed in the U.S. to comply
with accounting provisions requiring us to maintain books and records, which in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the corporation, including international subsidiaries, if any, and to
devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances regarding the
reliability of financial reporting and the preparation of financial statements. The scope of the FCPA includes interactions
with certain healthcare professionals in many countries.
International Laws
In Europe, and throughout the world, other countries have enacted anti-bribery laws and/or regulations similar to the FCPA.
Violations of any of these anti-bribery laws, or allegations of such violations, could have a negative impact on our business,
results of operations and reputation.
There are also international privacy laws that impose restrictions on the access, use, and disclosure of health information.
All of these laws may impact our business. Our failure to comply with these privacy laws or significant changes in the laws
restricting our ability to obtain required patient information could significantly impact our business and our future business
plans.
U.S. Healthcare Reform
Changes in healthcare policy could increase our costs and subject us to additional regulatory requirements that may
interrupt commercialization of our products. By way of example, the PPACA substantially changed the way healthcare is
financed by both governmental and private insurers, and significantly impacted the medical device industry.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the PPACA, and we expect
there will be additional challenges and amendments to the PPACA in the future. On March 2, 2020, the United States
Supreme Court announced that it would hear House of Representatives v. Texas, a case in which certain states have
challenged the constitutionality of the PPACA’s individual mandate and whether, if the individual mandate is
unconstitutional, if the individual mandate is severable from the remainder of the PPACA. If the Supreme Court rules that
the individual mandate is unconstitutional and unable to be severed from the remainder of the PPACA, the remaining
provisions of the PPACA would be invalid. It is unclear how this case, along with other efforts to repeal and replace the
PPACA will impact the PPACA and our business.
There will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to
reduce costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations
on the prices we will be able to charge and/or patients’ willingness to pay for our products. While in general it is too early
to predict what effect, if any, any future healthcare reform legislation or policies will have on our business,
32
Table of Contents
current and future healthcare reform legislation and policies could have a material adverse effect on our business and
financial condition.
Pricing and Reimbursement
In the U.S. and markets in other countries, sales of any products for which we receive regulatory approval for commercial
sale will depend in part on the availability of reimbursement from third party payors. Third party payors include
government health administrative authorities, managed care providers, private health insurers, and other organizations.
These third party payors are increasingly challenging the price and examining the cost-effectiveness of medical products
and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare
products, and efforts are underway by the current U.S. administration and states to reduce the cost of medical products and
services overall. We may need to conduct expensive studies in order to demonstrate the cost-effectiveness of our products.
Our product candidates may not be considered cost-effective. Decisions regarding the extent of coverage and amount of
reimbursement to be provided are made on a plan-by-plan basis. One third-party payor’s decision to cover a particular
product or procedure using the product does not ensure that other payors will also provide coverage for the product.
Adequate third party reimbursement may not be available to enable us to maintain price levels sufficient to realize an
appropriate revenue levels. Future legislation could limit payments for medical devices, including our products and our
future products.
The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost
containment programs to limit the growth of government-paid health care costs, including price controls, restrictions on
reimbursement and requirements for substitution of less costly products. Adoption of government controls and measures,
and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for our
products. The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the
government and third party payors fail to provide adequate coverage and reimbursement. In addition, an increasing
emphasis on managed care in the U.S. has increased and will continue to increase the pressure on medical product and
service pricing.
Corporate Information
We were incorporated on April 17, 2012.
Our primary executive offices are located at 1 Great Valley Parkway, Suite 24, Malvern, Pennsylvania 19355 and our
telephone number is (484) 320-2930. Our website address is www.telabio.com. The information contained in, or that can be
accessed through, our website is not part of this Annual Report.
Employees
As of December 31, 2019, we had 89 employees worldwide. None of our employees are represented by a collective
bargaining agreement and we have never experienced a work stoppage. We believe we have good relationships with our
employees.
33
Table of Contents
ITEM 1A.
RISK FACTORS
You should carefully consider the following risks described below, together with all of the other information in this Annual
Report, including our consolidated financial statements and related notes. While we believe that the risks and uncertainties
described below are the material risks facing our business, additional risks that we do not know of or that we currently
think are immaterial may also arise and materially affect our business. The realization of any of these risks could have a
material adverse effect on our business, financial condition, results of operations, and our ability to accomplish our
strategic objectives.
Risks Related to Our Limited Operating History, Financial Position and Capital Requirements
We have incurred significant operating losses since inception, we expect to incur operating losses in the future and we
may not be able to achieve or sustain profitability.
We have incurred net losses since our incorporation on April 17, 2012. For the years ended December 31, 2019 and 2018,
we had net losses of $22.4 million and $21.1 million, respectively. As of December 31, 2019, we had an accumulated
deficit of $167.9 million.
We expect to continue to incur significant sales and marketing, research and clinical development, regulatory and other
expenses as we expand our marketing efforts to increase adoption of our products, expand existing relationships with our
customers, obtain regulatory clearances or approvals for our planned or future products, conduct clinical trials on our
existing and planned or future products and develop new products or add new features to our existing products. In addition,
we expect our general and administrative expenses to increase due to the additional costs associated with being a public
company. As a result, we expect to continue to incur operating losses for the foreseeable future and may never achieve
profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.
If we do not achieve or sustain profitability, it will be more difficult for us to finance our business and accomplish our
strategic objectives, either of which would have a material adverse effect on our business, financial condition and results of
operations and may cause the market price of our common stock to decline.
We have limited history operating as a commercial company.
We began commercializing our OviTex products in the U.S. in 2016 and in certain European countries in 2019, and
therefore do not have a long history operating as a commercial company. Since 2016, our revenue has been derived almost
entirely from sales of our OviTex products. In April 2019, Aroa received 510(k) marketing clearance from the FDA, which
we hold for our OviTex PRS products. In May 2019, we commenced a limited launch of OviTex PRS and plan to continue
commercializing in a controlled manner, gradually expanding our surgeon network, throughout 2020 and will also evaluate
new generation products. As a result of its recent commercial introduction, our OviTex products have limited product and
brand recognition, and demand for our OviTex products may not increase as quickly as we expect, or may decline. Our
limited commercialization experience and limited number of cleared products make it difficult to evaluate our current
business and predict future prospects. Our ability to generate revenue from sales of our OviTex products, OviTex PRS and
other products we may seek to develop and commercialize in the future will depend on a number of factors, including our
ability to successfully market and commercialize our OviTex and OviTex PRS products in the U.S. If our assumptions
regarding the risks and uncertainties we face, which we use to plan our business, are incorrect or change due to
circumstances in our business or our markets, or if we do not address these risks successfully, our operating and financial
results could differ materially from our expectations and our business could suffer.
Our indebtedness may limit our flexibility in operating our business and adversely affect our financial health and
competitive position.
As of December 31, 2019, we had $30.0 million of indebtedness outstanding under our credit facility with OrbiMed
Royalty Opportunities II, LP (“OrbiMed”) that matures in November 2023.
34
Table of Contents
To service this indebtedness and any additional indebtedness we may incur in the future, we need to generate cash from our
operating activities. Our ability to generate cash is subject, in part, to our ability to successfully execute our business
strategy, as well as general economic, financial, competitive, regulatory and other factors beyond our control. We cannot
assure you that our business will be able to generate sufficient cash flow from operations or that future borrowings or other
financings will be available to us in an amount sufficient to enable us to service our indebtedness and fund our other
liquidity needs. To the extent we are required to use cash from operations or the proceeds of any future financing to service
our indebtedness, we will be less able to plan for, or react to, changes in our business, industry and the economy generally.
In addition, the agreement governing our credit facility contains certain covenants that limit our ability to engage in certain
transactions that may be in our long‑term best interests. Subject to certain limited exceptions, these covenants limit our
ability to, among other things:
·
·
·
·
·
create, incur, assume or permit to exist any additional indebtedness, or create, incur, allow or permit to exist
any additional liens;
enter into any amendment, supplement, waiver or other modification of, or enter into any forbearance from
exercising any rights with respect to, the terms or provisions contained in certain agreements without consent;
effect certain changes in our business, fiscal year, management, entity name, business locations;
liquidate or dissolve, merge with or into, consolidate with, or acquire all or substantially all of the capital
stock or assets of, any other company;
pay cash dividends on, make any other distributions in respect of, or redeem, retire or repurchase, any shares
of our capital stock;
· make certain investments; and
·
enter into transactions with our affiliates.
We have not previously breached and are not currently in breach of these or any of the other covenants; however, there can
be no guarantee that we will not breach these covenants in the future. In the event that we breach one or more covenants,
our lender may choose to declare an event of default and require that we immediately repay all amounts outstanding,
terminate any commitment to extend further credit and foreclose on the collateral granted to it to collateralize such
indebtedness. The occurrence of any of these events could have a material adverse effect on our business, financial
condition and results of operations.
We may require substantial additional capital to finance our planned operations, which may not be available to us on
acceptable terms or at all.
If needed, any future funding requirements will depend on many factors, including:
·
·
·
·
·
surgeon and market acceptance of our products;
the cost of our research and development activities;
the cost and timing of obtaining regulatory clearances or approvals;
the cost and timing of establishing additional sales and marketing capabilities;
the cost and timing of clinical trials that we are currently conducting or may conduct in the future;
35
Table of Contents
·
·
·
·
·
·
costs associated with any product recall that may occur;
the effect of competing products in our markets or competing technologies;
the extent to which we acquire or invest in products, technologies and businesses, although we currently have
no commitments or agreements relating to any of these types of transactions;
the costs of operating as a public company;
the cost of filing and prosecuting patent applications and defending and enforcing our patent or other
intellectual property rights; and
the cost of defending, in litigation or otherwise, any claims that we infringe third‑party patents or other
intellectual property rights.
Any additional equity or debt financing that we raise may contain terms that are not favorable to us or our stockholders. In
addition, any future debt financing into which we enter may impose upon us additional covenants that restrict our
operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common
stock, make certain investments or engage in certain merger, consolidation or asset sale transactions. If we raise additional
funds through collaboration and licensing arrangements with third‑parties, it may be necessary to relinquish some rights to
our technologies or our products, or grant licenses on terms that are not favorable to us.
Furthermore, we cannot be certain that additional funding will be available on acceptable terms, if at all. If we do not have,
or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or
license to third‑parties the rights to commercialize products or technologies that we would otherwise seek to
commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products or
cease operations. Any of these factors could harm our business, financial condition and results of operations.
We have limited experience marketing and selling our products, and if we are unable to expand, manage and maintain
our direct sales and marketing organizations, we may not be able to generate anticipated revenue.
We began selling our OviTex products in the U.S. in 2016. As a result, we currently have limited sales and marketing
capabilities. Building the requisite sales, marketing or distribution capabilities to successfully market and sell our products
will be expensive and time‑consuming and will require significant attention from our leadership team to manage. Any
failure or delay in the development of our sales, marketing or distribution capabilities would adversely impact the
commercialization of our products. Additionally, we may choose to collaborate, either globally or on a territory‑by‑territory
basis, with third parties on the commercialization of our products. If we are unable to enter into such arrangements on
acceptable terms or at all, we may not be able to successfully commercialize our products.
As of December 31, 2019, our commercial organization consisted of 60 employees. To generate future revenue growth, we
plan to expand the size and geographic scope of our direct sales organization. This growth may require us to split or adjust
existing sales territories, which may adversely affect our ability to retain customers in those territories. Additionally, our
future success will depend largely on our ability to continue to hire, train, retain and motivate skilled sales and marketing
personnel with significant industry experience and technical knowledge of medical devices and related products. The
competition for talented individuals experienced in selling and marketing medical device products is intense, and we cannot
assure you that we can assemble or maintain an effective team. We cannot assure you that we will be able to hire and retain
additional personnel on favorable or commercially reasonable terms, if at all. Our operating results are directly dependent
upon the sales and marketing efforts of our employees. Failure to hire or retain qualified sales and marketing personnel
would prevent us from expanding our business and generating revenue. If we are unable to expand our sales and marketing
capabilities, we may not be able to effectively commercialize our products, which could have an adverse effect on our
business, financial condition and results of operations.
36
Table of Contents
We may be unable to accurately forecast customer demand and our inventory levels.
Anticipating demand for our products may be challenging as surgeon demand and adoption rates are unpredictable. In
addition, as an increasing number of our products are adopted by surgeons, we anticipate greater fluctuations in demand for
our products, which makes demand forecasting more difficult.
We place orders with our supplier based on forecasts of demand and, in some instances, may acquire additional inventory
to accommodate anticipated demand. Our forecasts are based on management’s judgment and assumptions, each of which
may introduce error into our estimates. If we overestimate customer demand, our excess or obsolete inventory may increase
significantly, which would reduce our gross margin and adversely affect our financial results. Conversely, if we
underestimate customer demand or if insufficient manufacturing capacity is available, we would miss revenue opportunities
and potentially lose market share and damage our customer relationships.
Risks Related to the Commercialization of our Products
To date, substantially all of our revenue has been generated from sales of our OviTex products, and we therefore are
highly dependent on their success.
Sales of our OviTex products accounted for 91% of total revenue for the year ended December 31, 2019 and for all of our
revenue for the years ended December 31, 2018 and 2017. We first commercialized OviTex products in the U.S. in 2016
and in the last twelve months, we have introduced our larger sized OviTex products, our OviTex LPR product for use in
laparoscopic and robotic‑assisted hernia surgical repairs and sold the initial units of our OviTex PRS products for use in
surgery for soft tissue repair or reinforcement in plastic and reconstructive procedures. We expect that sales of our OviTex
products and, once fully commercialized, our OviTex PRS products, will account for all of our revenue for the foreseeable
future. Our failure to successfully increase sales of these products or any other event impeding our ability to sell these
products would result in a material adverse effect on our business, financial condition and results of operations.
The commercial success of our products will largely depend upon attaining significant market acceptance.
Our ability to execute our growth strategy, achieve commercial success and become profitable will depend upon the
adoption by inpatient and outpatient hospitals, surgeons, and medical device supply chain participants of our reinforced
tissue matrix products. We cannot predict how quickly, if at all, surgeons will accept our products or, if accepted, how
frequently they will be used. Our products and planned or future products we may develop or market may never gain broad
market acceptance among surgeons and the medical community for some or all of our indications. Some surgeons may
have prior history with or a preference for other soft tissue reinforcement products, such as permanent synthetic mesh,
resorbable synthetic mesh, or other biologic matrices, or may be reluctant to alter their practice patterns to treat patients
with our reinforced tissue matrix products. The degree of market acceptance of any of our products will depend on a
number of factors, including:
·
·
·
·
·
·
·
whether surgeons and others in the medical community consider our products to be safe, effective and cost
effective;
the potential and perceived advantages of our products over alternative products;
the effectiveness of our sales and marketing efforts for our products;
the prevalence and severity of any complications associated with using our products;
the convenience and ease of use of our products relative to competing products;
product labeling or product insert requirements by regulatory authorities;
the competitive pricing of our products;
37
Table of Contents
·
·
·
·
·
·
the quality of our products meeting patient and surgeon expectations;
the results of clinical trials and post‑market clinical studies relating to the use of our products;
pricing pressure, including from GPOs and government payors;
the availability of coverage and adequate reimbursement for procedures using our products from third‑party
payors, including government authorities;
the willingness of patients to pay out‑of‑pocket for our products in the absence of coverage and adequate
reimbursement by third‑party payors, including government authorities; and
our ability to provide incremental clinical and economic data that show the safety, clinical efficacy and cost
effectiveness, and patient benefits from, our products.
Additionally, even if our products achieve market acceptance, they may not maintain that market acceptance over time if
competing products or technologies, which are more cost effective or received more favorably, are introduced. Failure to
achieve or maintain market acceptance and/or market share would limit our ability to generate revenue and would have a
material adverse effect on our business, financial condition and results of operations.
Even if we are able to attain significant market acceptance of our products, the commercial success of our products is
not guaranteed.
Our future financial success will depend substantially on our ability to effectively and profitably market and sell our
products. Even if we are able to attain significant market acceptance of our products, the commercial success of our
products and any of our planned or future products is dependent on a number of additional factors, including the results of
clinical trials relating to the use of our products and our ability to obtain and maintain regulatory approval to market our
products and maintain compliance with applicable regulatory requirements. Successful growth of our sales and marketing
efforts will depend on the strength of our marketing and distribution infrastructure and the effectiveness of our marketing
and sales efforts, including our efforts to expand our direct sales force, while our ability to satisfy demand for our products
driven by our sales and marketing efforts will be largely dependent on the ability of Aroa to maintain a commercially viable
manufacturing process that is compliant with regulatory standards. If we fail to successfully market and sell our products,
we will not be able to achieve profitability, which will have a material adverse effect on our business, financial condition
and results of operations.
Our ability to grow our revenue in future periods will depend on our ability to increase sales of our OviTex and OviTex
PRS products and any new product or product indications that we introduce, which will, in turn, depend in part on our
success in expanding our customer base and driving increased use of our products. New products or product indications
may also need to be approved or cleared by the FDA and comparable non‑U.S. regulatory agencies to drive revenue
growth. If we cannot achieve revenue growth, it could have a material adverse effect on our business, financial condition
and results of operations.
The misuse or off‑label use of our products may harm our reputation in the marketplace, result in injuries that lead to
product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have
engaged in the promotion of our products for these uses.
Surgeons and other medical professionals may misuse our reinforced tissue matrix products or use improper techniques if
they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are
misused or used with improper technique, we may become subject to costly litigation by our customers or their patients.
Product liability claims could divert management’s attention from our core business, be expensive to defend and result in
sizeable damage awards against us that may not be covered by insurance. In addition, any of the events described above
could harm our business.
38
Table of Contents
The products we commercialize have been cleared by the FDA and other regulatory authorities for specific indications. Our
OviTex products are reinforced tissue matrices designed for use as a surgical mesh to reinforce and/or repair soft tissue
where weakness exists and indications for use of our OviTex products include the repair of hernia and/or body wall defects
which require the use of reinforcing or bridging material to obtain the desired surgical outcome. Our OviTex PRS products
are reconstructive reinforced tissue matrices designed for implantation to reinforce soft tissue where weakness exists in
patients requiring soft tissue repair or reinforcement in plastic and reconstructive surgery. In connection with the
March 2019 meeting of the General and Plastic Surgery Devices Panel of the Medical Devices Advisory Committee, the
FDA stated that no surgical mesh device, including OviTex PRS, has been cleared or approved for use in breast surgery,
and that to obtain such indication, the product sponsor must obtain an approved PMA. Our OviTex PRS products are not
cleared or approved specifically for breast reconstruction surgery and thus we are prohibited from marketing them for that
use. OviTex PRS or any other product we may develop for use in breast reconstruction surgery will need to be approved
specifically for that indication. We intend to engage in discussions with the FDA regarding an IDE protocol to study the
safety and effectiveness of our OviTex PRS product for an indication in breast reconstruction surgery. There can be no
assurance that we will be able to secure an IDE in a timely manner, or at all. Any marketing for OviTex PRS or any other
product for a use in breast reconstruction surgery would be deemed off‑label promotion of that product if it has been
cleared for a general indication of use to reinforce or repair soft tissue and has not received a clearance or approval
specifically for use in breast surgery. We train our marketing personnel and direct sales force to not promote our OviTex or
OviTex PRS products for uses outside of the FDA‑cleared indications for use, known as “off‑label uses.” We cannot,
however, prevent a surgeon or medical professional from using our OviTex or OviTex PRS products or other products we
may commercialize in the future for off‑label uses.
Although we train our direct sales force not to promote our products for off‑label uses, and our instructions for use in all
markets specify that our products are not intended for use outside of those indications cleared or approved for use, the FDA
or another regulatory authority could conclude that we have engaged in off‑label promotion. If the FDA determines that our
promotional or training materials constitute promotion of an off‑label use, it could request that we modify our training or
promotional materials or subject us to regulatory or enforcement actions. It is also possible that other federal, state or
non‑U.S. enforcement authorities might take action under other regulatory authority if they consider our business activities
to constitute promotion of an off‑label use, which could result in significant penalties, including, but not limited to,
criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government
healthcare programs and the curtailment of our operations.
Even if surgeons or medical professionals use our OviTex products only for their approved indications, a failure by such
surgeons and medical professionals to use our products in accordance with the processes and procedures established to
properly utilize our OviTex products could result in product liability lawsuits, costly investigations and potentially affect
our ability to achieve sufficient market penetration for our OviTex products. In those possible events, our reputation could
be damaged and adoption of the products would be impaired. We may also be required to reassess the training, written
instructions and product warnings we provide our customers. This process could require us to expend significant time and
capital and could have a material adverse effect on our business, financial condition and results of operations and impair
our ability to grow our business.
If we are unable to achieve and maintain adequate levels of coverage or reimbursement for our OviTex, OviTex PRS or
other products we may commercialize in the future, our commercial success may be hindered.
Our ability to successfully commercialize and achieve market acceptance of our products depends, in significant part, on
the availability of adequate financial coverage and reimbursement from third‑party payors, including governmental payors
(such as the Medicare and Medicaid programs in the U.S.), managed care organizations and private health insurers. The
primary customers for our products are hospitals and ambulatory surgery centers who will then seek reimbursement from
third‑party payors for the procedures performed using our products. While some third‑party payors currently cover and
provide reimbursement for procedures using our currently cleared or approved products, we can give no assurance that
these third‑party payors will continue to provide coverage and adequate reimbursement for the procedures using our
products, to permit hospitals and surgeons to offer procedures using our products to patients requiring treatment, or that
current reimbursement levels for procedures using our products will continue. Additionally, no uniform policy for coverage
and reimbursement exists in the U.S. and coverage and reimbursement can differ significantly from payor to payor. If
third‑party payors reverse or limit their coverage for the procedures using our
39
Table of Contents
currently cleared or approved products in the future, this could have a material adverse effect on our business. If we are
forced to lower the price we charge for our products, this could have a material adverse effect on our business, financial
condition and results of operations and impair our ability to grow our business.
Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform
initiatives. Third‑party payors, whether U.S. or non‑U.S., or governmental or commercial, are developing increasingly
sophisticated methods of controlling healthcare costs, including examining the cost effectiveness of procedures, in addition
to their safety and efficacy, when making coverage and payment decisions. Payors continually review new and existing
technologies for possible coverage and can, without notice, deny or reverse coverage or alter pre‑authorization
requirements for new or existing procedures. We cannot provide assurance that we will be successful in any efforts we may
potentially undertake to reverse such non‑coverage decisions. If we are not successful in reversing non‑coverage policies,
or if third‑party payors that currently cover or reimburse certain procedures reverse or limit their coverage of such
procedures in the future, or if other third‑party payors issue similar policies, our business could be adversely impacted.
Our long‑term growth depends on our ability to enhance our product offerings.
It is important to our business that we continue to enhance our OviTex and OviTex PRS products and develop and
introduce new reinforced tissue matrix products. Developing products is expensive and time‑consuming and could divert
management’s attention away from other aspects of our business. The success of any new reinforced tissue matrix product
offering or product enhancements to our OviTex and OviTex PRS products will depend on several factors, including our
ability to:
·
·
·
·
·
·
·
·
·
·
properly identify and anticipate surgeon and patient needs;
develop and introduce new products and product enhancements in a timely manner;
avoid infringing upon the intellectual property rights of third parties;
ensure the quality, manufacture and supply of new products by Aroa;
demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and
clinical trials;
obtain the necessary regulatory clearances or approvals for expanded indications, new products or product
modifications;
be fully FDA‑compliant with marketing of new devices or products;
provide adequate training to potential users of our new products;
receive adequate coverage and reimbursement for procedures performed with our new products; and
develop an effective and dedicated sales and marketing team.
If we are not successful in introducing new product indications and developing and commercializing new products and
product enhancements, our ability to increase our revenue may be impaired, which could have a material adverse effect on
our business, financial condition and results of operations.
In the future our products may become obsolete, which would negatively affect operations and financial condition.
The medical device industry is characterized by rapid and significant change. There can be no assurance that other
companies will not succeed in developing or marketing devices and products that are more effective than our reinforced
40
Table of Contents
tissue matrix products or that would render our reinforced tissue matrix products obsolete or noncompetitive. Additionally,
new surgical procedures, medications and other therapies could be developed that replace or reduce the importance of our
products. Accordingly, our success will depend in part on our ability to respond quickly to medical and other changes
through the development and introduction of new products. Our reinforced tissue matrix products have a limited shelf life
and will expire if not timely used. Product development involves a high degree of risk, and there can be no assurance that
our new product development efforts will result in any commercially successful products.
To successfully market and sell our products in markets outside of the U.S., we must address many international
business risks with which we have limited experience.
We did not have any sales in markets outside of the U.S. for the years ended December 31, 2018 or 2017 and
approximately 2% of our revenue for the year ended December 31, 2019 came from sales in markets outside of the
U.S. Part of our sales strategy is to maintain our European presence. European sales are subject to a number of risks,
including:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
difficulties in staffing and managing international operations;
increased competition as a result of more products and procedures receiving regulatory approval in
international markets;
longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
fluctuations in currency exchange rates;
non‑U.S. certification and regulatory clearance or approval requirements;
difficulties in developing effective marketing campaigns in unfamiliar non‑U.S. countries;
the impact of the potential exit of the United Kingdom from the European Union;
customs clearance and shipping delays;
complexities associated with managing multiple payor reimbursement regimes, government payors or patient
self‑pay systems;
political, social, and economic instability abroad, terrorist attacks, and security concerns in general;
preference for locally produced products;
potentially adverse tax consequences, including the complexities of non‑U.S. value‑added tax systems, tax
inefficiencies related to our corporate structure, and restrictions on the repatriation of earnings;
the burdens of complying with a wide variety of non‑U.S. laws and different legal standards; and
increased financial accounting and reporting burdens and complexities.
If one or more of these risks are realized, our business, financial condition and results of operations could be adversely
affected.
41
Table of Contents
Risks Related to Our Reliance on Third Parties
We are highly dependent upon Aroa, as the exclusive manufacturer and supplier of our products.
In August 2012, we entered into our Aroa License which was amended and restated in July 2015. The Aroa License grants
us an exclusive license in North America, the EU, Norway, Switzerland, Russia and former Soviet satellite countries to
certain intellectual property rights, including patents relating to the use of bovine and ovine rumen as a source of
extracellular matrix. Under the Aroa License, Aroa is our exclusive manufacturer and supplier of our products.
We are reliant upon the intellectual property we license from Aroa for the development and commercialization of our
products. Under the Aroa License, we hold an exclusive license to certain intellectual and technology rights to develop,
commercialize and sell certain endoform regenerative template products derived from cows and sheep. The Aroa License
also provides for cooperative development of our products utilizing the licensed intellectual property and all of our
products rely on intellectual property owned by Aroa and licensed to us under the Aroa License. The Aroa License imposes
various developmental and regulatory requirements upon us along with requiring us to make milestone payments upon the
achievement of certain commercial and regulatory milestones. If we fail to comply with our obligations under the Aroa
License, Aroa will have the right to terminate the Aroa License, in which event we would not be able to develop and
market our products. We are obligated to pay Aroa up to an aggregate of $4.0 million in revenue‑based milestone payments
upon our achievement of certain net sales thresholds for sales of our products within the specified licensed territory, of
which we have already paid $3.0 million.
Aroa is required under the Aroa License to manufacture all of our products at its manufacturing and warehousing facility in
Auckland, New Zealand. The production of all of our products in a single location exposes us to the risk of Aroa’s facility
being harmed or rendered inoperable by natural or man‑made disasters or pandemics, which may render it difficult or
impossible for Aroa to perform its manufacturing and assembly activities for some time. Although we and Aroa intend to
establish redundant production facilities to lessen the risk of production disruptions, we will need to ensure that any
manufacturing facility complies with our quality expectations and applicable regulatory requirements. If we are unable to
establish redundant manufacturing facilities in a timely manner, any disruption in the manufacture of our products at Aroa’s
manufacturing and warehouse facility, the continued commercialization of our products, the supply of our products to
customers and the development of any new reinforced tissue matrix products will be delayed, limited or prevented, which
could have material adverse effect on our business, financial condition and results of operations.
Under the Aroa License, Aroa provides all of the raw materials and components used in the manufacture and assembly of
our products. If Aroa is unable to supply the raw materials and components or to manufacture and assemble our products
reliably and at the levels we anticipate or that are required by the market, we may be unable to acquire a substitute supply
of raw materials and components on a timely basis, if at all. Under the Aroa License Aroa also holds the FDA clearances
under which we commercialize our products, and maintains ultimate responsibility for all regulatory interactions with FDA
relating to our products and decisions made with respect to changing or updating those clearances. If Aroa fails to comply
with all applicable regulatory requirements and maintain the FDA clearances related to our products, we may be unable to
commercialize our products on a timely basis, or at all. Our ability to supply our products commercially and to develop any
future products depends, in part, on our ability to obtain these materials, components and products in accordance with
regulatory requirements and in sufficient quantities for commercialization and clinical testing. While Aroa has historically
met our demand for its products and services on a timely basis in the past, we cannot guarantee that it will always be able to
meet our demand for its products. If Aroa fails to meet demand or notifies us that it believes it will fail to meet demand for
our products, we are required under the Aroa License to work with Aroa to cure its supply failure and may, only in certain
circumstances and on a temporary basis, engage a replacement contract manufacturer to mitigate a failure by Aroa to meet
demand for our products. As such, we are highly dependent upon Aroa’s continued ability to supply our products at the
levels we require and any production shortfall that impairs the supply of our products could have a material adverse effect
on our business, financial condition and results of operations and adversely affect our ability to satisfy demand for our
products, which could adversely affect our product sales and operating results materially.
42
Table of Contents
We or our partners may experience development, manufacturing problems, capacity constraints, or delays in the
production of our products that could limit the potential growth of our revenue or increase our losses.
We may encounter unforeseen situations in Aroa’s manufacturing and assembly of our products that would result in delays
or shortfalls in its production. For example, Aroa was unable to supply us with our products from September 2017 to
December 2017 due to a quality testing process failure identified by Aroa. Personnel shortages and reduced manufacturing
capacity due to the COVID-19 outbreak may also result in a disruption in production.
Based upon our current planned market adoption we believe we will reach our capacity limitations in the Aroa facility. We
have plans to expand capacity but there can be no assurance that we will be successful. If we are unable to successfully
expand capacity we may not be able to meet the demand for our products. In addition, Aroa’s production processes and
assembly methods may have to change in order to accommodate any significant future expansion of its manufacturing
capacity, which may increase our manufacturing costs, delay production of our products and adversely impact our business.
Conversely, if demand for our products shifts such that Aroa’s manufacturing facility is operated below its capacity for an
extended period, it may adjust its manufacturing operations to reduce fixed costs, which could lead to uncertainty and
delays in manufacturing times and quality during any transition period.
If Aroa’s manufacturing activities are adversely impacted or if it is otherwise unable to keep up with demand for our
products by successfully manufacturing, assembling, testing and shipping our products in a timely manner, our revenue
could be impaired, market acceptance for our products could be adversely affected and our customers might instead
purchase our competitors’ products, which would have a material adverse effect on our business, financial condition and
results of operations.
Our supply of ovine rumen for use in manufacturing our products may be vulnerable to disruption due to natural
disaster, disease or other events.
The ovine rumen used in the manufacturing of our products is sourced through Aroa in New Zealand. Although Aroa
obtains its supply of ovine rumen from jurisdictions with sheep that are not currently known to carry any prion disease
(progressive neurodegenerative disorders, including scrapie disease), there can be no assurance that these flocks will
remain prion disease‑free or that a future outbreak or presence of other unintended and potentially hazardous agents would
not adversely affect our products or patients that may receive them. The geographic concentration of our supply chain
increases our vulnerability to disruption due to natural disasters, disease or other events. If there is a disruption in the
supply of ovine rumen to our manufacturer and supplier, we may be unable to fulfill customer orders or delay the
commercialization of new products.
We may also be prohibited from importing our products into the U.S. in the event of disease outbreak or other event
impacting the sheep population in New Zealand. Any disruption in our supply lines could have a material adverse effect on
our business, financial condition and results of operations.
Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our business
and harm our reputation and ability to provide our products on a timely basis.
Expedited, reliable shipping is essential to our operations. We rely heavily on providers of transport services for reliable
and secure point‑to‑point transport of our OviTex and OviTex PRS products (and would rely heavily on such providers for
any other products we may commercialize and ship in the future) to our customers and for tracking of these shipments.
Should a carrier encounter delivery performance issues such as loss, damage or destruction of any of our products, it would
be costly to replace such products in a timely manner and such occurrences may damage our reputation and lead to
decreased demand for our OviTex and OviTex PRS products (or any other products we commercialize in the future) and
increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our
operating margins and results of operations. Similarly, strikes, severe weather, natural disasters, disease or other service
interruptions affecting delivery services we use would adversely affect our ability to deliver our OviTex and OviTex PRS
products (or any other products we commercialize in the future) on a timely basis. For example, disruptions to
transportation infrastructure as a result of the COVID-19 outbreak may impact our ability to provide our products to our
customers.
43
Table of Contents
Risks Related to Intellectual Property Matters
We may need to license intellectual property from third parties, and such licenses may not be available or may not be
available on commercially reasonable terms.
We may need to obtain licenses from third parties to advance our research or allow commercialization of our products, and
we cannot provide any assurances that third‑party patents do not exist which might be enforced against our products in the
absence of such a license. The licensing and acquisition of third‑party intellectual property rights is a competitive practice
and companies that may be more established, or have greater resources than we do, may also be pursuing strategies to
license or acquire third‑party intellectual property rights that we may consider necessary or attractive in order to
commercialize our products. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if
we are able to obtain a license, it may be non‑exclusive, thereby giving our competitors access to the same technologies
licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement
technology. If we are unable to do so, we may be unable to develop or commercialize the affected products, which could
materially harm our business and the third parties owning such intellectual property rights could seek either an injunction
prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of
compensation. Licensing of intellectual property is of critical importance to our business and involves complex legal,
business and scientific issues. If disputes over intellectual property that we have licensed prevent or impair our ability to
maintain our current licensing arrangements on acceptable terms, we may not be able to successfully develop and
commercialize the affected products, which would have a material adverse effect on our business.
If we fail to comply with our obligations under any license, collaboration or other agreements, we could lose intellectual
property rights that are necessary for developing and protecting our products.
We have licensed certain intellectual property rights covering our current products from third parties, including Aroa. We
are heavily dependent on our agreements with such third parties for our current products. If, for any reason, one or more of
our agreements is terminated or we otherwise lose those rights, it could harm our business. Our license and other
agreements impose, and any future collaboration agreements or license agreements we enter into are likely to impose
various development, commercialization, funding, milestone, royalty, diligence, sublicensing, insurance, patent prosecution
and enforcement or other obligations on us. If we breach any material obligations, or use the intellectual property licensed
to us in an unauthorized manner, we may be required to pay damages and the licensor may have the right to terminate the
license, which could result in us being unable to develop, manufacture and sell products that are covered by the licensed
technology, having to negotiate new or reinstated licenses on less favorable terms, or enabling a competitor to gain access
to the licensed technology.
If we are unable to adequately protect our intellectual property rights, or if we are accused of infringing on the
intellectual property rights of others, our competitive position could be harmed or we could be required to incur
significant expenses to enforce or defend our rights.
Our commercial success will depend in part on our success in obtaining and maintaining issued patents, trademarks and
other intellectual property rights in the U.S. and elsewhere and protecting our proprietary technology. If we do not
adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies or
the goodwill we have acquired in the marketplace and erode or negate any competitive advantage we may have, which
could harm our business and ability to achieve profitability.
We own seven issued or allowed U.S. patents and have six pending U.S. patent applications. As of December 31, 2019, we
had rights, whether through ownership or licensing, to twelve issued or allowed U.S. patents, six pending U.S. patent
applications, two issued non‑U.S. patents and four pending non‑U.S. patent applications. Our issued U.S. patents will
expire between 2035 and 2037. The licensed patents will expire between 2029 and 2031.
Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers
who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain
evidence of infringement in a competitor’s or potential competitor’s product. We may not prevail in
44
Table of Contents
any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially
meaningful.
The patent prosecution process is expensive and time‑consuming, and we may not be able to file and prosecute all
necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to
identify patentable aspects of our research and development output before it is too late to obtain patent protection. We
cannot provide any assurances that any of our patents, or patents to which we have ownership rights through licensing
agreements, have, or that any of our pending patent applications that mature into issued patents will include, claims with a
scope sufficient to protect our OviTex and OviTex PRS products, any additional features we develop for our OviTex and
OviTex PRS products or any new products we seek to develop in the future. Other parties may have developed
technologies that may be related or competitive to our OviTex or OviTex PRS products, may have filed or may file patent
applications and may have received or may receive patents that overlap or conflict with our patent applications, either by
claiming the same methods or devices or by claiming subject matter that could dominate our patent position. The patent
positions of medical device companies, including our patent position, may involve complex legal, scientific and factual
questions, and, therefore, the issuance, scope, validity and enforceability of any patent claims that we may obtain cannot be
predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated or circumvented.
Proceedings challenging our patents could result in either loss of the patent or denial of the patent application or loss or
reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be
costly. Thus, any patents that we may own, or to which we have ownership rights through licensing agreements, may not
provide any protection against competitors. Furthermore, an adverse decision in a judicial or administrative proceeding can
result in a third party receiving the patent right sought by us, which in turn could affect our ability to commercialize our
products.
Patents covering our products could be found invalid or unenforceable if challenged in court or before administrative
bodies in the U.S. or abroad.
Although an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its
enforceability and it may not provide us with adequate proprietary protection or competitive advantages against
competitors with similar products. Competitors could purchase our OviTex or OviTex PRS products and attempt to
replicate the competitive advantages we derive from our development efforts, willfully infringe our intellectual property
rights, design around the relevant patents, or develop and obtain patent protection for more effective technologies, designs
or methods. We may be unable to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by
consultants, suppliers, vendors, former employees and current employees. The laws of some non‑U.S. countries do not
protect our proprietary rights to the same extent as the laws of the U.S., and we may encounter significant problems in
protecting our proprietary rights in these countries.
In addition, proceedings to enforce or defend our patents, or patents to which we have ownership rights through licensing
agreements, could put those patents at risk of being invalidated, held unenforceable or interpreted narrowly. Such
proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or
more of those patents are invalid or otherwise unenforceable. If any of the patents covering our OviTex or OviTex PRS
products are invalidated or found unenforceable, or if a court found that valid, enforceable patents held by third parties
covered one or more of our products, our competitive position could be harmed or we could be required to incur significant
expenses to enforce or defend our rights.
Third parties may assert ownership or commercial rights to inventions we develop.
Third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. In
addition, we may face claims by third parties that our agreements with employees, contractors or consultants obligating
them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of
assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop
and interfere with our ability to capture the commercial value of such intellectual property. Litigation may be necessary to
resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property or
may lose our exclusive rights in such intellectual property. Either outcome could harm our business and competitive
position.
45
Table of Contents
Litigation or other proceedings or third‑party claims of intellectual property infringement could require us to spend
significant time and money and could prevent us from selling our products or affect our stock price.
Our commercial success will depend in part on not infringing the patents or violating other proprietary rights of others.
Significant litigation regarding patent rights occurs in our industry. Our competitors may have applied for or obtained, or
may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make, use
and sell our products. We do not always conduct independent reviews of patents issued to third parties. In addition, patent
applications in the U.S. and elsewhere can be pending for many years before issuance, or unintentionally abandoned
patents or applications can be revived, so there may be applications of others now pending or recently revived patents of
which we are unaware. Patent applications in the U.S., the EU and elsewhere are published approximately 18 months after
the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority
date. These applications may later result in issued patents, or the revival of previously abandoned patents, that will prevent,
limit or otherwise interfere with our ability to develop and market our products. Third parties may assert claims that we are
employing their proprietary technology without authorization, including claims from competitors or from nonpracticing
entities that have no relevant product revenue and against whom our own patent portfolio may have no deterrent effect.
As we continue to commercialize our products in their current or updated forms, launch new products and enter new
markets, we expect competitors may claim that one or more of our products infringe their intellectual property rights as a
strategy to impede our commercialization and entry into new markets. The large number of patents, the rapid rate of new
patent applications and issuances, the complexities of the technologies involved, and the uncertainty of litigation may
increase the risk of business resources and management’s attention being diverted to patent litigation. We have received,
and we may in the future receive, letters or other threats or claims from third parties inviting us to take licenses under, or
alleging that we infringe, their patents.
Moreover, we may become party to adversarial proceedings regarding our or third‑party patent portfolios. Such
proceedings could include supplemental examination or contested post‑grant proceedings such as review, reexamination,
inter partes review, interference or derivation proceedings before the U.S. Patent and Trademark Office (“USPTO”) and
challenges in U.S. District Courts. Patents may be subjected to opposition, post‑grant review or comparable proceedings
lodged in various foreign, both national and regional, patent offices. The legal threshold for initiating litigation or contested
proceedings may be low, so that even lawsuits or proceedings with a low probability of success might be initiated.
Litigation and contested proceedings can also be expensive and time‑consuming, and our adversaries in these proceedings
may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can. We may also
occasionally use these proceedings to challenge the patent rights of others. We cannot be certain that any particular
challenge will be successful in limiting or eliminating the challenged patent rights of the third party.
Any lawsuits resulting from such allegations could subject us to significant liability for damages and/ or invalidate our
proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:
·
·
·
·
·
stop making, selling or using products or technologies that allegedly infringe the asserted intellectual
property;
lose the opportunity to license our technology to others or to collect royalty payments;
incur significant legal expenses, including, in some cases, the attorney’s fees and costs of litigation to the
party whose intellectual property rights we may be found to be infringing;
pay substantial damages (possibly treble damages) or royalties to the party whose intellectual property rights
on which we may be found to be infringing;
redesign products that contain the allegedly infringing intellectual property; and
46
Table of Contents
·
attempt to obtain a license to the relevant intellectual property from third parties, which may not be available
on reasonable terms or at all.
Any litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could place a
significant strain on our financial resources, divert the attention of management from our business and harm our reputation.
If we are found to infringe the intellectual property rights of third parties, we could be required to pay substantial damages
(which may be increased up to three times of awarded damages) and/or substantial royalties and could be prevented from
selling our products unless we obtain a license or are able to redesign our products to avoid infringement. Any such license
may not be available on reasonable terms, if at all, and there can be no assurance that we would be able to redesign our
products in a technically feasible way that would not infringe the intellectual property rights of others. We could encounter
delays in product introductions while we attempt to develop alternative methods or products. If we fail to obtain any
required licenses or make any necessary changes to our products or technologies, we may have to withdraw existing
products from the market or may be unable to commercialize one or more of our products.
Even if we were ultimately to prevail, any of these events could require us to divert substantial financial and management
resources that we would otherwise be able to devote to our business. Intellectual property litigation, regardless of its
outcome, may cause negative publicity, adversely impact prospective customers, cause product shipment delays, or prohibit
us from manufacturing, importing, marketing or otherwise commercializing our products, services and technology. In
addition, if the breadth or strength of protection provided the patents and patent applications we own or in‑license is
threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future
products. In addition, because of the substantial amount of discovery required in connection with intellectual property
litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of
litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or
developments, and if securities analysts or investors view these announcements in a negative light, the price of our
common stock could be adversely affected.
In addition, we generally indemnify our customers with respect to infringement by our products of the proprietary rights of
third parties. Third parties may assert infringement claims against our customers. These claims may require us to initiate or
defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these
claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or may be
required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable
terms, our customers may be forced to stop using our products.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be
harmed.
We also rely upon copyright and trade secret protection, as well as non‑disclosure agreements and invention assignment
agreements with our employees, consultants and third parties, to protect our confidential and proprietary information.
In addition to contractual measures, we try to protect the confidential nature of our proprietary information using
commonly accepted physical and technological security measures. Such measures may not provide adequate protection for
our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our
trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an
adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain
aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a
trade secret can be difficult, expensive and time‑consuming, and the outcome of any such claim is unpredictable. Trade
secret violations are often a matter of state law, and the criteria for protection of trade secrets can vary among different
jurisdictions. In addition, trade secrets may be independently developed or reverse engineered by others in a manner that
could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to
be disclosed or misappropriated, or if any such information was independently developed by a competitor, our business and
competitive position could be harmed.
47
Table of Contents
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in
our markets of interest.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our
target markets and our business may be adversely affected. At times, competitors may adopt trade names or trademarks
similar to ours, thereby impeding our ability to build brand identity, possibly leading to market confusion and potentially
requiring us to pursue legal action. In addition, there could be potential trade name or trademark infringement claims
brought by owners of other registered trademarks or trademarks that incorporate variations of our unregistered trademarks
or trade names. If we are unable to successfully register our trademarks and trade names and establish name recognition
based on our trademarks and trade names, then we may not be able to compete effectively and our business may be
adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain
names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of
resources and could adversely impact our financial condition or results of operations.
We may be unable to enforce our intellectual property rights throughout the world.
Filing, prosecuting and defending patents covering our products in all countries throughout the world would be
prohibitively expensive, and the laws of some foreign countries do not protect intellectual property rights to the same extent
as the laws of the U.S. Many companies have encountered significant problems in protecting and defending intellectual
property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign
patents, if obtained, or the misappropriation of our other intellectual property rights. For example, some foreign countries
have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries
limit the enforceability of patents against third parties, including government agencies or government contractors. In these
countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country‑by‑country
basis, which is an expensive and time‑consuming process with uncertain outcomes. Accordingly, we may choose not to
seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
Additionally, in the event that our trademarks are successfully challenged, we could be forced to rebrand our products,
which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new
brands. Our competitors may infringe our trademarks, and we may not have adequate resources to enforce our trademarks.
Proceedings to enforce our patent or trademark rights in foreign jurisdictions could result in substantial costs and divert our
efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights
in such countries may be inadequate.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information
or misappropriated trade secrets.
We employ individuals who previously worked with other companies, including our competitors. Although we try to
ensure that our employees and consultants do not use the proprietary information or know‑how of others in their work for
us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or
otherwise used or disclosed intellectual property or personal data, including trade secrets or other proprietary information,
of a former employer or other third party. Litigation may be necessary to defend against these claims. If we fail in
defending any such claims or settling those claims, in addition to paying monetary damages or a settlement payment, we
may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims,
litigation could result in substantial costs and be a distraction to management and other employees.
Recent changes in U.S. patent laws may limit our ability to obtain, defend and/or enforce our patents.
The U.S. has recently enacted and implemented wide ranging patent reform legislation. The U.S. Supreme Court has ruled
on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or
weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability
to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once
obtained. Depending on actions by the U.S. Congress, the U.S. federal courts, and the USPTO, the
48
Table of Contents
laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new
patents or to enforce patents that we have licensed or that we might obtain in the future. Similarly, changes in patent law
and regulations in other countries or jurisdictions, changes in the governmental bodies that enforce them or changes in how
the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to
enforce patents that we have licensed or that we may obtain in the future.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document
submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection
could be reduced or eliminated for non‑compliance with these requirements.
The USPTO and other patent agencies require compliance with a number of procedural, documentary, fee payment and
other similar provisions during the patent application process. In addition, periodic maintenance and annuity fees on any
issued patent are due to be paid to the USPTO and other patent agencies over the lifetime of the patent. While an
inadvertent failure to make payment of such fees or to comply with such provisions can in many cases be cured by
additional payment of a late fee or by other means in accordance with the applicable rules, there are situations in which
non‑compliance with such provisions will result in the abandonment or lapse of the patent or patent application, and the
partial or complete loss of patent rights in the relevant jurisdiction. Non‑compliance events that could result in
abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time
limits, non‑payment of fees and failure to properly legalize and submit formal documents within prescribed time limits. If
we or our licensors fail to maintain the patents and patent applications covering our product or if we or our licensors
otherwise allow our patents or patent applications to be abandoned or lapse, it can create opportunities for competitors to
enter the market, which would hurt our competitive position and could impair our ability to successfully commercialize our
products.
Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount
of time.
The term of any individual patent depends on applicable law in the country where the patent is granted. In the U.S.,
provided all maintenance fees are timely paid, a patent generally has a term of 20 years from its application filing date or
earliest claimed non‑provisional filing date. Extensions may be available under certain circumstances, but the life of a
patent and, correspondingly, the protection it affords is limited. Even if we or our licensors obtain patents covering our
products, when the terms of all patents covering a product expire, our business may become subject to competition from
products identical or similar to ours. As a result, our owned and licensed patent portfolio may not provide us with sufficient
rights to exclude others from commercializing products similar or identical to ours.
We may be unable to patent term extension in the U.S. under the Hatch‑Waxman Act and in foreign countries under
similar legislation.
In the U.S., a patent that covers a drug product or medical device approved by the FDA may be eligible for a term
extension designed to restore the period of the patent term that is lost during the premarket regulatory review process
conducted by the FDA. Depending upon the timing, duration and conditions of FDA marketing approval of our products,
one or more of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and
Patent Term Restoration Act of 1984, or the Hatch‑Waxman Act, which permits a patent term extension of up to five years
for a patent covering an approved product as compensation for effective patent term lost during product development and
the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of
14 years from the date of product approval, and only claims covering such approved drug product, a method for using it or
a method for manufacturing it may be extended. In the European Union, our product candidates may be eligible for term
extensions based on similar legislation. In either jurisdiction, however, we may not receive an extension if we fail to apply
within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable
requirements. Even if we are granted such extension, the duration of such extension may be less than our request. If we are
unable to obtain a patent term extension, or if the term of any such extension is less than our request, the period during
which we can enforce our patent rights for that product will be in effect shortened and our competitors may obtain approval
to market competing products sooner. The resulting reduction of years of revenue from applicable products could be
substantial.
49
Table of Contents
Intellectual property rights do not necessarily address all potential threats.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights
have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For
example:
·
·
·
·
·
·
·
·
·
·
·
others may be able to make products that are similar to our products or utilize similar technology but that are
not covered by the claims of our patents or that incorporate certain technology in our products that is in the
public domain;
we, or our future licensors or collaborators, might not have been the first to make the inventions covered by
the applicable issued patent or pending patent application that we own now or may own or license in the
future;
we, or our future licensors or collaborators, might not have been the first to file patent applications covering
certain of our or their inventions;
we may not be able to successfully commercialize our products before our relevant patents we may have, or
to which we have ownership rights through licensing agreements, expire;
others may independently develop similar or alternative technologies or duplicate any of our technologies
without infringing our intellectual property rights;
it is possible that our current or future pending patent applications will not lead to issued patents;
issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal
challenges by our competitors or other third parties;
our competitors or other third parties might conduct research and development activities in countries where
we do not have patent rights and then use the information learned from such activities to develop competitive
products for sale in our major commercial markets;
we may not develop additional proprietary technologies that are patentable;
the patents of others may harm our business; and
we may choose not to file a patent in order to maintain certain trade secrets or know‑how, and a third party
may subsequently file a patent covering such intellectual property.
Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Government Regulation
Our products and operations are subject to extensive government regulation and oversight both in the U.S. and
internationally.
Our products are regulated as medical devices. We and our products are subject to extensive regulation in the U.S. and
internationally including by the FDA and European Medicines Agency (“EMA”). The FDA, EMA and other foreign
equivalents regulate, among other things, with respect to medical devices: design, development and manufacturing; testing,
labeling, content and language of instructions for use and storage; clinical trials; product safety; establishment registration
and device listing; marketing, sales and distribution; pre‑market clearance and approval; record keeping procedures;
advertising and promotion; recalls and field safety corrective actions; post‑market surveillance, including
50
Table of Contents
reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury;
post‑market approval studies; and product import and export.
The regulations to which we are subject are complex and have become more stringent over time. Failure to comply with
applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as: warning
letters; fines; injunctions; civil penalties; termination of distribution; recalls or seizures of products; delays in the
introduction of products into the market; total or partial suspension of production; refusal to grant future clearances or
approvals; withdrawals or suspensions of current approvals, resulting in prohibitions on sales of our products; and in the
most serious cases, criminal penalties.
We may not receive, or may be significantly delayed in receiving, the necessary clearances or approvals for our future
products and modifications to our current products may require new 510(k) clearances or PMA approvals, and may
require us to cease marketing or recall the modified products until clearances or approvals are obtained.
An element of our strategy is to continue to add new features and expand the indications and uses for our current products.
In the U.S., before we can market a new medical device, or a new use of, new claim for or significant modification to an
existing product, we must first receive either clearance under Section 510(k) of the FDCA or approval of a PMA from the
FDA, unless an exemption applies. Our products are cleared with the FDA, through clearances obtained and, with the
exception of the clearances relating to our OviTex PRS products, held by Aroa, under Section 510(k) of the FDCA, which
permits marketing of a device if it is “substantially equivalent” to an already legally‑marketed “predicate” device, which
includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to
May 28, 1976 (preamendments device), a device that was originally on the U.S. market pursuant to an approved PMA and
later downclassified, or a 510(k)‑exempt device. To be “substantially equivalent,” the proposed device must have the same
intended use as the predicate device, and either have the same technological characteristics as the predicate device or have
different technological characteristics and not raise different questions of safety or effectiveness than the predicate device.
Clinical data are sometimes required to support substantial equivalence. In the PMA process, the FDA must determine that
a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to,
technical, preclinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that
are deemed to pose the greatest risk, such as life‑sustaining, life‑supporting or implantable devices. To date, our products
have been the subject of cleared 510(k)s, obtained and, with the exception of the clearances relating to our OviTex PRS
products, held by Aroa. For more information regarding the regulation of our products, see “Business — Government
Regulation.”
Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain
modifications made to products cleared through a 510(k) may require a new 510(k) clearance. Both the PMA approval and
the 510(k) clearance process can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes
from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the
510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is filed
with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort
and cost, we cannot assure you that any particular device will be approved or cleared by the FDA. Any delay or failure to
obtain necessary regulatory clearances or approvals could harm our business.
In the U.S., Aroa has obtained and holds 510(k) clearances from the FDA to market our OviTex products and obtained the
501(k) clearances from the FDA held by us for our OviTex PRS products. An element of our strategy is to continue to
upgrade our reinforced tissue matrix products. We expect that any such modifications may require new 510(k) clearances;
however, future modifications may be subject to the substantially more costly, time‑consuming and uncertain PMA process.
If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing
products than we had expected, product introductions or modifications could be delayed or canceled, which could cause our
sales to decline.
The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
·
we may not be able to demonstrate to the FDA’s satisfaction that the product or modification is substantially
equivalent to the proposed predicate device or safe and effective for its intended use;
51
Table of Contents
·
·
the data from our preclinical studies and clinical trials may be insufficient to support clearance or approval,
where required; and
the manufacturing process or facilities we use may not meet applicable requirements.
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing
regulations, or take other actions which may prevent or delay approval or clearance of our future products under
development. For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to
modernize the premarket notification pathway under Section 510(k) of the FDCA. Among other things, the FDA
announced that it plans to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer
predicates. These proposals include plans to potentially sunset certain older devices that were used as predicates under the
510(k) clearance pathway, and to potentially publish a list of devices that have been cleared on the basis of demonstrated
substantial equivalence to predicate devices that are more than 10 years old. The FDA also announced that it intends to
finalize guidance to establish a premarket review pathway for “manufacturers of certain well‑understood device types” as
an alternative to the 510(k) clearance pathway and that such premarket review pathway would allow manufacturers to rely
on objective safety and performance criteria recognized by the FDA to demonstrate substantial equivalence, obviating the
need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the
clearance process. These proposals have not yet been finalized or adopted, and the FDA announced that it would seek
public feedback prior to publication of any such proposals, and may work with Congress to implement such proposals
through legislation. Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional
regulatory requirements on us that could delay our ability to obtain new 510(k) clearances, increase the costs of
compliance, or restrict our ability to maintain our current clearances, or otherwise create competition that may negatively
affect our business.
Even after we have obtained the proper regulatory clearance or approval to market a product, we have ongoing
responsibilities under FDA regulations. The failure to comply with applicable regulations could jeopardize our ability to
sell our reinforced tissue matrix products and result in enforcement actions such as:
·
·
·
·
·
·
·
·
·
·
·
warning letters;
fines;
injunctions;
civil penalties;
termination of distribution;
recalls or seizures of products;
delays in the introduction of products into the market;
total or partial suspension of production;
refusal to grant future clearances or approvals;
withdrawals or suspensions of current clearances or approvals, resulting in prohibitions on sales of our
products; and
in the most serious cases, criminal penalties.
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and harm our reputation,
business, financial condition and results of operations.
52
Table of Contents
In addition, regulators may determine that our financial relationships with our principal investigators resulted in a perceived
or actual conflict of interest that may have affected the interpretation of a study. Principal investigators for our clinical trials
may serve as speakers or consultants to us from time to time and receive compensation in connection with such services.
Under certain circumstances, we may be required to report some of these relationships to the FDA or other regulatory
authority. The FDA or other regulatory authority may conclude that a financial relationship between us and a principal
investigator has created a conflict of interest or otherwise affected interpretation of the study. The FDA or other regulatory
authority may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the
clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications
by the FDA or other regulatory authority, as the case may be, and may ultimately lead to the denial of marketing approval
of one or more of our future products.
To sell our products in member countries of the EEA our products must comply with the essential requirements of the EU
Medical Devices Directive (Council Directive 93/42/EEC) and the Active Implantable Medical Devices Directive (Council
Directive 90/385/EEC). Compliance with these requirements is a prerequisite to be able to affix the Conformité
Européenne, or CE, mark to our products, without which they cannot be sold or marketed in the EEA. In the EEA, we have
obtained the CE mark for our OviTex products. For more information regarding regulation of our products, see “Business
—Government Regulation.”
An element of our strategy is to continue to add new features and expand the indications and uses for our current products.
Any modification to a 510(k)‑cleared device that could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, approval
of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review
any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals
are necessary. Such modifications can be expensive and uncertain in time and outcome. We may not be able to obtain
additional 510(k) clearances or PMAs for new products or for modifications to, or additional indications for, our products
in a timely fashion, or at all. Delays in obtaining required future clearances or approvals would adversely affect our ability
to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. We have made
modifications to our products in the past and expect to make additional modifications in the future that we believe do not or
will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for these
modifications, we may be required to recall and to stop selling or marketing such products as modified until we obtain
clearance or approval, which could harm our operating results and require us to redesign such products. In these
circumstances, we may be subject to significant enforcement actions, including significant fines or penalties.
International regulatory approval processes may take more or less time than the FDA clearance or approval process. If we
fail to comply with applicable FDA and comparable non‑U.S. regulatory requirements, we may not receive regulatory
clearances or approvals or may be subject to FDA or comparable non‑U.S. enforcement actions.
We may be unable to obtain future regulatory clearance or approval in a timely manner, or at all, especially if existing
regulations are changed or new regulations are adopted. For example, the FDA clearance or approval process can take
longer than anticipated due to requests for additional clinical data and changes in regulatory requirements. A failure or
delay in obtaining necessary regulatory clearances or approvals would materially adversely affect our business, financial
condition and results of operations.
Although we have obtained regulatory clearance for our products, they will remain subject to extensive regulatory
scrutiny.
We are subject to ongoing and pervasive regulatory requirements governing, among other things, the manufacturing,
marketing, advertising, medical device reporting, selling and promoting our products. For example, we must submit
periodic reports to the FDA as a condition of our clearance under Section 510(k). These reports include safety and
effectiveness information about the device after its clearance. Failure to submit such reports, or failure to submit the reports
in a timely manner, could result in enforcement action by the FDA.
53
Table of Contents
Even after we have obtained the proper regulatory approval to market our products, they will be subject to ongoing
regulatory requirements for design, development, manufacturing, testing, labeling, packaging, storage, advertising,
promotion, sampling, record‑keeping, recalls and field safety corrective actions, conduct of post‑marketing studies and
submission of safety, effectiveness and other post‑market information, including both federal and state requirements in the
U.S. and requirements of comparable non‑U.S. regulatory authorities. Our failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA, EMA and applicable state regulatory authorities, which may
include any of the following sanctions:
·
·
·
·
·
·
·
·
·
issue warning or untitled letters that would result in adverse publicity or may require corrective advertising;
fines, injunctions, consent decrees and civil penalties;
recalls, termination of distribution, administrative detention, or seizure of our products;
customer notifications or repair, replacement or refunds;
operating restrictions or partial suspension or total shutdown of production;
delays in or refusal to grant our requests for future clearances under Section 510(k) or pre‑market approvals
or EU regulatory approvals of new products, new intended uses, or modifications to existing products;
withdrawal or suspension of regulatory clearances or approvals;
FDA refusal to issue certificates to non‑U.S. governments needed to export products for sale in other
countries; and
criminal prosecution.
Any government investigation of alleged violations of law could require us to expend significant time and resources in
response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may
significantly and adversely affect our ability to commercialize and generate revenue from our products. If regulatory
sanctions are applied or if regulatory clearance or approval is withdrawn, it would have a material adverse effect on our
business, financial condition and results of operations.
Our products must be manufactured in accordance with federal and state regulations, and we could be forced to recall
our products or terminate production if we fail to comply with these regulations.
The methods used in, and the facilities used for, the manufacture of our products must comply with the FDA’s QSR which
is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process
controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing and shipping of
medical devices. Furthermore, Aroa must maintain facilities, procedures and operations that comply with our quality
standards and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced
inspections of medical device manufacturing facilities, which may include the facilities of subcontractors. Our products are
also subject to similar state regulations and various EU laws and regulations governing manufacturing.
Aroa may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of
our products. For example, following an inspection in March 2017, Aroa received an FDA Form 483 that contained
multiple observations related to its manufacturing processes and procedures. In addition, failure to comply with applicable
FDA requirements or later discovery of previously unknown problems with our products or manufacturing processes could
result in, among other things: untitled letters or warning letters; fines, injunctions or civil penalties; suspension or
withdrawal of approvals; seizures or recalls of our products; total or partial suspension of production or distribution;
administrative or judicially imposed sanctions; the FDA’s refusal to grant pending or future clearances or
54
Table of Contents
approvals for our products; clinical holds; refusal to permit the import or export of our products; and criminal prosecution
of us or our employees.
Any of these actions could significantly and negatively affect supply of our products. If any of these events occurs, our
reputation could be harmed, we could be exposed to product liability claims and we could lose customers and experience
reduced sales and increased costs.
If guidelines for soft tissue reconstruction surgery change or the standard of care evolves, we may need to redesign and
seek new marketing authorization from the FDA for our OviTex and OviTex PRS products or other products we may
commercialize in the future.
If guidelines for soft tissue reconstruction surgery change or the standard of care for reconstructing tissue evolves, we may
need to redesign the applicable product and seek new approvals from the FDA. Our clearances under Section 510(k) of the
FDCA are based on current soft tissue reconstruction surgery guidelines. If the guidelines change so that different surgeries
or products become desirable, the clinical utility of one or more of our OviTex and OviTex PRS products or other products
we may commercialize in the future could be diminished and our business could be adversely affected.
If any of our products cause or contribute to a death, serious injury, or other adverse medical events, or malfunction in
certain ways, we will be required to report these events to FDA and other comparable regulatory authorities under
applicable medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement
actions. If we fail to comply with our reporting obligations, we would be subject to sanctions that could harm our
reputation, business, financial condition and results of operations. The discovery of serious safety issues with our products,
or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a
negative impact on us.
We are subject to the FDA’s medical device reporting regulations and similar EU regulations, which require us to report to
the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may
have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur,
could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we
become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we
become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable
adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or
removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take
action, including untitled letters, warning letters, administrative actions, criminal prosecution, imposition of civil monetary
penalties, revocation of related approvals, seizure of our products or delay in clearance or approval of future products.
The FDA and EMA have the authority to require the recall of commercialized products in the event of material deficiencies
or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The
FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could
cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. For
example, in April 2018, Aroa, as the product manufacturer, issued a voluntary recall of our resorbable OviTex products due
to a reduction in the labeled shelf life of such products from 24 months to 18 months. The recall included a total of 1,974
units from 48 manufacturing lots and was ultimately terminated in April 2019. A government‑mandated or voluntary recall
by us could also occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing
defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable
regulations. Product defects or other errors may occur in the future.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may
decide, that we will need to obtain new clearances or approvals for the device before we may market or distribute the
corrected device. Seeking such approvals may delay our ability to replace the recalled devices in a timely manner.
Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory
55
Table of Contents
enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties or civil or
criminal fines.
Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA.
We may initiate voluntary withdrawals or corrections for our products in the future that we determine do not require
notification of the FDA. If the FDA disagrees with our determinations, it could require us to report those actions as recalls
and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers,
potentially lead to product liability claims against us and negatively affect our sales. Any corrective action, whether
voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital,
distract management from operating our business and may harm our reputation and financial results.
Legislative or regulatory reforms may make it more difficult and costly for us to obtain regulatory clearances or
approvals for our products or to manufacture, market or distribute our products after clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions
governing the regulation of medical devices, or the FDA may change its clearance and approval policies, adopt additional
regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our
future products under development. For example, in November 2018, FDA officials announced forthcoming steps that the
FDA intends to take to modernize the premarket notification pathway under Section 510(k) of the FDCA. These proposals
have not yet been finalized or adopted, and the FDA announced that it would seek public feedback prior to publication of
any such proposals, and may work with Congress to implement such proposals through legislation. In addition, FDA
regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business
and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose
additional costs or lengthen review times of any future products or make it more difficult to obtain clearance of or approval
for, manufacture, market or distribute our products. We cannot determine what effect changes in regulations, statutes, legal
interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such
changes could, among other things, require: additional testing prior to obtaining clearance or approval; changes to
manufacturing methods; recall, replacement or discontinuance of our products; or additional record keeping.
The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted
that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or
extent of government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad.
For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump
administration has taken several executive actions, including the issuance of a number of executive orders, that could
impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine oversight activities
such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing
applications. It is difficult to predict how these executive actions will be implemented, and the extent to which they will
impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose restrictions on FDA’s ability
to engage in oversight and implementation activities in the normal course, our business may be negatively impacted. If we
are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are
not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may
not achieve or sustain profitability.
On April 5, 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals
and replaces the EU Medical Devices Directive and the Active Implantable Medical Devices Directive. Unlike directives,
which must be implemented into the national laws of the EEA member states, the regulations would be directly applicable,
i.e., without the need for adoption of EEA member state laws implementing them, in all EEA member states and are
intended to eliminate current differences in the regulation of medical devices among EEA member states. The Medical
Devices Regulation is intended to, among other things, establish a uniform, transparent, predictable and sustainable
regulatory framework across the EEA for medical devices and ensure a high level of safety and health while supporting
innovation.
56
Table of Contents
The Medical Devices Regulation will become applicable in 2020, and, once applicable, the new regulations will, among
other things:
·
·
·
·
·
strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers’ responsibilities for the follow‑up of the quality, performance
and safety of devices placed on the market;
improve the traceability of medical devices throughout the supply chain to the end‑user or patient through a
unique identification number;
establish a central database to provide patients, healthcare professionals and the public with comprehensive
information on products available in the EU; and
strengthen rules for the assessment of certain high‑risk devices, which may have to undergo an additional
check by experts before they are placed on the market.
Failure to comply with these regulations may harm our business.
Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key
leadership and other personnel, or otherwise prevent new products and services from being developed or
commercialized in a timely manner.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government
budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory,
regulatory, and policy changes. Average review times at the FDA have fluctuated in recent years as a result. In addition,
government funding of other government agencies that fund research and development activities is subject to the political
process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new devices to be reviewed and/or
approved or cleared by necessary government agencies, which would adversely affect our business. For example, over the
last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several
times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical
activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review
and process our regulatory submissions, which could have a material adverse effect on our business.
Our relationships with surgeons, patients and payors in the U.S. are subject to applicable anti‑kickback, fraud and
abuse laws and regulations.
Our current and future operations with respect to the commercialization of our products are subject to various U.S. federal
and state healthcare laws and regulations. These laws impact, among other things, our proposed sales, marketing, support
and education programs and constrain our business and financial arrangements and relationships with third‑party payors,
surgeons and other healthcare professionals. The laws are described in greater detail in the section below under
“Business — Government Regulation,” and include, but are not limited to:
·
the U.S. federal Anti‑Kickback Statute, which prohibits, among other things, persons or entities from
knowingly and willfully soliciting, offering, receiving or paying any remuneration, directly or indirectly,
overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the
purchase, lease, order, or arranging for or recommending the purchase, lease or order of, any good or service,
for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and
Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate
it in order to have committed a violation;
57
Table of Contents
·
·
·
·
the U.S. federal false claims laws, including the civil False Claims Act (which can be enforced through “qui
tam,” or whistleblower actions, by private citizens on behalf of the federal government), which prohibits any
person from, among other things, knowingly presenting, or causing to be presented false or fraudulent claims
for payment of government funds or knowingly making, using or causing to be made or used, a false record
or statement material to an obligation to pay money to the government or knowingly and improperly
avoiding, decreasing or concealing an obligation to pay money to the U.S. federal government;
the U.S. federal Health Insurance Portability and Accountability Act of 1996 which imposes criminal and
civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme
to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a
material fact or making any materially false statement, in connection with the delivery of, or payment for
healthcare benefits, items or services by a healthcare benefit program, which includes both government and
privately funded benefits programs; similar to the U.S. federal Anti‑Kickback Statute, a person or entity does
not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a
violation;
the Physician Payments Sunshine Act, implemented as the Open Payments program, and its implementing
regulations, which requires certain manufacturers of drugs, devices, biologics and medical supplies that are
reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to the
Centers for Medicare and Medicare Services, or CMS, information related to certain payments made in the
preceding calendar year and other transfers of value to physicians and teaching hospitals, as well as
ownership and investment interests held by physicians and their immediate family members; and
state laws and regulations, including state anti‑kickback and false claims laws, that may apply to our business
practices, including but not limited to, research, distribution, sales and marketing arrangements and claims
involving healthcare items or services reimbursed by any third‑party payor, including private insurers; state
laws that require medical device companies to comply with the medical device industry’s voluntary
compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government, or
otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and
state laws and regulations that require drug and device manufacturers to file reports relating to pricing and
marketing information, which requires tracking gifts and other remuneration and items of value provided to
healthcare professionals and entities.
The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to
comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that a
healthcare or medical device company may fail to comply fully with one or more of these requirements. Efforts to ensure
that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve
substantial costs. Certain physicians who influence the ordering or use of our products in procedures they perform have
ownership interests in us and/or receive compensation for consulting services provided to us. It is possible that
governmental authorities will conclude that our business practices do not comply with applicable fraud and abuse or other
healthcare laws and regulations or guidance.
To enforce compliance with healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of
interactions between healthcare companies and healthcare providers, which has led to a number of investigations,
prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time‑ and
resource‑consuming and can divert management’s attention from the business. Additionally, as a result of these
investigations, healthcare providers and entities may also have to agree to additional compliance and reporting
requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlements could
increase our costs or otherwise have an adverse effect on our business. Even an unsuccessful challenge or investigation into
our practices could cause adverse publicity and be costly to respond to.
If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to
us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment,
58
Table of Contents
exclusion from government funded healthcare programs, such as Medicare and Medicaid, additional oversight and
reporting requirements if we become subject to a corporate integrity agreement to resolve allegations of non‑compliance
with these laws and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities
with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to the
same criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
We are subject to anti‑bribery, anti‑corruption, and anti‑money laundering laws, including the U.S. Foreign Corrupt
Practices Act, in which violations of these laws could result in substantial penalties and prosecution.
We are exposed to trade and economic sanctions and other restrictions imposed by the U.S. and other governments and
organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other federal agencies and authorities
have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for
violations of economic sanctions laws, export control laws, the U.S. Foreign Corrupt Practices Act, or the FCPA, and other
federal statutes and regulations, including those established by the Office of Foreign Assets Control. In addition, the U.K.
Bribery Act of 2010 (“Bribery Act”), prohibits both domestic and international bribery, as well as bribery across both
private and public sectors. An organization that “fails to prevent bribery” by anyone associated with the organization can be
charged under the Bribery Act unless the organization can establish the defense of having implemented “adequate
procedures” to prevent bribery. Under these laws and regulations, as well as other anti‑corruption laws, anti‑money
laundering laws, export control laws, customs laws, sanctions laws and other laws governing our operations, various
government agencies may require export licenses, may seek to impose modifications to business practices, including
cessation of business activities in sanctioned countries or with sanctioned persons or entities and modifications to
compliance programs, which may increase compliance costs, and may subject us to fines, penalties and other sanctions. A
violation of these laws or regulations would negatively affect our business, financial condition and results of operations.
We face risks related to our collection and use of data, which could result in investigations, inquiries, litigation, fines,
legislative and regulatory action and negative press about our privacy and data protection practices.
Our business processes personal data, including some data related to health. When conducting clinical trials, we face risks
associated with collecting trial participants’ data, especially health data, in a manner consistent with applicable laws and
regulations. We also face risks inherent in handling large volumes of data and in protecting the security of such data. We
could be subject to attacks on our systems by outside parties or fraudulent or inappropriate behavior by our service
providers or employees. Third parties may also gain access to users’ accounts using stolen or inferred credentials, computer
malware, viruses, spamming, phishing attacks or other means, and may use such access to obtain users’ personal data or
prevent use of their accounts. Data breaches could result in a violation of applicable U.S. and international privacy, data
protection and other laws, and subject us to individual or consumer class action litigation and governmental investigations
and proceedings by federal, state and local regulatory entities in the U.S. and by international regulatory entities, resulting
in exposure to material civil and/or criminal liability. Further, our general liability insurance and corporate risk program
may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that
may be imposed.
As our operations and business grow, we may become subject to or affected by new or additional data protection laws and
regulations and face increased scrutiny or attention from regulatory authorities. In the U.S., HIPAA imposes, among other
things, certain standards relating to the privacy, security, transmission and breach reporting of individually identifiable
health information. Certain states have also adopted comparable privacy and security laws and regulations, some of which
may be more stringent than HIPAA. Such laws and regulations will be subject to interpretation by various courts and other
governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic
partners. In addition, California enacted the CCPA on June 28, 2018, which takes effect on January 1, 2020. The CCPA
creates individual privacy rights for California consumers and increases the privacy and security obligations of entities
handling certain personal data. The CCPA provides for civil penalties for violations, as well as a private right of action for
data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and
potential liability, and many similar laws have been proposed at the federal level and in other states. In the event that we are
subject to or affected by HIPAA, the CCPA or other domestic privacy and data
59
Table of Contents
protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our
financial condition.
This risk is enhanced in certain jurisdictions and, as we expand our operations domestically and internationally, we may be
subject to additional laws in other jurisdictions. Any failure, or perceived failure, by us to comply with privacy and data
protection laws, rules and regulations could result in proceedings or actions against us by governmental entities or others.
These proceedings or actions may subject us to significant penalties and negative publicity, require us to change our
business practices, increase our costs and severely disrupt our business. The EU’s General Data Protection Regulation, or
GDPR, became effective in May 2018. The GDPR applies extraterritorially and imposes several stringent requirements for
controllers and processors of personal data, including, for example, higher standards for obtaining consent from individuals
to process their personal data, more robust disclosures to individuals and a strengthened individual data rights regime,
shortened timelines for data breach notifications, limitations on retention of information, increased requirements pertaining
to special categories of personal data and pseudonymised (i.e., key‑coded) data and additional obligations when we contract
third‑party processors in connection with the processing of the personal data. The GDPR provides that EU member states
may make their own laws and regulations limiting the processing of personal data, including special categories of data
(e.g., racial or ethnic origin, political opinions, religious or philosophical beliefs) and profiling and automated individual
decision‑making of individuals, which could limit our ability to use and share personal data or other data and could cause
our costs to increase, harming our business and financial condition. Non‑compliance with GDPR is subject to significant
penalties, including fines of up to €20.0 million or 4% of total worldwide revenue, whichever is greater. The
implementation and enforcement of the GDPR may subject us to enforcement risk and requirements to change certain of
our data collection, processing and other policies and practices. We could incur significant costs investigating and
defending such claims and, if we are found liable, significant damages. If any of these events were to occur, our business
and financial results could be adversely affected. Other jurisdictions outside the EU are similarly introducing or enhancing
laws and regulations relating to privacy and data security, which enhances risks relating to compliance with such laws.
Additionally, we are subject to laws and regulations regarding cross‑border transfers of personal data, including laws
relating to transfer of personal data outside of the EEA. We rely on transfer mechanisms permitted under these laws,
including EU Standard Contract Clauses. If we cannot rely on existing mechanisms for transferring personal data from the
EEA, the United Kingdom or other jurisdictions, we could be prevented from transferring personal data of users or
employees in those regions. This could adversely affect the manner in which we provide our services and thus materially
affect our operations and financial results.
Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system, could harm our
business, financial condition and results of operations.
In the U.S., there have been and continue to be a number of legislative initiatives to contain healthcare costs. In
March 2010, the PPACA was enacted in the U.S., which made a number of substantial changes in the way healthcare is
financed by both governmental and private insurers. Among other ways in which it may affect our business, the PPACA:
·
·
·
established a new Patient‑Centered Outcomes Research Institute to oversee and identify priorities in
comparative clinical effectiveness research in an effort to coordinate and develop such research;
implemented payment system reforms including a national pilot program on payment bundling to encourage
hospitals, physicians and other healthcare providers to improve the coordination, quality and efficiency of
certain healthcare services through bundled payment models; and
expanded the eligibility criteria for Medicaid programs.
We do not yet know the full impact that the PPACA will have on our business. Since its enactment, there have been judicial
and Congressional challenges to certain aspects of the PPACA, and we expect there will be additional challenges and
amendments to the PPACA in the future. On March 2, 2020, the United States Supreme Court announced that it will hear
House of Representatives v. Texas, a case in which certain states have challenged the constitutionality of the PPACA’s
individual mandate and whether, if the individual mandate is unconstitutional, if the individual mandate is
60
Table of Contents
severable from the remainder of the PPACA. If the Supreme Court rules that the individual mandate is unconstitutional and
unable to be severed from the remainder of the PPACA, the remaining provisions of the PPACA would be invalid. It is
unclear how this case, along with other efforts to repeal and replace the PPACA will impact the PPACA and our business.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. On August 2, 2011,
the Budget Control Act of 2011 was signed into law, which, among other things, reduced Medicare payments to providers
by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain
in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief
Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including
hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from
three to five years. The Medicare Access and CHIP Reauthorization Act of 2015, (“MACRA”) enacted on April 16, 2015,
repealed the formula by which Medicare made annual payment adjustments to physicians and implemented fixed annual
updates and a new system of incentive payments that began in 2019 that are based on various performance measures and
physicians’ participation in alternative payment models such as accountable care organizations. It is unclear what effect
new quality and payment programs, such as MACRA, may have on our business, financial condition, results of operations
or cash flows.
We expect additional state and federal healthcare policies and reform measures to be adopted in the future, any of which
could limit reimbursement for healthcare products and services or otherwise result in reduced demand for our products or
other products we may commercialize in the future or additional pricing pressure and have a material adverse effect on our
industry generally and on our customers. Any changes of, or uncertainty with respect to, future coverage or reimbursement
rates could affect demand for our products or other products we may commercialize in the future, which in turn could
impact our ability to successfully commercialize our products or other products we may commercialize in the future and
could have a material adverse effect on our business, financial condition and results of operations.
Our business involves the use of hazardous materials and we and Aroa must comply with environmental laws and
regulations, which may be expensive and restrict how we do business.
Aroa’s activities in manufacturing our products may involve the controlled storage, use and disposal of hazardous
materials. Aroa is or may be subject to federal, state, local and non‑U.S. laws and regulations governing the use,
generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance
specifically covering environmental claims relating to the use of hazardous materials.
Although we believe that Aroa’s safety procedures for handling and disposing of these materials and waste products
comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or
contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, federal, state
or other applicable authorities may curtail Aroa’s use of these materials and interrupt their business operations which could
adversely affect our business.
Compliance with environmental laws and regulations may be expensive and non‑compliance could result in substantial
liabilities, fines and penalties, personal injury and third party property damage claims and substantial investigation and
remediation costs. Environmental laws and regulations could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with violations. We cannot assure you that violations of
these laws and regulations will not occur in the future or have not occurred in the past as a result of human error, accidents,
equipment failure or other causes. The expense associated with environmental regulation and remediation could harm our
financial condition and results of operations.
61
Table of Contents
Risks Related to Our Business and Products
Our financial results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our quarterly and annual results of operations may vary significantly in the future, and period‑to‑period comparisons of our
operating results may not be meaningful. Accordingly, the results of any one quarter or period should not be relied upon as
an indication of future performance. Our quarterly and annual financial results may fluctuate as a result of a variety of
factors, many of which are outside our control.
Factors that may cause fluctuations in our quarterly and annual results include:
·
·
·
·
·
·
·
·
·
·
·
·
surgeon and patient adoption of our products;
timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;
changes in coverage policies by third‑party payors that affect the reimbursement of procedures in which our
products are used;
unanticipated pricing pressure;
our ability to obtain and maintain regulatory clearance or approval for any products in development or for our
current products for additional indications or in additional jurisdictions;
the hiring, retention and continued productivity of our sales representatives;
our ability to expand the geographic reach of our sales and marketing efforts;
results of clinical research and trials on our existing products and products in development;
delays in, or failure of, component and raw material deliveries by Aroa;
recalls or other field safety corrective actions by Aroa;
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters
such as earthquakes, floods or public health emergencies such as the recent COVID-19 pandemic; and
positive or negative coverage in the media or clinical publications of our products or products of our
competitors or our industry.
Because our quarterly and annual results may fluctuate, period‑to‑period comparisons may not be the best indication of the
underlying results of our business. In particular, we cannot predict at this time the extent of the impact that the recent
COVID-19 pandemic will have on our sales and financial results. These fluctuations may also increase the likelihood that
we will not meet our forecasted performance, which could negatively affect the market price for our common stock.
The recent outbreak of the COVID-19 may negatively impact our commercialization strategy and the sales of OviTex
and OviTex PRS.
In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. As of March
2020, COVID-19 has spread to other countries, including the United States, and has been declared to be a pandemic by the
World Health Organization. Efforts to contain the spread of COVID-19 have intensified and the U.S., Europe and Asia
have implemented severe travel restrictions, social distancing and delays or cancellations of elective surgeries. The
outbreak of COVID-19 poses the risk that we or our employees, contractors, suppliers, and other partners
62
Table of Contents
may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may
be requested or mandated by governmental authorities.
Hospitals have begun to reduce and divert staffing, divert resources to patients suffering from the infectious disease and
limit hospital access for non-patients, including our sales professionals. In addition, travel restrictions due to COVID-19
have impacted our sales professionals’ ability to travel to customers. These circumstances have negatively impacted the
ability of our sales professionals to effectively market to physicians, which will have a negative impact on our sales and the
market penetration of our OviTex and OviTex PRS products. In addition, the spread of COVID-19 has had, and may
continue to have, an impact on the number of patients seeking and receiving hernia repair, abdominal wall reconstruction or
plastic and reconstructive surgeries, as hospitals cancel elective surgeries and patients postpone these procedures due to
COVID-19 concerns, which may reduce demand for our OviTex and OviTex PRS products and negatively impact our sales
and results of operations.
COVID-19 has and will continue to have an impact on ports and trade globally. We currently rely on Aroa, which is
headquartered in New Zealand, for supply of our products. There is a risk that supplies of our products may be significantly
delayed or may become unavailable as a result of COVID-19 and the resulting impact on Aroa’s labor force and operations,
including as a result of governmental restrictions on business operations and the movement of people and goods in an effort
to curtail the spread of the virus. There can be no assurance that we would be able to timely implement any mitigation
plans. Disruptions in our supply chain, whether as a result of restricted travel, quarantine requirements or otherwise, could
negatively impact our ability to supply and sell our products.
The continued spread of COVID-19 has also led to severe disruption and volatility in the global capital markets, which
could increase our cost of capital and adversely affect our ability to access the capital markets. It is possible that the
continued spread of COVID-19 could cause an economic slowdown or recession or cause other unpredictable events, each
of which could adversely affect our business, results of operations or financial condition.
The extent to which COVID-19 impacts our financial results will depend on future developments, which are highly
uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19
outbreak and the actions to contain the outbreak or treat its impact, among others. Moreover, the COVID-19 outbreak has
begun to have indeterminable adverse effects on general commercial activity and the world economy, and our business and
results of operations could be adversely affected to the extent that COVID-19 or any other pandemic harms the global
economy generally.
We may be unable to compete successfully with larger competitors in our highly competitive industry.
The medical device industry is intensely competitive, subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. Our competitors also compete with us in recruiting and
retaining qualified scientific, management and commercial personnel, as well as in acquiring technologies complementary
to, or necessary for, our products. Because of the complex and technical nature of our products and the dynamic market in
which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our
ability to develop and commercialize our products, which would have a material adverse effect on our business, financial
condition and results of operations.
In the U.S., we currently compete with LifeCell Corporation, an affiliate of Allergan plc, and Davol Inc., a subsidiary of
C.R. Bard, Inc. which produce, among other things, soft tissue reconstruction surgery products, including Strattice and
Phasix, respectively. In the EEA, we compete with C.R. Bard, Inc. who produces other soft tissue reinforcement products.
Many of these competitors are large, well‑capitalized companies with significantly greater market share and resources than
us. As a consequence, they are able to spend more on product development, marketing, sales and other product initiatives
than we can. We believe other emerging businesses are in the early stages of developing similar products designed for soft
tissue reconstruction surgery. Although we are the only ovine‑derived implantable product designed for soft tissue
reconstruction surgery, there are other soft tissue reconstruction surgery products derived solely, or in part, from other
biological sources.
63
Table of Contents
Most of the other soft tissue reconstruction surgery products currently have a greater penetration into the soft tissue
reconstruction surgery market. Often, other soft tissue reconstruction surgery products with which our products compete
are marketed as part of a bundled product line, which may provide our potential customers a better price‑per‑product than
we could offer. If we are unable to penetrate the soft tissue reconstruction surgery market, or offer competitive pricing on
our products compared with products sold as part of a bundled product line, it could have a material adverse effect on our
business, financial condition and results of operations.
In addition, competitors with greater financial resources could acquire other companies to gain enhanced name recognition
and market share, as well as new technologies or products that could effectively compete with our existing products, which
may cause our revenue to decline and would harm our business.
We may be unable to obtain additional contract positions with major GPOs and integrated delivery networks, or IDNs,
for our products, and even if we are able to do so, such contracts may not generate sufficient sales of our products.
Many existing and potential customers for our products within the U.S. are members of GPOs and IDNs, including
accountable care organizations or public‑based purchasing organizations, and our business strategy is focused on entering
into major contracts with these organizations. Our products can be contracted under national tenders or with larger
hospital GPOs. GPOs and IDNs typically award contracts on a category‑by‑category basis through a competitive bidding
process. We are currently responding to bids and negotiating a number of GPO and IDN agreements.
Due to the highly competitive nature of the bidding process and the GPO and IDN contracting processes in the U.S., we
may not be able to obtain contract positions with major GPOs and IDNs for our products. In addition, while having a
contract with a major purchaser for a given product category can facilitate sales, sales volumes of those products may not
be maintained. For example, GPOs and IDNs are increasingly awarding contracts to multiple suppliers for the same product
category. Even if we are the sole contracted supplier of a GPO or IDN for our product category, members of the GPO or
IDN generally are free to purchase from other suppliers. Furthermore, GPO and IDN contracts typically are terminable
without cause upon 60 to 90 days’ notice.
We face the risk of product liability claims that could be expensive, divert management’s attention and harm our
reputation and business.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing
of medical devices. This risk exists even if a product is cleared or approved for commercial sale by the FDA or EMA, and
manufactured in facilities licensed and regulated by the FDA or EMA. Any side effects, manufacturing defects or misuse
associated with our products could result in patient injury or death. The industry in which we operate has historically been
subject to extensive litigation over product liability claims, and we cannot offer any assurance that we will not face product
liability suits. We may be subject to product liability claims if our products cause, or merely appear to have caused, patient
injury or death. In addition, an injury that is caused by the activities of Aroa may be the basis for a claim against us.
Product liability claims may be brought against us by patients, healthcare providers or others selling or otherwise coming
into contact with our products. If we cannot successfully defend ourselves against product liability claims, we will incur
substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims
may result in substantial litigation costs, product recalls or market withdrawals, decreased sales and demand for our
products and damage to our reputation.
While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market
any defective products, any recall or market withdrawal of our products may delay the supply of those products to our
customers and may impact our reputation. We can provide no assurance that we will be successful in initiating appropriate
market recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended
effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and
withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety
risk when considering the use of our products, either of which could have a material adverse effect on our business,
financial condition and results of operations.
64
Table of Contents
Although we have product liability insurance that we believe is appropriate, this insurance is subject to deductibles and
coverage limitations. In addition, our current product liability insurance may not continue to be available to us on
acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability
claims. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of
insured liabilities could have a material adverse effect on our business, financial condition and results of operations.
The continuing development of our products depends upon our maintaining strong working relationships with
surgeons.
The research, development, marketing and sale of our current and future products and any future product indications for
which we receive regulatory clearance or approval depend upon our maintaining working relationships with surgeons. We
rely on these professionals to provide us with considerable knowledge and experience regarding the development,
marketing and sale of our products. Surgeons assist us in clinical trials and in marketing, and as researchers, product
consultants and public speakers. If we cannot maintain our strong working relationships with these professionals and
continue to receive their advice and input, the development and marketing of our products could suffer, which could have a
material adverse effect on our business, financial condition and results of operations. At the same time, the medical device
industry’s relationship with surgeons is under increasing scrutiny by the U.S. Department of Health and Human Services
Office of Inspector General (“OIG”), the U.S. Department of Justice (“DOJ”), the state attorneys general and other foreign
and domestic government agencies. Our failure to comply with requirements governing the industry’s relationships with
surgeons or an investigation into our compliance by the OIG, the DOJ, state attorneys general and other government
agencies, could have a material adverse effect on our business, financial condition and results of operations. Additional
information regarding the laws impacting our relationships with surgeons and other healthcare professionals can be found
above under “Risks Related to Government Regulation.”
We have limited data and experience regarding the safety and efficacy of our products. Results of earlier studies may not
be predictive of future clinical trial results, or the safety or efficacy profile for such products.
We currently have 91 patients enrolled in our ongoing prospective, single arm multicenter post‑market clinical study, or our
BRAVO study, which we are conducting to support the marketing of our OviTex products for their cleared indicated uses,
and do not currently have any clinical data for use of our OviTex PRS products in patients. The long‑term effects of using
our products in a large number of patients have not been studied and the results of short‑term clinical use of such products
do not necessarily predict long‑term clinical benefits or reveal long‑term adverse effects. The results of preclinical studies
and clinical studies of our products conducted to date and ongoing or future studies and trials of our current, planned or
future products may not be predictive of the results of later clinical trials, and interim results of a clinical trial do not
necessarily predict final results. Our interpretation of data and results from our clinical trials do not ensure that we will
achieve similar results in future clinical trials in other patient populations. In addition, preclinical and clinical data are often
susceptible to various interpretations and analyses, and many companies that have believed their products performed
satisfactorily in preclinical studies and earlier clinical trials have nonetheless failed to replicate results in later clinical trials.
Products in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through
nonclinical studies and earlier clinical trials.
Interim or preliminary data from our clinical trials that we announce or publish from time to time may change as more
patient data become available and are subject to audit and verification procedures that could result in material changes
in the final data.
From time to time, we may publicly disclose interim or preliminary data from our BRAVO study or other clinical studies
that we may conduct in the future, which is based on a preliminary analysis of then‑available data, and the results and
related findings and conclusions are subject to change following a full analyses of all data related to the particular trial. We
also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have
received or had the opportunity to fully and carefully evaluate all data. As a result, the interim results that we report may
differ from future results of the same trials, or different conclusions or considerations may qualify such results, once
additional data have been received and fully evaluated. Interim or preliminary data also remain subject to audit and
verification procedures that may result in the final data being materially different from the preliminary data we
65
Table of Contents
previously published. As a result, interim or preliminary data should be viewed with caution until the final data are
available. We may also disclose interim data from our clinical trials. Interim data from clinical trials that we may complete
are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and
more patient data become available. Adverse differences between preliminary or interim data and final data could
significantly harm our business prospects.
Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations,
conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the
particular program, the approvability or commercialization of the particular product candidate or product and our business
in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based
on what is typically extensive information, and you or others may not agree with what we determine is the material or
otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may
ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a
particular drug, product candidate or our business. If the interim or preliminary data that we report differ from actual
results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to use such results to
support the marketing of our products may be jeopardized.
The sizes of the markets for our current and future products have not been established with precision, and may be
smaller than we estimate.
Our estimates of the annual total addressable markets for our current products and products under development are based
on a number of internal and third‑party estimates, including, without limitation, the number of hernia and soft tissue
reconstruction surgery patients and overall market and the assumed prices at which we can sell our products. While we
believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be
correct and the conditions supporting our assumptions or estimates may change at any time, thereby reducing the predictive
accuracy of these underlying factors. As a result, our estimates of the annual total addressable market for our products may
prove to be incorrect. If the price at which we can sell future products, or the annual total addressable market for our
products is smaller than we have estimated, it may impair our sales growth and have an adverse impact on our business.
Our results of operations could be materially harmed if we are unable to accurately forecast customer demand for our
products and manage our inventory.
Our reinforced tissue matrix products have a limited shelf life and will expire if not timely used. To ensure adequate
inventory supply, we must forecast inventory needs and place orders with Aroa based on our estimates of future demand for
our reinforced tissue matrix products. Our ability to accurately forecast demand for such products could be negatively
affected by many factors, including:
·
·
·
·
·
·
·
·
product introductions by competitors;
an increase or decrease in surgeon demand for our products or for products of our competitors;
our failure to accurately manage our expansion strategy;
our failure to accurately forecast surgeon acceptance of new products;
our failure to obtain contracts with a significant number of GPOs and IDNs;
unanticipated changes in general market conditions or regulatory matters;
the severity and duration of market disruptions as a result of the COVID-19 outbreak; and
weakening of economic conditions or consumer confidence.
66
Table of Contents
Inventory levels in excess of customer demand may result in inventory write‑downs or write‑offs, which would cause our
gross margin to be adversely affected and could impair the strength of our brand. Additionally, we are subject to the risk
that a portion of our inventory will expire, which could have a material adverse effect on our earnings and cash flows due
to the resulting costs associated with the inventory impairment charges and costs required to replace such inventory.
Conversely, if we underestimate customer demand for our products, Aroa may not be able to deliver products to meet our
requirements, and this could result in damage to our reputation and customer relationships. In addition, if we experience a
significant increase in demand, additional supplies of raw materials or additional manufacturing capacity may not be
available when required on terms that are acceptable to us, or at all, or Aroa may not be able to allocate sufficient capacity
to meet our increased requirements, which could have an adverse effect on our ability to meet customer demand for our
products and our results of operations.
Our ability to maintain our competitive position depends on our ability to attract and retain senior management and
other highly qualified personnel.
We are highly dependent on our senior management and other key personnel. Our success depends in part on our continued
ability to attract, retain and motivate highly qualified senior management and attract, retain and motivate qualified
employees, including sales and marketing professionals, clinical specialists and other highly skilled personnel. Competition
for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on
acceptable terms, or at all. If we are not successful in attracting and retaining highly qualified personnel, it would have a
material adverse effect on our business, financial condition and results of operations. The loss of highly qualified
employees could result in delays in product development and commercialization and harm our business
Although we have entered into employment agreements with all of our executive officers, each of them may terminate their
employment with us at any time. The replacement of any of our key personnel likely would involve significant time and
costs and may significantly delay or prevent the achievement of our business objectives and could therefore have an
adverse effect on our business. We also do not maintain “key man” insurance policies on the lives of these individuals or
the lives of any of our other employees.
We rely on our own direct sales force for our products, which may result in higher fixed costs than our competitors and
may slow our ability to reduce costs.
We rely on our own direct sales force, which as of December 31, 2019 consisted of 29 representatives in the U.S. and 2
representatives in Europe, to market and sell our products. A direct sales force may subject us to higher fixed costs than
those of companies that market competing products through independent third parties, due to the costs that we will bear
associated with employee benefits, training and managing sales personnel. As a result, we may be at a competitive
disadvantage. Additionally, these fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand
for our products, which could have a material adverse effect on our business, financial condition and results of operations.
Our employees, independent contractors, consultants, commercial partners, distributors and vendors may engage in
misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk that our employees, independent contractors, consultants, commercial partners and vendors may
engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent
conduct or disclosure of unauthorized activities to us that violates: (i) the rules of the FDA and other similar foreign
regulatory bodies; (ii) manufacturing standards; (iii) healthcare fraud and abuse laws in the U.S. and similar foreign
fraudulent misconduct laws; (iv) data privacy laws and other similar non‑U.S. laws; or (v) laws that require the true,
complete and accurate reporting of financial information or data. These laws may impact, among other things, future sales,
marketing and education programs.
It is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we
take to detect and prevent these activities may not be effective in controlling unknown or unmanaged risks or losses or in
protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance
with such laws or regulations. In addition, we are subject to the risk that a person or government could allege
67
Table of Contents
such fraud or other misconduct, even if none occurred. If any such actions are instituted against us and we are not
successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or
other sanctions, including the imposition of civil, criminal and administrative penalties, additional integrity reporting and
oversight obligations and possible exclusion from participation in Medicare, Medicaid and other federal healthcare
programs, any of which could adversely affect our ability to operate our business and our results of operations. Whether or
not we are successful in defending against any such actions or investigations, we could incur substantial costs, including
legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations,
which could have a material adverse effect on our business, financial condition and results of operations.
We could be adversely affected by any interruption to our ability to conduct business at our current location.
We do not have redundant facilities. We perform substantially all of our research and development and back office activity
and maintain all our finished goods inventory in a single location in Malvern, Pennsylvania. Our facility, equipment and
inventory would be costly to replace and could require substantial lead time to repair or replace. The facility may be
harmed or rendered inoperable by natural or man‑made disasters, including, but not limited to, tornadoes, flooding, fire,
public health emergencies such as pandemics and power outages, which may render it difficult or impossible for us to
perform our customer service research, development and commercialization activities for some period of time. The
inability to perform those activities, combined with the time it may take to rebuild our inventory of finished product, may
result in the loss of customers or harm to our reputation. Although we possess insurance for damage to our property and the
disruption of our business, this insurance may not be sufficient to cover all of our potential losses and this insurance may
not continue to be available to us on acceptable terms, or at all.
If we experience significant disruption or a breach in our information technology systems, our business could be
adversely affected.
We rely extensively on information technology systems to conduct our business. These systems affect, among other things,
ordering and managing products, shipping products to customers, processing transactions, summarizing and reporting
results of operations, complying with regulatory, legal and tax requirements, data security and other processes necessary to
manage our business. If our systems are damaged or cease to function properly due to any number of causes, ranging from
catastrophic events to power outages to security breaches, and our business continuity plans do not effectively compensate
on a timely basis, we may experience interruptions in our operations, which could have an adverse effect on our business.
Furthermore, any breach in our information technology systems could lead to the unauthorized access, disclosure and use
of non‑public information from our patient registry or other patient information which is protected by HIPAA and other
laws. Any such access, disclosure, or other loss of information could result in legal claims or proceedings, liability under
laws that protect the privacy of personal information and damage to our reputation.
Economic conditions may adversely affect our business.
Adverse worldwide economic conditions may negatively impact our business. Our general business strategy may be
adversely affected by such economic conditions or the presence of a volatile business environment or unpredictable and
unstable market conditions, such as the economic turmoil resulting from the spread of the COVID-19 outbreak. Adverse
worldwide economic conditions may also adversely impact our suppliers’ ability to provide us with materials and
components, which could have a material adverse effect on our business, financial condition and results of operations.
If we become profitable, our ability to use our net operating loss carryforwards and other tax attributes to offset future
taxable income or taxes may be subject to limitations.
As described under “—Risks Related to Our Limited Operating History, Financial Position and Capital Requirements,” we
have incurred net losses since our inception, and expect to continue to incur operating losses for the foreseeable future. If
we become profitable in the future, our ability to use net operating loss carryforwards (“NOLs”) and other tax attributes to
offset future taxable income or reduce taxes may be subject to limitations. In general, under Sections 382 and 383 of the
Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” (generally
defined as a greater than 50% cumulative change by value in its equity ownership of certain
68
Table of Contents
stockholders over a rolling three‑year period) is subject to an annual limitation on its ability to utilize its pre‑change NOLs
and other tax attributes (including any research and development credit carryforwards). Similar provisions of state tax law
may also apply to limit the use of our state NOLs and other tax attributes.
We have not performed an analysis to determine whether our past issuances of stock and other changes in our stock
ownership may have resulted in one or more ownership changes within the meaning of Sections 382 and 383 of the Code.
In addition, we may experience an ownership change in the future as a result of subsequent changes in our stock ownership,
some of which are outside our control. If an ownership change has occurred in the past or occurs in the future, we may not
be able to use a material portion of our NOLs and other tax attributes to offset future taxable income or taxes if we attain
profitability.
In addition to any limitation imposed by Section 382 of Code, the use of NOLs arising after December 31, 2017 generally
is limited to a deduction of 80% of taxable income for the corresponding taxable year. NOLs arising after December 31,
2017 may not be carried back to previous taxable years, but may be carried forward indefinitely.
Risks Related to Our Securities
The trading price of the shares of our common stock has been and could in the future be highly volatile.
The price of our common stock has been and may continue to be volatile. Even though our common stock is now listed on
the Nasdaq Global Market, (“Nasdaq”) an active trading market for our common stock may not be sustained. The lack of
an active trading market may impair the value of your shares and your ability to sell your shares at the time you wish to sell
them. An inactive trading market may also impair our ability to raise capital by selling shares of our common stock and
enter into strategic partnerships or acquire other complementary products, technologies or businesses by using shares of our
common stock as consideration. Furthermore, there can be no guarantee that we will continue to satisfy the continued
listing standards of Nasdaq. If we fail to satisfy the continued listing standards, we could be de‑listed, which would have a
negative effect on the price of our common stock.
We cannot predict the prices at which our shares of common stock may trade. The market price of our common stock is
likely to be highly volatile and may fluctuate substantially due to many factors, including:
·
·
·
·
·
·
the volume and timing of sales of our products;
the introduction of new products or product enhancements by us or others in our industry;
disputes or other developments with respect to our or others’ intellectual property rights;
our ability to develop, obtain regulatory clearance for, and market new and enhanced products on a timely
basis;
product liability claims or other litigation;
quarterly variations in our results of operations or those of others in our industry;
· media exposure of our products or of those of others in our industry;
·
·
·
changes in governmental regulations or in reimbursement;
changes in earnings estimates or recommendations by securities analysts; and
general market conditions and other factors, including factors unrelated to our operating performance or the
operating performance of our competitors, including any economic downturn as a result of the COVID-19
outbreak.
69
Table of Contents
In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may
significantly affect the market price of our common stock, regardless of our actual operating performance.
In addition, in the past, class action litigation has often been instituted against companies whose securities have
experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock
price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our
financial condition and operating results and divert management’s attention and resources from our business.
We do not intend to pay cash dividends on our common stock for the foreseeable future.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business
and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, the agreement
governing our credit facility precludes, and any future debt agreements may preclude, us from paying cash dividends. Any
future determination to declare dividends will be made at the discretion of our board of directors and will depend on,
among other factors, our financial condition, operating results, capital requirements, general business conditions and other
factors that our board of directors may deem relevant. Any return to stockholders will therefore be limited to the
appreciation in the value of their stock, if any.
Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in
the best interests of our other stockholders.
Our officers, directors and principal stockholders each holding more than 5% of our common stock, collectively, control
approximately 77.4% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to
significantly influence our management and affairs and most matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. The interests of these stockholders may not be the same as
or may even conflict with your interests. For example, these stockholders could attempt to delay or prevent a change in
control, even if such change in control would benefit our other stockholders, which could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of our capital stock or our assets, and might
affect the prevailing market price of our common stock due to investors’ perceptions that conflicts of interest may exist or
arise. As a result, this concentration of ownership may not be in the best interests of our other stockholders.
A significant portion of our outstanding shares of common stock are restricted from immediate resale but may be sold
into the market in the near future. This could cause the market price of our common stock to drop significantly, even if
our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or
the perception in the market that these sales may occur, could result in a decrease in the market price of our common stock.
In connection with the IPO, approximately 6.6 million shares of common stock are restricted from sale as a result of
securities laws or 180‑day lock‑up agreements but will generally be able to be sold beginning in May 2020. Moreover,
holders of an aggregate of up to 6.3 million shares of our common stock, have rights, subject to certain conditions, to
require us to file registration statements covering their shares or to include their shares in registration statements that we
may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under
our equity compensation plans. Once we register these shares, they can be freely sold in the public market, subject to
volume limitations applicable to affiliates and the lockup agreements referred to above.
We are an emerging growth company and the reduced disclosure requirements applicable to emerging growth
companies may make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and we may take advantage of certain exemptions and
relief from various reporting requirements that are applicable to other public companies that are not “emerging growth
companies.” In particular, while we are an “emerging growth company” (i) we will not be required to comply with the
auditor attestation requirements of Section 404(b) of the Sarbanes‑Oxley Act, (ii) we will be exempt from any
70
Table of Contents
rules that could be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations
or a supplement to the auditor’s report on financial statements, (iii) we will be subject to reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements, and (iv) we will not be required to hold
nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not
previously approved.
We may remain an emerging growth company until as late as December 31, 2024, the fiscal year‑end following the fifth
anniversary of the completion of our IPO, though we may cease to be an “emerging growth company” earlier under certain
circumstances, including if (i) we have more than $1.07 billion in annual revenue in any fiscal year, (ii) the market value
of our common stock that is held by non‑affiliates exceeds $700 million as of any June 30 or (iii) we issue more than
$1.0 billion of non‑convertible debt over a three‑year period.
The exact implications of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory
agencies, and we cannot assure you that we will be able to take advantage of all of the benefits of the JOBS Act. In
addition, investors may find our common stock less attractive to the extent we rely on the exemptions and relief granted by
the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market
for our common stock and our stock price may decline or become more volatile.
We expect to incur significant additional costs as a result of being a public company.
We expect to incur costs associated with corporate governance requirements applicable to us as a public company,
including rules and regulations of the SEC, under the Sarbanes‑Oxley Act, the Dodd‑Frank Wall Street Reform and
Consumer Protection Act of 2010, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as
the rules of Nasdaq. These rules and regulations are expected to significantly increase our accounting, legal and financial
compliance costs and make some activities more time‑consuming. These rules and regulations make it more expensive for
us to secure and maintain directors’ and officers’ liability insurance at adequate coverage amounts. Accordingly, increases
in costs incurred as a result of becoming a publicly traded company may adversely affect our business, financial condition
and results of operations.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and
procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the
Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures,
no matter how well those controls and procedures are conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision‑making can be faulty, and that breakdowns can
occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the
inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
We are at risk of securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market
price of its securities. This risk is especially relevant for us because medical device companies have experienced significant
stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of
management’s attention and resources, which could harm our business.
71
Table of Contents
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could decline.
The trading market for our common stock will be influenced to some extent by the research and reports that industry or
financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may
be slow to attract research coverage and the analysts who publish information about our common stock will have had
relatively little experience with us or our business and products, which could affect their ability to accurately forecast our
results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry
analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse
opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or
fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price
or trading volume to decline and result in the loss of all or a part of your investment in us.
Provisions in our corporate charter documents and under Delaware law could discourage another company from
acquiring us and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our fourth amended and restated certificate of incorporation and our second amended and restated bylaws
may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider
favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These
provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock,
thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any
attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to
replace members of our board of directors. As our board of directors is responsible for appointing the members of our
management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our
management team. These provisions provide, among other things, that:
·
·
·
·
·
·
·
our board of directors has the exclusive right to expand the size of our board of directors and to elect directors
to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a
director, which prevents stockholders from being able to fill vacancies on our board of directors;
our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving
staggered three‑year terms, which may delay the ability of stockholders to change the membership of a
majority of our board of directors;
our stockholders may not act by written consent, which forces stockholder action to be taken at an annual or
special meeting of our stockholders;
a special meeting of stockholders may be called only by the chair of our board of directors, our chief
executive officer (or president, in the absence of a chief executive officer) or a majority of our board of
directors, which may delay the ability of our stockholders to force consideration of a proposal or to take
action, including the removal of directors;
our fourth amended and restated certificate of incorporation prohibits cumulative voting in the election of
directors, which limits the ability of minority stockholders to elect director candidates;
our board of directors may alter certain provisions of our second amended and restated bylaws without
obtaining stockholder approval;
the approval of the holders of at least two‑thirds of our shares entitled to vote at an election of our board of
directors is required to adopt, amend or repeal our second amended and restated bylaws or repeal the
provisions of our fourth amended and restated certificate of incorporation regarding the election and removal
of directors;
72
Table of Contents
·
·
stockholders must provide advance notice and additional disclosures to nominate individuals for election to
the board of directors or to propose matters that can be acted upon at a stockholders’ meeting, which may
discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own
slate of directors or otherwise attempting to obtain voting control of our shares; and
our board of directors is authorized to issue shares of preferred stock and to determine the terms of those
shares, including preferences and voting rights, without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquirer.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware (“DGCL”) which prohibits a person who owns in excess of 15% of our
outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in
which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved
in a prescribed manner.
Our fourth amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit
our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our fourth amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware
(or, if the Court of Chancery does not have jurisdiction, the United State District Court for the District of Delaware) is the
exclusive forum, to the fullest extent permitted by law, for (i) any derivative action or proceeding brought on our behalf,
(ii) any action asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers,
employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the
DGCL or our fourth amended and restated certificate of incorporation or second amended and restated bylaws or (iv) any
action asserting a claim governed by the internal affairs doctrine, except, in each case, (A) any claim as to which such court
determines that there is an indispensable party not subject to the jurisdiction of such court (and the indispensable party does
not consent to the personal jurisdiction of such court within 10 days following such determination), (B) which is vested in
the exclusive jurisdiction of a court or forum other than such court, or (C) for which such court does not have subject
matter jurisdiction, in all cases subject to the courts having jurisdiction over indispensable parties named as defendants.
This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with
us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers
and other employees. For example, stockholders who do bring a claim in the Court of Chancery could face additional
litigations costs in pursuing any such claim, particularly if they do not reside in or near the State of Delaware. The Court of
Chancery may also reach different judgments or results than would other courts, including courts where a stockholder
considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be
more favorable to us than to our stockholders. The enforceability of similar choice of forum provisions in other companies’
certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any
applicable action brought against us, a court could find the choice of forum provisions contained in our fourth amended and
restated certificate of incorporation to be inapplicable or unenforceable in such action. Alternatively, if a court were to find
the choice of forum provision contained in our fourth amended and restated certificate of incorporation to be inapplicable
or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.
This provision will not apply to actions arising under the Securities Act or Exchange Act. Our fourth amended and restated
certificate of incorporation and second amended and restated bylaws further provide that the federal district courts of the
U.S. will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.
Section 22 of the Securities Act, however, creates concurrent jurisdiction for federal and state courts over all suits brought
to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is
uncertainty as to whether a court would enforce such a forum selection provision as written in connection with claims
arising under the Securities Act.
73
Table of Contents
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our products are manufactured by our exclusive manufacturer and supplier of our products, Aroa, at their facility in
Auckland, New Zealand which currently totals approximately 25,000 square feet.
We lease our corporate headquarters in Malvern, Pennsylvania, which houses our research and development operations,
controlled environment room, and office space, and currently totals approximately 15,000 square feet.
We believe that our current facilities meet our current and future anticipated needs, although we may seek to negotiate new
leases or evaluate additional or alternate space for our operations. We believe appropriate office space will be readily
available on commercially reasonable terms.
ITEM 3.
LEGAL PROCEEDINGS
We may be subject to other legal proceedings and claims in the ordinary course of business. We cannot predict the results
of any such disputes, and despite the potential outcomes, the existence thereof may have an adverse material impact on us
due to diversion of management time and attention as well as the financial costs related to resolving such disputes.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock has been publicly traded on the Nasdaq Global Market under the symbol “TELA” since November 8,
2019.
Holders
As of March 20, 2020, the Company had approximately 95 record holders of its common stock.
Dividends
The Company has not declared or paid any dividends since its inception nor does it expect to pay dividends in the
foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The information under the heading “Securities Authorized for Issuance Under Equity Compensation Plans” will be filed in
the Company’s definitive proxy statement for the 2020 annual meeting of stockholders and is incorporated herein by
reference.
74
Table of Contents
Resent Sales of Unregistered Securities
Except as previously reported in our quarterly report on Form 10-Q filed with the SEC on December 18, 2019, there were
no unregistered sales of equity securities during the period.
Use of Proceeds
The registration statement on Form S-1 (File No. 333-234217) relating to the IPO of shares of our common stock, became
effective on November 7, 2019. The registration statement registered the offer and sale of 4,000,000 shares of our common
stock (including 600,000 shares of our common stock subject to the underwriters’ option to purchase additional shares). In
November 2019, we completed the sale of 4,398,700 of the shares of our common stock registered thereunder at an initial
public offering price of $13.00 per share for an aggregate offering price of approximately $57.2 million, which included
398,700 shares of our common stock pursuant to the underwriters’ option to purchase additional shares. The underwriters
of the offering were Jefferies LLC, Piper Jaffray & Co., Canaccord Genuity LLC and JMP Securities LLC. Following the
sale of the shares in connection with the closing of the IPO, the offering terminated.
We received net proceeds of approximately $50.6 million after deducting underwriting discount and commissions of $4.0
million and offering costs of $2.6 million. No payments for such expenses were made directly or indirectly to (i) any of our
officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii)
any of our affiliates.
As of December 31, 2019, we have not used any of the proceeds from our IPO. There has been no material change in the
planned use of proceeds from our IPO from that described in the Prospectus filed with the SEC on November 8, 2019
pursuant to Rule 424(b)(4).
Issuer Purchases of Equity Securities
None.
75
Table of Contents
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data together with the section titled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and
the related notes included elsewhere in this Annual Report. The selected consolidated financial data included in this section
are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated
financial statements and the related notes included elsewhere in this Annual Report.
We derived the selected consolidated financial data from our audited consolidated financial statements for each of the
periods presented. Our historical results are not necessarily indicative of the results that may be expected for any period in
the future.
Statement of Operations:
Revenue
Cost of revenue (excluding amortization of intangible assets)
Amortization of intangible assets
Gross profit
Operating expenses:
Sales and marketing
General and administrative
Research and development
Gain on litigation settlement
Total operating expenses
Loss from operations
Other (expense) income:
Interest expense
Loss on extinguishment of debt
Change in fair value of preferred stock warrant liability
Other income
Total other (expense) income
Net loss
Accretion of redeemable convertible preferred stock to redemption value
Net loss attributable to common stockholders
Net loss per common share, basic and diluted
Weighted average common, shares outstanding, basic and diluted
(1)
Balance Sheet Data (in thousands):
Cash, cash equivalents and short-term investments
Working capital
Total assets
Long-term debt
Redeemable convertible preferred stock
Total stockholders’ equity (deficit)
(1) We define working capital as current assets minus current liabilities.
76
Year Ended December 31,
2018
(in thousands, except share and per share data)
2017
2019
$
15,446 $
5,870
304
9,272
8,274 $
4,547
785
2,942
4,245
1,713
—
2,532
18,060
6,223
4,151
—
28,434
(19,162)
13,646
4,899
4,339
(2,160)
20,724
(17,782)
8,712
4,958
5,786
—
19,456
(16,924)
(4,558)
(1,802)
(3,609)
—
(1,822)
—
54
244
(5)
94
70
351
(4,410)
(3,310)
(3,263)
(21,334)
(21,092)
(22,425)
(7,783)
(5,893)
(8,823)
(30,208) $ (29,915) $ (27,227)
(93.26)
(17.10) $ (101.41) $
291,963
294,988
$
$
1,766,408
2019
As of December 31,
2018
2017
$
$
54,587 $
57,621
67,922
30,243
—
11,346
17,278 $
8,199
13,695
15,532
27,227
3,610
29,733
111,349
124,150
30,962 $ (137,860) $ (108,171)
Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the
section titled “Selected Consolidated Financial Data” and the consolidated financial statements and the related notes
included elsewhere in this Annual Report. In addition to historical financial information, the following discussion contains
forward-looking statements based upon our current plans, expectations and beliefs that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those described in or implied by these forward-looking
statements as a result of many factors, including those set forth under the section titled “Risk Factors” and in other parts
of this Annual Report.
Overview
We are a commercial stage medical technology company focused on designing, developing and marketing a new category
of tissue reinforcement materials to address unmet needs in soft tissue reconstruction. We offer a portfolio of advanced
reinforced tissue matrices that improve clinical outcomes and reduce overall costs of care in hernia repair, abdominal wall
reconstruction and plastic and reconstructive surgery. Our products are an innovative solution that integrate multiple layers
of minimally-processed biologic material with interwoven polymers in a unique embroidered pattern, which we refer to as
a reinforced tissue matrix.
Our first portfolio of products, 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 FDA, which clearance was obtained and is currently
held by Aroa and have demonstrated safety and clinical effectiveness in our BRAVO study. The first 32 patients who
reached one year follow-up in the BRAVO study had experienced no ventral hernia recurrences, no explantations and no
surgical site occurrences requiring follow-up surgery. Our second portfolio of products, OviTex PRS, addresses unmet
needs in plastic and reconstructive surgery.
We began commercialization of our OviTex products in the U.S. in July 2016 and they are now sold to more than 250
hospital accounts. In the first half of 2017, we began scaling our U.S. direct commercial presence and we initiated our
BRAVO study in April 2017. 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 for use in laparoscopic
and robotic-assisted surgery called OviTex LPR which we began commercializing in November 2018. We introduced
additional sizes of our OviTex products in both 25 × 30 cm and 25 × 40 cm sizes in January 2019. In April 2019, our
OviTex PRS products received 510(k) clearance from the FDA for plastic and reconstructive surgery, which clearance was
obtained by Aroa and is currently held by us. We commenced a limited launch in May 2019 and expect to continue
commercializing in a controlled manner to gradually expand our surgeon network throughout 2020.
Our commercial efforts are predominantly focused on the U.S. market where we have established strong relationships in
the U.S. with key constituencies, including hospitals, ambulatory surgery centers, GPOs, IDN, third-party payors and other
key clinical and economic decision makers by offering a unique high quality, cost-effective product. We market our
products through a single direct sales force, predominantly in the U.S. We plan to continue to invest in our commercial
organization by adding account managers, clinical development specialists, business managers and administrative support
staff in order to cover the highest potential of accounts for soft tissue reconstruction procedures. We plan to continue to
contract with GPOs and IDNs to increase access to and penetration of hospital accounts. We plan to adjust our commercial
expansion plan as appropriate as we continue to better understand the effects of COVID-19 pandemic on our sales and
marketing efforts, which could be negatively impacted by a potential decrease in the number of patients seeking procedures
which utilize our products and by restrictions on the ability of our sales professionals to effectively market to physicians, as
hospitals defer elective surgeries, reduce and divert staffing, divert resources to patients suffering from the infectious
disease and limit hospital access for non-patients.
Prior to obtaining FDA clearance for our first OviTex product, we devoted substantially all of our resources to the design
and development of our reinforced tissue matrices. Our development efforts to date have included an extensive non-
77
Table of Contents
human primate preclinical research data set for OviTex. In addition to our current portfolio, we are developing new product
features and designs for both our OviTex and OviTex PRS portfolios. We intend to continue to make investments in
research and development efforts to develop improvements and enhancements.
Substantially all of our revenue to date has been generated by the sale of our OviTex products. Our revenue for the years
ended December 31, 2019 and 2018 was $15.4 million and $8.3 million, respectively, an increase of $7.2 million, or 87%
in the year ended December 31, 2019 as compared to the year ended December 31, 2018. Net loss increased from
$21.1 million in the year ended December 31, 2018 to $22.4 million in the year ended December 31, 2019. We have not
been profitable since inception and as of December 31, 2019, we had an accumulated deficit of $167.9 million. We expect
to incur losses for the foreseeable future.
During 2019, we received net proceeds of $14.4 million from the issuance of Series B preferred stock and then, in
November 2019, we closed our IPO and received net proceeds of $50.6 million after deducting underwriting discounts,
commissions and other offering expenses.
Our products are manufactured by Aroa at their FDA registered and ISO 13485 facility in Auckland, 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.
Components of Our Results of Operations
Revenue
Substantially all of our revenue consists of direct sales of our products to hospital accounts in the U.S. Depending on the
terms of our agreements with our customers, we recognize revenue related to product sales either 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, and we expect continued growth as a result of, increasing revenue from product sales due to our
expanding customer base.
Cost of Revenue
Cost of revenue primarily consists of the costs of licensed products purchased from Aroa, charges related to excess and
obsolete inventory adjustments, and costs related to shipping. We purchase product from 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.
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.
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 margin has been, and we expect
it will continue to be, affected by a variety of factors, including sales volume and excess and inventory obsolescence costs.
Our gross profit may increase to the extent our revenue grows.
78
Table of Contents
Sales and Marketing Expenses
Sales and marketing expenses consist of market research and commercial activities related to the sale of OviTex and
OviTex PRS and salaries and related benefits, 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. We expect our sales and marketing
expenses to continue 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 expand our headcount to
support our growth and incur additional expenses related to operating as a public company, including director and officer
insurance coverage, legal costs, accounting costs, costs related to exchange listing and costs related to SEC compliance and
investor relations. We expect our general and administrative expenses to continue 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, stock-based compensation,
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 research and development expenses in absolute dollars to increase in the future as we develop new products and
enhance existing products. 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 under our credit facilities, non-cash interest attributable to the accrual of final
payment fees and the amortization of deferred financing costs related to our indebtedness.
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.
Change in Fair Value of Preferred Stock Warrant Liability
Prior to our IPO, our outstanding warrants to purchase shares of our preferred stock were classified as liabilities, recorded
at fair value and were subject to remeasurement at each balance sheet date until they were exercised, expired or were
otherwise settled. The change in fair value of our preferred stock warrant liability reflected a non-cash charge primarily
driven by changes in the fair value of our underlying Series B preferred stock. All outstanding warrants to purchase shares
of our preferred stock were converted into warrants to purchase shares of our common stock after our IPO.
79
Table of Contents
Other Income
Other income consists primarily of income earned on our cash, cash equivalents and short-term investments.
Results of Operations
Comparison of the Year Ended December 31, 2019 and 2018
Revenue
Cost of revenue (excluding amortization of intangible assets)
Amortization of intangible assets
Gross profit
Gross margin
Operating expenses:
Sales and marketing
General and administrative
Research and development
Gain on litigation settlement
Total operating expenses
Loss from operations
Other (expense) income:
Interest expense
Loss on extinguishment of debt
Change in fair value of preferred stock warrant liability
Other income
Total other (expense) income
Net loss
Revenue
Year Ended December 31,
Change
2019
2018
(in thousands except percentages)
Dollar
Percentage
$ 15,446
5,870
304
9,272
$
8,274
4,547
785
2,942
$
7,172
1,323
(481)
6,330
60 %
36 %
18,060
6,223
4,151
—
28,434
(19,162)
(3,609)
—
(5)
351
(3,263)
$ (22,425)
13,646
4,899
4,339
(2,160)
20,724
(17,782)
(1,802)
(1,822)
244
70
(3,310)
$ (21,092)
4,414
1,324
(188)
2,160
7,710
(1,380)
(1,807)
1,822
(249)
281
47
$ (1,333)
87 %
29 %
(61)%
215 %
32 %
27 %
(4)%
(100)%
37 %
8 %
100 %
(100)%
(102)%
401 %
(1)%
6 %
Revenue increased by $7.2 million, or 87%, to $15.4 million for the year ended December 31, 2019 from $8.3 million for
the year ended December 31, 2018. The increase in revenue was primarily driven by an increase in unit sales of our
products due to the expansion of our commercial organization with increased penetration within existing customer accounts
as well as the introduction of larger sizes of OviTex during 2019. During the year ended December 31, 2019, we sold 3,779
units of OviTex compared to 2,110 units of OviTex during the year ended December 31, 2018, a 79% increase in unit sales
volume. We commenced a limited launch of OviTex PRS in May 2019, selling 240 units during the year ended December
31, 2019.
Cost of Revenue
Cost of revenue (excluding amortization of intangible assets) increased by $1.3 million to $5.9 million for the year ended
December 31, 2019 from $4.5 million for the year ended December 31, 2018. The increase in cost of revenue was primarily
the result of higher revenue due to the growth in the number of OviTex and OviTex PRS units sold offset by a lower charge
to excess and obsolete inventory of $0.7 million during the year ended December 31, 2019 compared to the prior year. The
larger reserve expense recognized during the year ended December 31, 2018 was primarily due to Aroa reducing the shelf
life of a certain product line during the year.
Amortization of Intangible Assets
Amortization of intangible assets was $0.3 million for the year ended December 31, 2019 as compared to $0.8 million for
the year ended December 31, 2018. In May 2018, we achieved one of our regulatory milestones, and we determined
80
Table of Contents
that certain commercial sales milestone targets under our licensing agreement with Aroa became probable of being met. As
a result, we recorded these milestone payments as intangible assets that required a cumulative amortization charge during
2018.
Gross Margin
Gross margin increased to 60% for the year ended December 31, 2019 from 36% for the year ended December 31, 2018.
The increase was primarily due to a lower expense recognized for excess and obsolete inventory adjustments as a
percentage of revenue during the year ended December 31, 2019 as compared to the prior year and the $0.4 million
cumulative amortization charge recognized during the year ended December 31, 2018.
Sales and Marketing
Sales and marketing expenses increased by $4.4 million, or 32%, to $18.1 million for the year ended December 31, 2019
from $13.6 million for the year ended December 31, 2018. The increase was primarily due to higher salary, benefits and
commission costs of $4.4 million due to our sales expansion activities, including the hiring of additional sales personnel.
General and Administrative
General and administrative expenses increased by $1.3 million, or 27%, to $6.2 million for the year ended December 31,
2019 from $4.9 million for the year ended December 31, 2018. The increase was primarily due to higher salary and benefits
costs of $0.7 million, increased insurance costs of $0.4 million and higher professional fees of $0.1 million.
Research and Development
Research and development expenses decreased by $0.2 million, or 4%, to $4.2 million for the year ended December 31,
2019 from $4.3 million for the year ended December 31, 2018. The decrease in research and development expense
primarily relates to a decrease in external development and testing.
Gain on Litigation Settlement
In 2018, we recognized a gain on litigation settlement of $2.2 million related to a litigation claim that we had brought
against the former carrier for our directors and officer and employment practices liability insurance for breach of contract
and failure to reimburse us for defense costs incurred in litigation against LifeCell that was fully settled in 2016.
Interest Expense
Interest expense increased by $1.8 million, or 100%, to $3.6 million for the year ended December 31, 2019 from
$1.8 million for the year ended December 31, 2018. The increase was primarily due to having a larger principal balance
outstanding with a higher interest rate during the year ended December 31, 2019 compared to the prior year.
Loss on Extinguishment of Debt
We recorded a loss on the extinguishment of debt of $1.8 million during the year ended December 31, 2018 related to the
repayment of borrowings and cancellation of refinancing of our credit facilities with Hercules and MidCap Financial Trust
(“MidCap”) in April and November, respectively. The losses were primarily comprised of the write-off of unamortized debt
discounts and prepayment penalties at the time of extinguishment.
Change in Fair Value of Preferred Stock Warrant Liability
We recognized a loss on the change in the fair value of our preferred stock warrant liability of $5,000 during the year ended
December 31, 2019. All outstanding warrants to purchase shares of our preferred stock were converted into warrants to
purchase shares of our common stock and the liability was reclassed to additional paid-in capital in the accompanying
consolidated balance sheet.
81
Table of Contents
Other Income
Other income increased by $0.3 million, which was primarily attributable to having larger cash, cash equivalents and short-
term investment balances, which earned more interest income during the year ended December 31, 2019 as compared to the
prior year.
Comparison of the Years Ended December 31, 2018 and 2017
Year Ended December 31,
Change
Percentage
Revenue
Cost of revenue (excluding amortization of intangible assets)
Amortization of intangible assets
$
Gross profit
Gross margin
Operating expenses:
Sales and marketing
General and administrative
Research and development
Gain on litigation settlement
Total operating expenses
Loss from operations
Other (expense) income:
Interest expense
Loss on extinguishment of debt
Change in fair value of preferred stock warrant liability
Other income
Total other (expense) income
Net loss
Revenue
2018
$
Dollar
2017
(in thousands, except percentages)
8,274
4,547
785
2,942
4,245
1,713
—
2,532
$ 4,029
2,834
785
410
36 %
60 %
13,646
4,899
4,339
(2,160)
20,724
(17,782)
(1,802)
(1,822)
244
70
(3,310)
$ (21,092)
8,712
4,958
5,786
—
19,456
(16,924)
(4,558)
—
54
94
(4,410)
$ (21,334)
4,934
(59)
(1,447)
(2,160)
1,268
(858)
2,756
(1,822)
190
(24)
1,100
242
$
95 %
165 %
— %
16 %
57 %
(1)%
(25)%
— %
7 %
5 %
(60)%
— %
352 %
(26)%
(25)%
(1)%
Revenue increased by $4.0 million, or 95%, to $8.3 million for the year ended December 31, 2018 from $4.2 million for
the year ended December 31, 2017. The increase in revenue was primarily driven by an increase in unit sales of our
products due to the expansion of our commercial organization and increased penetration within the market. During 2018,
we sold 2,110 units of OviTex as compared to 1,027 units of OviTex during 2017, a 105% increase in unit sales volume.
Cost of Revenue
Cost of revenue (excluding amortization of intangible assets) increased by $2.8 million, or 165%, to $4.5 million for the
year ended December 31, 2018 from $1.7 million for the year ended December 31, 2017. The increase in cost of revenue
was primarily the result of an increase in revenue as well as a $1.8 million increase in our excess and obsolete inventory
reserve recognized during the year ended December 31, 2018 as compared to the prior year, primarily due to Aroa reducing
the shelf life of a certain product line.
Amortization of Intangible Assets
Amortization of intangible assets was $0.8 million for the year ended December 31, 2018. In May 2018, we determined
that certain milestone targets under our licensing agreement with Aroa became probable of being met and recorded the
payment obligation as an intangible asset. There were no intangible assets or related amortization expense during the year
ended December 31, 2017.
82
Table of Contents
Gross Margin
Gross margin decreased to 36% for the year ended December 31, 2018 from 60% for the year ended December 31, 2017.
The decrease was primarily due to a $1.8 million increase in excess and obsolete inventory adjustments recognized during
2018 as compared to the prior year, primarily due to Aroa reducing the shelf life of a certain product line during 2018. We
also recognized $0.8 million in amortization of intangible assets in 2018. There was no such expense in 2017.
Sales and Marketing
Sales and marketing expenses increased by $4.9 million, or 57%, to $13.6 million for the year ended December 31, 2018
from $8.7 million for the year ended December 31, 2017. The increase was primarily due to higher salary and commission
costs of $2.6 million as a result of our sales expansion activities, including hiring of additional sales personnel and
expansion of marketing activity costs of $2.3 million, consistent with our growth in revenue.
General and Administrative
General and administrative expenses remained flat for the year ended December 31, 2018 compared to the year ended
December 31, 2017.
Research and Development
Research and development expenses decreased by $1.4 million, or 25%, to $4.3 million for the year ended December 31,
2018 from $5.8 million for the year ended December 31, 2017. The decrease in research and development expense was
primarily attributable to a decrease in licensing payments of $0.5 million, a decrease in external testing and analysis costs
of $0.2 million and a decrease of $0.7 million in overall research and development efforts as we shifted our focus to the
commercialization of our approved products.
Gain on Litigation Settlement
In 2018, we recognized a gain on litigation settlement of $2.2 million related to a litigation claim that we had brought
against the former carrier for our directors and officer and employment practices liability insurance for breach of contract
and failure to reimburse us for defense costs incurred in litigation against LifeCell that was fully settled in 2016.
Interest Expense
Interest expense decreased by $2.8 million, or 60%, to $1.8 million for the year ended December 31, 2018 from
$4.6 million for the year ended December 31, 2017. The decrease was primarily due to a decrease of $1.4 million related to
non-cash accretion expense, and a decrease of $1.4 million related to the recognition of a beneficial conversion feature
recognized in 2017.
Loss on Extinguishment of Debt
We recorded a loss on the extinguishment of debt of $1.8 million during the year ended December 31, 2018 related to the
repayment of borrowings and cancellation of refinancing of our credit facilities with Hercules and MidCap, in April and
November, respectively. The losses were primarily comprised of the write-off of unamortized debt discounts and
prepayment penalties at the time of extinguishment.
Change in Fair Value of Preferred Stock Warrant Liability
The fair value of our preferred stock warrant liability decreased during both of the years ended December 31, 2018 and
2017, primarily attributable to the decrease in the remaining contractual term of the outstanding warrants. As a result, we
recognized a gain on the change in the fair value of our preferred stock warrant liability of $0.2 million and $54,000 during
the years ended December 31, 2018 and 2017, respectively.
83
Table of Contents
Liquidity and Capital Resources
Overview
As of December 31, 2019, we had cash, cash equivalents and short-term investments of $54.6 million, working capital of
$57.6 and an accumulated deficit of $167.9 million. As of December 31, 2018, we had cash and cash equivalents of
$17.3 million, working capital of $13.7 million and an accumulated deficit of $137.9 million as of December 31, 2018.
On November 13, 2019, we closed our IPO in which we issued and sold 4,398,700 shares of our common stock at a public
offering price of $13.00 per share, which included 398,700 shares of our common stock sold pursuant to the underwriters’
option to purchase additional shares. We received net proceeds of $50.6 million after deducting underwriting discounts and
commissions and other expenses.
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 expand our sales and marketing initiatives to support our growth in existing and new markets and invest
funds in additional research and development activities. We will also incur additional costs of operating as a public
company. As of December 31, 2019, we had $30.0 million of borrowings outstanding under our credit facility (the
“OrbiMed Credit Facility”). This credit facility matures in November 2023 and had $5.0 million of additional capacity
through December 31, 2019, which we did not borrow. This facility requires that we maintain a minimum cash balance of
$2.0 million.
Based on our current business plan, we believe that our existing cash resources and short-term investments will be
sufficient to meet our capital requirements and fund our operations for at least the next 12 months from the issuance of this
Annual Report. If these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional
common or preferred equity or debt securities, or enter into a new credit facility. 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 outbreak. 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:
(in thousands)
Cash used in operating activities
Cash used in investing activities
Cash provided by financing activities
Effect of exchange rate on cash
Net increase in cash and cash equivalents
Operating Activities
Year Ended December 31,
2018
2017
2019
$ (25,524)
(11,980)
65,532
(4)
$ 28,024
$ (19,924) $ (16,368)
(101)
26,335
—
9,866
(1,558)
27,414
—
5,932 $
$
During the year ended December 31, 2019, we used $25.5 million of cash in operating activities, resulting from our net loss
of $22.4 million and the change in operating assets and liabilities of $6.3 million, offset by non-cash charges of
$3.2 million. Our non-cash charges were primarily comprised of our excess and obsolete inventory charge of $1.6 million,
stock-based compensation expense of $0.5 million, interest expense of $0.5 million, depreciation of $0.3 million and
amortization of intangibles of $0.3 million. The change in our operating assets was primarily related to increases in
accounts receivable, inventory and prepaid expenses and other assets.
84
Table of Contents
During the year ended December 31, 2018, we used $19.9 million of cash in operating activities, resulting from our net loss
of $21.1 million and the change in operating assets and liabilities of $4.5 million offset by non-cash charges of
$5.6 million. Our non-cash charges were comprised of depreciation of $0.5 million, the amortization of intangibles of
$0.8 million, interest expense of $0.7 million, the recognition of a loss on extinguishment of debt of $1.8 million, and our
excess and obsolete inventory charge of $2.2 million. We also had stock-based compensation expense of $0.2 million and a
change in the fair value of our warrants of $0.2 million. The change in our operating assets was primarily related to a
$4.8 million increase in inventory, a $0.5 million increase in accounts receivable, and a decrease in accrued expenses and
other liabilities of $1.2 million. These amounts were slightly offset by a $1.9 million increase in accounts payable.
Investing Activities
During the year ended December 31, 2019, cash used in investing activities was $12.0 million, consisting of purchases of
short-term investments of $9.3 million, payments made for our intangible assets of $2.5 million and purchases of property
and equipment of $0.2 million.
During the year ended December 31, 2018, cash used in investing activities was $1.6 million, consisting of payments made
for our intangible assets of $1.5 million, and purchases of property and equipment of $0.1 million.
Financing Activities
During the year ended December 31, 2019, cash provided by financing activities was $65.5 million, consisting primarily
from the net proceeds received from our IPO and the net proceeds from the issuance of our Series B preferred stock.
During the year ended December 31, 2018, cash provided by financing activities was $27.4 million, consisting primarily of
$30.0 million in proceeds received from the issuance of long-term related party debt with OrbiMed, $8.0 million in
proceeds from the issuance of long-term debt with MidCap, $4.0 million in net proceeds received from the issuance of our
Series B preferred stock, partially offset by $13.0 million in repayments made on our long-term debt with MidCap and
Hercules and $1.6 million in payments of issuance costs related to our debt financings.
Indebtedness
In November 2018, we entered into the OrbiMed Credit Facility, which consists of up to $35.0 million in term loans (the
“OrbiMed Term Loans”). The OrbiMed Term Loans consist of two tranches, a $30.0 million Tranche 1 (“Tranche 1”) and a
$5.0 million Tranche 2 (“Tranche 2”). Upon closing, we borrowed $30.0 million of Tranche 1 and used a portion of the
proceeds to repay borrowings under our credit facility with MidCap and intend to use the remaining proceeds to fund
operations and capital expenditures. We elected not to borrow Tranche 2 prior to its expiration on December 31, 2019.
Pursuant to the OrbiMed Credit Facility, we provided a first priority security interest in all existing and future acquired
assets, excluding intellectual property and certain other assets, owned by us. The OrbiMed Credit Facility contains a
negative pledge on intellectual property owned by us. The OrbiMed Credit Facility 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, (iv) change
of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) key permit events, (x) key person event,
(xi) regulatory matters, (xii) and key contracts. In addition, we must maintain a minimum cash balance of $2.0 million. In
the event of default under the OrbiMed Credit Facility, we would be required to pay interest on principal and all other due
and unpaid obligations at the current rate in effect plus 3%.
The OrbiMed Term Loans mature on November 16, 2023 and bear interest at a rate equal to 7.75% plus the greater of one-
month LIBOR or 2.0%. We are required to make 60 monthly interest payments beginning on November 30, 2018 with the
entire principal payment due at maturity. The OrbiMed Term Loans have a prepayment penalty equal to 10.0% of the
prepaid principal amount prior to the second anniversary of the OrbiMed Term Loans, 5.0% of the prepaid principal
amount after the second anniversary but prior to the third anniversary and 2.5% of the prepaid principal amount
85
Table of Contents
after the third anniversary. We are also required to pay an administration fee equal to $10,000 on the last day of each
quarter until all obligations have been paid in full and an exit fee at the time of maturity or prepayment event equal to $3.0
million.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2019 and the effects that such obligations
are expected to have on our liquidity and cash flows in future periods:
Payments due by Period
(in thousands)
Principal payments on long-term debt
Interest and end of term charge on long-term debt
Operating lease commitments
Purchase commitments with Aroa
(2)
(1)
Total
(3)
Total
$ 30,000 $
14,339
309
8,250
More than
— $
— $ 30,000 $
Less than
1 year 1 to 3 years 3 to 5 years 5 years
—
—
—
—
—
2,925
217
4,000
5,564
—
1,000
5,850
92
3,250
$ 52,898 $ 7,142 $ 9,192 $ 36,564 $
(1) Interest payable reflects the rate in effect as of December 31, 2019. The interest rate on borrowings under the OrbiMed
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 Malvern, Pennsylvania under an operating lease
agreement that expires in 2021.
(3) This table does not include (a) any milestone payments that are not deemed probable under license agreements as the
timing and likelihood of such payments are not known with certainty and (b) contracts that are entered into in the
ordinary course of business that are not material in the aggregate in any period presented above. Excluded amounts
primarily consist of a $1,000 milestone payment due to Aroa when certain sales milestones are met.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash is held on deposit in demand accounts at high credit quality financial institutions in amounts in excess of the
Federal Deposit Insurance Corporation (“FDIC”) insurance coverage limit of $250,000 per depositor, per FDIC-insured
bank, per ownership category. We have reviewed the consolidated financial statements of these institutions and believe they
have sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk
to us.
Financial instruments that potentially subject us to concentrations of credit risk principally consist of cash equivalents,
short-term investments and accounts receivable. We limit our credit risk associated with cash equivalents by placing
investments in highly-rated money market funds, corporate debt securities and agency securities. Our short-term
investments are classified as available-for sale-securities and are reported at fair value in the accompanying consolidated
balance sheet. We limit our credit risk with respect to accounts receivable by performing credit evaluations when deemed
necessary, but we do not require collateral to secure amounts owed to us by our customers.
As discussed above in the section of this Annual Report entitled “Liquidity and Capital Resources — Indebtedness,” The
OrbiMed Credit Facility bears interest at a floating rate of interest, which resets monthly and is equal to 7.75% plus the
greater of one-month LIBOR or 2.0%. As a result, we are exposed to risks from changes in interest rates. A 1.0% increase
in interest rates would have resulted in a $0.3 million increase to our interest expense for the year ended December 31,
2019.
Inflationary factors, such as increases in our cost of revenue and operating expenses, may adversely affect our operating
results. Although we do not believe inflation has had a material impact on our financial condition, results of operations or
cash flows to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and
86
Table of Contents
increase our gross margin or decrease our operating expenses as a percentage of our revenue if our selling prices of our
products do not increase as much or more than our costs increase.
We do not currently have any material exposure to foreign currency fluctuations and do not engage in any hedging
activities as part of our normal course of business.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S.
(“GAAP”). The preparation of our consolidated financial statements and related disclosures requires us to make estimates
and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting
period. We base our estimates on historical experience, known trends and events, and various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an
ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 3 to our consolidated financial statements
appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the
judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We account for revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with
Customers (“ASC 606”) which was adopted on January 1, 2019 using the modified retrospective method. The adoption of
this guidance had no cumulative adjustment to our consolidated financial statements. Under ASC 606, we recognize
revenue when our customer obtains control of our promised good, in an amount that reflects the consideration that the
entity expects to be entitled in exchange for those goods.
Prior to the adoption of ASC 606 in January 2019, revenue was recognized when persuasive evidence of an arrangement
exists, the price was fixed and determinable, delivery has occurred, and there was reasonable assurance of collection of the
sales proceeds. Revenue for products sold to a customer was recognized when the product was shipped to the customer, at
which time title passed to the customer. Fees charged to customers for shipping were recognized as revenue. In the case of
consigned inventory, revenue was recognized when the product was utilized in a surgical procedure.
Inventory Valuation
Inventory is stated at the lower of cost or net realizable value, with cost determined using the first-in-first-out method.
Inventory, which consists of our OviTex and OviTex PRS product held on consignment or held in our warehouse, is
considered finished goods and is purchased from a third party.
We evaluate the carrying value of our inventory in relations to the estimated forecast of product demand, which takes into
consideration the expiration date of the products. A significant decrease in demand could result in an increase in the
amount of excess inventory on hand, which could lead to additional charges for excess and obsolete inventory. The need to
maintain substantial levels of inventory impacts our estimates for excess and obsolete inventory. In addition, we continue to
introduce new products and sizes, which we believe will increase our revenue. As a result, we may be required to take
additional charges for excess and obsolete inventory in the future if the purchased units do not align with sales.
87
Table of Contents
Stock-Based Compensation
The following table summarizes stock-based compensation expense resulting from stock options:
(in thousands)
Sales and marketing
General and administrative
Research and development
Total stock-based compensation
Year Ended December 31,
2019
2018
2017
164
225
68
457
$
$
68 $
115
33
216 $
44
116
37
197
$
$
We measure stock options and other stock-based awards based on their estimated fair value on the date of the grant and
recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of
the respective award, while awards containing a performance condition are recognized when the achievement of the
performance criteria is considered probable. We apply the straight-line method of expense recognition to all awards with
service-based vesting conditions.
We estimate the fair value of stock options using the Black-Scholes option-pricing model, which requires assumptions,
including the fair value of our common stock, volatility, the expected term of our stock options, the risk-free interest rate
for a period that approximates the expected term of our stock options, and our expected dividend yield. Certain
assumptions used in our Black-Scholes option-pricing model represent management’s best estimates and involve a number
of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently
subjective. If any assumptions change, our stock-based compensation expense could be materially different in the future.
These subjective assumptions are estimated as follows:
·
·
Expected volatility. The expected volatility was based on the historical stock volatility of several of our
comparable publicly traded companies over a period of time equal to the expected term of the options, as we
do not have any trading history to use the volatility of our own common stock.
Fair value of common stock. On November 13, 2019, we closed our IPO. Following the closing, the fair
value of common stock was the closing price of our common stock on the Nasdaq Global Market as reported
on the date of the grant. Prior to that, our common stock had not historically been publicly traded and we had
to periodically estimate the fair value of common stock.
Estimating the Fair Value of Common Stock
Prior to the closing of our IPO, there was no public market for our common stock and the estimated fair value of our
common stock was determined by our board of directors as of the date of each option grant, with input from management,
considering the most recently available third-party valuation of common stock, and our board of directors’ assessment of
additional objective and subjective factors that it believed were relevant and which may have changed from the date of the
most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the
guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation. In addition to considering the results of these third-
party valuations, our board of directors considered various objective and subjective factors to determine the fair value of
our common stock as of each grant date, including:
·
·
the prices at which we sold shares of preferred stock and the superior rights and preferences of the preferred
stock relative to our common stock at the time of each grant;
the progress of our commercialization efforts;
88
Table of Contents
·
·
·
·
·
·
·
the progress of our research and development programs, including the status and results of preclinical studies
for our product candidates;
our stage of development and our business strategy;
external market conditions affecting the medical device industry and trends within the medical device
industry;
our financial position, including cash on hand, and our historical and forecasted performance and operating
results;
the lack of an active public market for our common stock and our preferred stock;
the likelihood of achieving a liquidity event, such as an IPO, or sale of our company in light of prevailing
market conditions; and
the analysis of IPOs and the market performance of similar companies in the medical device industry.
In determining the estimated fair value of common stock, our board of directors considered the subjective factors discussed
above in conjunction with the most recent valuations of our common stock that were prepared by an independent third-
party.
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 the SEC.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results
of operations is disclosed in Note 3 to our consolidated financial statements appearing elsewhere in this Annual Report.
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and
are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public
companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth
company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933
for complying with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such
time as those standards apply to private companies. Section 107 of the JOBS Act provides that we can elect to opt out of
the extended transition period at any time, which election is irrevocable. We have elected to avail ourselves of this
exemption from complying with new or revised accounting standards and, therefore, will not be subject to the same new or
revised accounting standards as other public companies that are not emerging growth companies.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth on pages F-1 through F-26 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
89
Table of Contents
ITEM 9A. CONTROLS AND PROCEDURES
Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements in accordance with GAAP. This Annual Report does not
include a report of management’s assessment regarding internal control over financial reporting or an attestation report of
the of the Company’s registered public accounting firm due to a transition period established by rules of the SEC for newly
public companies. We will be required, under Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the
Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control
over financial reporting beginning with our Annual Report on Form 10‑K for the year ending December 31, 2020. This
assessment will need to include disclosure of any material weaknesses identified by our management in our internal control
over financial reporting. The SEC defines a material weakness as a deficiency, or combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s
annual or interim consolidated financial statements will not be detected or prevented on a timely basis.
In accordance with the provisions of the Sarbanes-Oxley Act, neither we nor our independent registered public accounting
firm has performed an evaluation of our internal control over financial reporting during any period included in this annual
report.
ITEM 9B. OTHER INFORMATION
None.
90
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning directors and compliance with Section 16(a) of the Exchange Act and our Code of Conduct
that applies to our principal executive officer, principal financial officer, principal accounting officer or controller called for
by Item 10 of Form 10-K will be set forth in our definitive proxy statement for the 2020 annual meeting of stockholders, to
be filed within 120 days after the end of the fiscal year covered by this annual report on Form 10-K, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in our
definitive proxy statement for the 2020 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLER MATTERS
The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in our
definitive proxy statement for the 2020 annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in our
definitive proxy statement for the 2020 annual meeting of stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference to the information contained in our
definitive proxy statement for the 2020 annual meeting of stockholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
See Index to the Consolidated Financial Statements on page F-1 of this Annual Report.
2. Financial Statement Schedules
None, as all information required in these schedules is included in the Notes to the Consolidated Financial Statements.
3. Exhibits
Reference is made to the Exhibit Index on page 92 of this Annual Report for a list of exhibits required by Item 601 of
Regulation S-K to be filed as part of this Annual Report.
91
Table of Contents
TELA BIO, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
TELA Bio, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of TELA Bio, Inc. and its subsidiary (the Company) as of
December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, redeemable
convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (U.S.) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditors since 2013.
Philadelphia, Pennsylvania
March 30, 2020
F-2
Table of Contents
TELA Bio, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventory
Prepaid expenses and other assets
Total current assets
Property and equipment, net
Intangible assets, net
Total assets
Liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
Current liabilities:
Accounts payable
Accrued expenses
Other current liabilities
Total current liabilities
Long‑term debt with related party
Preferred stock warrant liability
Other long‑term liabilities
Total liabilities
Contingencies and commitments (Note 11)
Redeemable convertible preferred stock; $0.001 par value:
Series A Preferred stock: 22,501,174 shares previously authorized, no shares issued or
outstanding at December 31, 2019 and 22,501,174 issued and outstanding at December 31,
2018
Series B Preferred stock: 82,891,619 shares previously authorized, no shares issued or
outstanding at December 31, 2019 and 63,032,500 issued and outstanding at December 31,
2018
Total redeemable convertible preferred stock
Stockholders’ equity (deficit):
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; 11,406,976 and 296,629
shares issued and 11,406,221 and 295,717 shares outstanding at December 31, 2019 and
2018, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
See accompanying notes to consolidated financial statements.
F-3
$
$
$
December 31,
2019
2018
45,302 $
9,285
2,836
4,603
2,308
64,334
677
2,911
67,922 $
3,171 $
3,533
9
6,713
30,243
—
4
36,960
17,278
—
1,298
4,348
330
23,254
758
3,215
27,227
3,421
5,153
985
9,559
29,733
1,640
5
40,937
—
33,112
—
—
91,038
124,150
—
—
11
198,829
(19)
(167,859)
30,962
67,922 $
—
—
—
(137,860)
(137,860)
27,227
$
Table of Contents
TELA Bio, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share amounts)
Revenue
Cost of revenue (excluding amortization of intangible assets)
Amortization of intangible assets
Gross profit
Operating expenses:
Sales and marketing
General and administrative
Research and development
Gain on litigation settlement
Total operating expenses
Loss from operations
Other (expense) income:
Interest expense
Loss on extinguishment of debt
Change in fair value of preferred stock warrant liability
Other income
Total other (expense) income
Net loss
Accretion of redeemable convertible preferred stock to redemption value
Net loss attributable to common stockholders
Net loss per common share, basic and diluted
Weighted average common shares outstanding, basic and diluted
Comprehensive loss:
Net loss
Foreign currency translation adjustment
Unrealized loss on short-term investments
Comprehensive loss
$
$
$
Year ended December 31,
2018
2019
15,446 $
5,870
304
9,272
8,274 $
4,547
785
2,942
2017
4,245
1,713
—
2,532
18,060
6,223
4,151
—
28,434
(19,162)
13,646
4,899
4,339
(2,160)
20,724
(17,782)
8,712
4,958
5,786
—
19,456
(16,924)
(4,558)
(1,802)
(3,609)
—
(1,822)
—
54
244
(5)
94
70
351
(4,410)
(3,310)
(3,263)
(21,334)
(21,092)
(22,425)
(7,783)
(5,893)
(8,823)
(30,208) $ (29,915) $ (27,227)
(93.26)
(17.10) $ (101.41) $
291,963
1,766,412 294,988
$
$
(22,425) $ (21,092) $ (21,334)
—
—
(22,444) $ (21,092) $ (21,334)
(15)
(4)
—
—
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
TELA Bio, Inc.
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
Redeemable Convertible Preferred Stock
Stockholders’ Equity (Deficit)
Accumulated
other
Additional
Balance at January 1, 2017
22,501,174 $ 28,811
39,543,222 $ 52,452
286,432 $
— $
— $
— $
(81,174) $ (81,174)
Series A
Series B
Common stock
Shares
Amount
Shares
Amount Shares
Amount
paid‑in comprehensive Accumulated
capital
deficit
loss
Total
Vesting of common stock previously subject to
repurchase
Exercise of stock options
Issuance of Series B redeemable convertible
preferred stock upon conversion of promissory
notes
Sale of Series B redeemable convertible preferred
stock, net of stock issue costs of $269
Stock‑based compensation expense
Accretion of redeemable convertible preferred
stock to redemption value
Net loss
Balance at December 31, 2017
Vesting of common stock previously subject to
repurchase
Exercise of stock options
Sale of Series B redeemable convertible preferred
stock, net of stock issue costs of $206
Stock‑based compensation expense
Accretion of redeemable convertible preferred
stock to redemption value
Net loss
Balance at December 31, 2018
Vesting of common stock previously subject to
repurchase
Exercise of stock options
Sale of Series B redeemable convertible preferred
stock, net of stock issue costs of $165
Unrealized loss on short-term investments
Foreign currency translation adjustment
Stock‑based compensation expense
Accretion of redeemable convertible preferred
stock to redemption value
Conversion of convertible preferred stock to
common stock in connection with the initial
public offering
Issuance of common stock upon initial public
offering, net of underwriting discounts,
commissions and offering costs
Conversion of preferred stock warrants to
common stock warrants
Net loss
Balance at December 31, 2019
—
—
—
—
—
—
—
—
—
—
—
6,955
404
—
6,951,175
9,462
—
—
12,931,034
—
14,731
—
—
—
—
—
—
22,501,174
2,129
—
30,940
—
—
59,425,431
3,764
—
80,409
—
—
293,791
—
—
—
—
—
—
—
—
—
—
—
—
549
1,377
3,607,069
—
3,978
—
—
—
—
—
22,501,174
2,172
—
33,112
—
—
63,032,500
6,651
—
91,038
—
—
295,717
—
—
—
—
628
2,527
—
—
—
—
—
—
—
—
—
—
—
—
12,527,956
—
—
—
14,367
—
—
—
—
1,563
—
6,220
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
31
2
—
—
197
(230)
—
—
5
5
—
216
(226)
—
—
4
14
—
—
—
457
(209)
(22,501,174)
(34,675)
(75,560,456)
(111,625) 6,708,649
7
146,293
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4)
(15)
—
—
—
—
—
—
—
—
—
31
2
—
—
197
(5,663)
(21,334)
(108,171)
(5,893)
(21,334)
(108,171)
—
—
—
—
5
5
—
216
(8,597)
(21,092)
(137,860)
(8,823)
(21,092)
(137,860)
—
—
—
—
—
—
4
14
—
(4)
(15)
457
(7,574)
(7,783)
—
146,300
—
50,629
—
—
—
— $
—
—
—
—
—
— 4,398,700
4
50,625
—
—
— $
—
—
— 11,406,221 $
—
—
—
—
11 $ 198,829 $
1,645
—
—
—
(19) $
1,645
—
(22,425)
(22,425)
(167,859) $ 30,962
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
TELA Bio, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense
Noncash interest expense
Noncash loss on extinguishment of debt
Amortization of intangible assets
Inventory excess and obsolescence charge
Beneficial conversion feature upon conversion of promissory notes
Change in fair value of warrants
Stock‑based compensation expense
Loss (gain) on sale of property and equipment
Change in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other assets
Restricted cash
Accounts payable
Accrued expenses and other liabilities
Foreign currency remeasurement gain
Net cash used in operating activities
Cash flows from investing activities:
Purchases of short-term investments
Payment for intangible asset
Purchase of property and equipment
Proceeds from sale of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from initial public offering net of underwriting discounts, commissions and offering costs
Proceeds from issuance of long‑term debt with related party
Proceeds from issuance of long‑term debt and preferred stock warrants
Repayment of long‑term debt
Borrowings under revolving credit facility
Repayments of revolving credit facility
Proceeds from issuance of Series B redeemable convertible preferred stock, net of offering costs
Proceeds from issuance of convertible promissory notes and preferred stock warrants
Payment of deferred financing costs
Payment of capital lease obligations
Proceeds from exercise of stock options
Net cash provided by financing activities
Effect of exchange rate on cash
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
Cash paid on loss on extinguishment of debt
Supplemental disclosures of noncash investing and financing activities:
Fair value of warrants issued in connection with equity and debt financing
Accretion of redeemable convertible preferred stock
Conversion of convertible preferred stock to common stock in connection with the initial public offering
Conversion of outstanding preferred stock warrants
Offering costs in accounts payable
Conversion of convertible promissory notes and accrued interest to Series B redeemable convertible preferred
stock
Intangible assets in accrued expenses and other liabilities
Recognition of exit fee for debt discount
Issuance of common stock for early exercised stock options
Unrealized loss on short-term investments
Year ended December 31,
2018
2019
2017
$
(22,425)
$
(21,092)
$
(21,334)
278
523
—
304
1,591
—
5
457
—
(1,528)
(1,839)
(1,977)
—
(773)
(118)
(21)
(25,523)
(9,284)
(2,500)
(197)
—
(11,981)
51,151
—
—
—
—
—
14,367
—
—
—
14
65,532
(4)
28,024
17,278
45,302
3,086
—
—
7,783
146,300
1,645
522
—
—
—
4
4
$
$
$
$
$
$
$
$
$
$
$
$
$
463
712
1,469
785
2,224
—
(244)
216
(2)
(541)
(4,757)
99
24
1,914
(1,194)
—
(19,924)
—
(1,500)
(62)
4
(1,558)
—
30,000
8,000
(13,000)
5,732
(5,732)
3,978
—
(1,569)
—
5
27,414
—
5,932
11,346
17,278
1,090
353
187
8,823
—
—
—
—
2,500
3,400
5
—
$
$
$
$
$
$
$
$
$
$
$
$
$
761
2,113
—
—
452
1,408
(54)
197
14
(578)
(127)
(58)
—
(748)
1,586
—
(16,368)
—
—
(114)
13
(101)
—
—
5,000
—
—
—
14,731
7,386
(596)
(188)
2
26,335
—
9,866
1,480
11,346
329
—
1,751
5,893
—
—
—
8,054
—
—
31
—
$
$
$
$
$
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
(1) Background
TELA BIO, INC.
Notes to Consolidated Financial Statements
TELA Bio, Inc. (the “Company”) was incorporated in the state of Delaware on April 17, 2012 and wholly owns TELA Bio
Limited, a company incorporated in the United Kingdom. The Company is focused on the commercialization and sale of
OviTex Reinforced Tissue Matrix (“OviTex”), which utilizes surgical reconstruction medical device technology licensed
from a strategic partner, Aroa Biosurgery (“Aroa”), as described in Note 11, and on the research and development of
additional medical devices with Aroa and on other internally developed technologies. In April 2019, the Company received
510(k) clearance from the U.S. Food and Drug Administration (“FDA”) for OviTex PRS Reinforced Tissue Matrix
(“OviTex PRS”), which addresses unmet needs in plastic reconstruction surgery. The Company’s principal corporate office
and research facility is located in Malvern, Pennsylvania.
(2) Risks and Liquidity
The Company’s operations to date have focused on commercializing products, developing and acquiring technology and
assets, business planning, raising capital and organization and staffing. The Company has incurred recurring losses and
negative cash flows from operations since inception and has an accumulated deficit of $167.9 million as of December 31,
2019. The Company anticipates incurring additional losses until such time, if ever, it can generate sufficient revenue from
its products to cover its expenses and has limited resources available to fund current commercialization and research and
development activities.
In November 2019, the Company closed its initial public offering (“IPO”) in which the Company issued and sold 4,398,700
shares of its common stock at a public offering price of $13.00 per share, including 398,700 shares of the Company’s
common stock sold pursuant to the underwriters’ option to purchase additional shares. The Company received net
proceeds of $50.6 million after deducting underwriting discounts, commissions and other offering expenses.
The operations of the Company are subject to certain risks and uncertainties including, among others, uncertainty of
product development, technological uncertainty, commercial acceptance of any developed products, alternative competing
technologies, dependence on collaborative partners, uncertainty regarding patents and proprietary rights, comprehensive
government regulations, and dependence on key personnel.
(3) Summary of Significant Accounting Policies
Basis of Presentation and Principals of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to
GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”)
promulgated by the Financial Accounting Standards Board (“FASB”). The consolidated financial statements include the
accounts of TELA Bio, Inc. and its wholly owned subsidiary TELA Bio Limited. All intercompany accounts and
transactions have been eliminated in consolidation.
Reverse Stock Split
The Company effected a one‑for‑24.69 reverse stock split of its common stock on October 28, 2019. The reverse stock split
combined approximately 25 shares of the Company’s issued and outstanding common stock into one share of common
stock and correspondingly adjusted the conversion price of its redeemable convertible preferred stock. No fractional shares
were issued in connection with the reverse stock split. Any fractional share resulting from the reverse stock split was
rounded down to the nearest whole share, and in lieu of any fractional shares, the Company will pay in cash to the holders
of such fractional shares an amount equal to the fair value, as determined by the board of directors, of
F-7
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
such fractional shares. All common stock, per share and related information presented in the consolidated financial
statements and accompanying notes have been retroactively adjusted to reflect the reverse stock split.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent
liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the
reporting period. The most significant judgments are employed in estimates used to determine the fair value of redeemable
convertible preferred stock, preferred stock warrant liability and stock‑based awards issued, and recoverability of the
carrying value of the Company’s inventory. As future events and their effects cannot be determined with precision, actual
results may differ significantly from these estimates.
Segments
Operating segments are defined as components of an enterprise about which separate discrete information is available for
evaluation by the chief operating decision maker, or decision‑making group, in deciding how to allocate resources and in
assessing performance. The Company views its operations and manages its business in one segment.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash
equivalents and short-term investments. The Company places its cash with high‑credit‑quality financial institutions and
invests in money market funds, government agency securities and corporate debt securities. The Company has established
guidelines relative to credit ratings and maturities that seek to maintain safety and liquidity.
As described in Note 11, the Company has licensed patents and other intellectual property from Aroa. As part of this
agreement, Aroa is also the sole manufacturer of the Company’s products. The inability of Aroa to fulfill supply
requirements of the Company could materially impact future operating results. A change in the relationship with Aroa, or
an adverse change in their business, could materially impact future operating results.
Cash and Cash Equivalents
The Company considers cash equivalents to be highly liquid investments with maturities of three months or less from the
date of purchase. Cash equivalents consist of investments in a money market fund. The Company’s cash and cash
equivalents are carried at the fair value of the investment based on quoted market prices.
Short-Term Investments
Short-term investments consist of investments in corporate debt securities with a maturity of greater than three months
when acquired. The Company classifies these investments as available-for-sale securities. These investments are reported at
fair value with the related unrealized gains and losses included in accumulated other comprehensive loss, a component of
stockholders’ equity.
The Company evaluates its investments for other-than-temporary impairment by reviewing factors such as the length of
time and extent to which fair value has been below cost basis and the Company’s ability and intent to hold the investment
for a period of time which may be sufficient for anticipated recovery of the market value. There were no other-than-
temporary impairments in 2019.
F-8
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
Short-term investments consisted of the following at December 31, 2019 (in thousands):
Corporate debt securities
Inventory
Cost
Amortization/
Accretion
$
9,284
$
5
Unrealized
Gains/(Losses)
$
(4)
Estimated
Fair
Value
$
9,285
Inventory consists of finished goods and is identified and tracked by lot and stated at the lower of cost or net realizable
value, with cost being determined on a first‑in, first‑out basis. The Company periodically analyzes its inventory levels and
writes down inventory that has become obsolete or that has a cost basis in excess of its expected net realizable value based
on expected customer demand. As of December 31, 2019 and 2018, the Company had $1.1 million and $0.8 million,
respectively, in inventory consigned to others.
Property and Equipment
Property and equipment are stated at the aggregate cost incurred to acquire and place the asset in service. Expenditures for
routine maintenance and repairs are charged to expense as incurred and costs of improvements and renewals are
capitalized. Depreciation is provided over the estimated useful lives of the assets using the straight‑line method.
Intangible Assets
Upfront payments and milestone payments due related to licenses or commercialization rights prior to future economic
benefit being established are recorded as research and development expenses. Milestone payments due related to licenses or
commercialization rights after future economic benefit is established are recorded as intangible assets. In 2018, the
Company recorded $4.0 million in intangible assets as it became probable that the Company would make these payments.
In 2019 and 2018, the Company recorded $0.3 million and $0.8 million, respectively, of amortization expense related to
intangible assets. At December 31, 2019, the remaining life of intangible assets was 9.6 years. The Company anticipates
recognizing amortization expense of $0.3 million for the next five years and $1.4 million thereafter.
Long‑Lived Assets
Long‑lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be recoverable. If circumstances require a
long‑lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows
expected to be generated by such asset or asset group to its carrying value. If the carrying value of the long‑lived asset or
asset group exceeds the undiscounted cash flows, an impairment is recognized to the extent the carrying value exceeds its
fair value. Fair value is determined using various valuation techniques, including discounted cash flow models, quoted
market values, and third‑party independent appraisals, as considered necessary. No impairment losses were recognized
during the year ended December 31, 2019, 2018 or 2017.
Debt Issuance Costs
Debt issuance costs incurred in connection with debt (Note 6) are amortized to interest expense over the term of the
respective financing arrangement using the effective‑interest method, and debt issuance costs incurred under the revolver
are amortized to interest expense over the term of the respective financing arrangement using the straight‑line method. Debt
issuance costs, net of related amortization are deducted from the carrying value of the related debt.
F-9
Table of Contents
Revenue Recognition
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which
was adopted on January 1, 2019, using the modified retrospective method. The Company determined that the new guidance
did not have a material impact on its revenue recognition practices as it does not provide customers with price concessions,
rebates, volume discounts or other such reductions for which an estimated transaction price must be determined and then
allocated to specific deliverables. The adoption of this guidance had no cumulative adjustment to the Company’s
consolidated financial statements as of the adoption date. Under ASC Topic 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 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 contracts, the only identified performance obligation is providing the
product to the customer.
Payment terms with customers do not exceed one year and, therefore, the Company does not account for a financing
component in its 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 (in thousands):
OviTex
OviTex PRS
Total revenue
Year ended December 31,
14,041
$
1,405
15,446
$
Sales of OviTex accounted for all of the Company’s revenue for the years ended December 31, 2018 and 2017.
Prior to the adoption of ASC Topic 606, revenue was recognized when persuasive evidence of an arrangement existed, the
price was fixed or determinable, delivery had occurred, and there was a reasonable assurance of collection of the sales
proceeds. Revenue for products sold to a customer was recognized when the product was shipped to the customer, at which
time title passed to the customer. In the case of consigned inventory, revenue was recognized when the product was utilized
in a surgical procedure.
Research and Development
Research and development costs are charged to expense as incurred and consist primarily of salaries, benefits, and other
related costs, including stock‑based compensation for personnel serving in the research and development functions as
F-10
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
well as payments to Aroa and related supply and manufacturing costs. At the end of the reporting period, the Company
compares payments made to third‑party service providers to the estimated progress toward completion of the research or
development objectives. Such estimates are subject to change as additional information becomes available. Depending on
the timing of payments to the service providers and the progress that the Company estimates has been made as a result of
the service provided, the Company may record net prepaid or accrued expense relating to these costs. Costs incurred in
obtaining patent and other intellectual property licenses for which there are no alternative future uses are charged to
expense as incurred.
Stock‑Based Compensation
The Company accounts for stock‑based awards in accordance with provisions of ASC Topic 718, Compensation—Stock
Compensation, under which the Company recognizes the grant‑date fair value of stock‑based awards issued to employees
and nonemployee board members as compensation expense on a straight‑line basis over the vesting period of the award
while awards containing a performance condition are recognized as expense when the achievement of the performance
criteria is considered probable. The Company accounts for stock‑based compensation for awards granted to nonemployee
consultants by revaluing the award over the vesting period of the awards. The Company uses the Black‑Scholes option
pricing model to determine the grant‑date fair value of stock options. The Company estimates forfeitures that it expects will
occur and adjusts expense for actual forfeitures in the periods they occur.
Income Taxes
Income taxes are accounted for under the asset‑and‑liability method as required by ASC Topic 740 (“ASC 740”), Income
Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period corresponding to the
enactment date. Under ASC 740, a valuation allowance is required when it is more likely than not all or some portion of the
deferred tax assets will not be realized through generating sufficient future taxable income.
ASC Subtopic 740‑10 (“ASC 740‑10”), Accounting for Uncertainty of Income Taxes, defines the criterion an individual tax
position must meet for any part of the benefit of the tax position to be recognized in consolidated financial statements
prepared in conformity with GAAP. The Company may recognize the tax benefit from an uncertain tax position only if it is
more likely than not such tax position will be sustained on examination by the taxing authorities, based solely on the
technical merits of the respective tax position. The tax benefits recognized in the consolidated financial statements from
such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority. In accordance with the disclosure requirements of ASC 740‑10, the
Company’s policy on income statement classification of interest and penalties related to income tax obligations is to
include such items as part of total interest expense and other expense, respectively.
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 and 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 our
F-11
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
OrbiMed Credit Facility (Note 6), it is impractical to determine the fair value of the debt. Items measured at fair value on a
recurring basis included the Company’s preferred stock warrants. The warrants were carried at their estimated fair value.
The Company follows the provisions of 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).
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 as of December 31, 2019 and 2018 (in thousands):
December 31, 2019:
Assets:
Cash equivalents – money market fund
Cash equivalents – corporate debt securities
Cash equivalents – government agency securities
Short-term investments – corporate debt securities
December 31, 2018:
Assets:
Cash equivalents – money market fund
Liability:
Warrant liability
F-12
Fair value measurement at reporting date using
Quoted prices in
active markets Significant other
Significant
for identical
assets
(Level 1)
observable
inputs
(Level 2)
unobservable
inputs
(Level 3)
$
$
$
$
$
$
34,918 $
— $
— $
— $
— $
8,850 $
1,000 $
9,285 $
—
—
—
—
16,002 $
— $
—
— $
— $
1,640
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
A rollforward of the warrant liability (Level 3 measurement) is as follows (in thousands):
January 1, 2017
Fair value of warrants issued – Convertible promissory notes
Fair value of warrants issued – Notes payable
Change in fair value of warrants
December 31, 2017
Fair value of warrants issued – MidCap Credit Facility
Change in fair value of warrants
December 31, 2018
Change in fair value of warrants
Conversion into common stock warrants
December 31, 2019
$
$
—
1,408
343
(54)
1,697
187
(244)
1,640
5
(1,645)
—
The fair value of the warrants at November 13, 2019 was determined using the Black‑Scholes option pricing model with
the following assumptions:
Expected dividend yield
Expected volatility
Risk-free interest rate
Remaining contractual term in years
MidCap Credit
Facility
—
57.5 %
2.04 %
8.4
Convertible
promissory
notes
Notes payable
—
57.5 %
1.79 %
7.4
—
57.4 %
1.79 %
7.2
The fair value of the warrants at December 31, 2018 was determined using the Black‑Scholes option pricing model with the
following assumptions:
Expected dividend yield
Expected volatility
Risk‑free interest rate
Remaining contractual term in years
Net loss per share
MidCap Credit
Facility
—
58.1 %
2.69 %
9.3
Convertible
promissory
notes
Notes payable
—
57.4 %
2.64 %
8.3
—
57.0 %
2.64 %
8.1
Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the
weighted‑average shares of common stock outstanding during the reporting period. The Company’s outstanding
redeemable convertible preferred stock contractually entitled the holders of such shares to participate in distributions but
contractually did not require the holders of such shares to participate in losses of the Company. In periods in which the
Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common
stockholders is the same as basic net loss per share attributable to common stockholders 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 loss per share are the same.
F-13
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
The following potentially dilutive securities have been excluded from the computation of diluted weighted‑average shares
outstanding as of December 31, 2019 and 2018, as they would be antidilutive.
Years ended December 31,
Series A redeemable convertible preferred stock
Series B redeemable convertible preferred stock
Stock options (including shares subject to repurchase)
Series B redeemable convertible preferred stock warrants
Common stock warrants
Total
2019
2018
—
911,336
— 2,552,919
490,134
88,556
—
1,510,253 4,042,945
1,421,697
—
88,556
Amounts in the above table reflect the common stock equivalents of the noted instrument.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016‑02, Leases, which requires a lessee to record a right‑of‑use 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. If an entity chooses the second option, the transition
requirements for existing leases also apply to leases entered into between the date of initial application and the effective
date. The standard is effective for the Company beginning January 1, 2021, with early adoption permitted. The Company
plans to adopt this standard on January 1, 2021 and is currently evaluating the expected impact that the standard could have
on its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016‑18, Consolidated Statement of Cash Flows: Restricted Cash. The
amendments address diversity in practice that exists in the classification and presentation of changes in restricted cash and
require that a consolidated statement of cash flows explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The standard was effective
for the Company beginning January 1, 2019. The Company’s adoption of this standard did not have a material impact on
the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018‑07, Compensation—Stock Compensation (Topic 718) Improvements to
Nonemployee Share‑Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include
stock‑based payment transactions for acquiring goods and services from nonemployees. Under this ASU, an entity should
apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing
model and the attribution of costs (i.e., the period of time over which stock‑based payment awards vest and the pattern of
cost recognition over that period). The guidance is effective for the Company beginning January 1, 2020, with early
adoption permitted. The adoption of this guidance is not expected to be material to the Company’s consolidated financial
statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018‑13, Disclosure Framework—Changes to the Disclosure Requirements for
Fair Value Measurements, which changes the fair value measurement disclosure requirements of ASC Topic 820. The goal
of the ASU is to improve the effectiveness of ASC Topic 820’s disclosure requirements. The standard is effective for the
Company beginning January 1, 2020. The adoption of this guidance is not expected to be material to the Company’s
consolidated financial statements and related disclosures.
F-14
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
(4) Property and Equipment
Property and equipment consisted of the following (in thousands):
Asset description
Lab equipment
Furniture and fixtures
Computer equipment and software
Leasehold improvements
Estimated useful lives
5 Years
5 Years
3 Years
Lesser of useful life or lease term
$
Total
Less accumulated depreciation and
amortization
Property and equipment, net
December 31,
2019
2,250 $
112
508
1,328
4,198
2018
2,203
110
398
1,290
4,001
(3,521)
$
677 $
(3,243)
758
The cost of property and equipment at both December 31, 2019 and 2018 includes $0.2 million of equipment located at
Aroa. Depreciation expense was $0.3 million, $0.5 million and $0.8 million for the years ended December 31, 2019, 2018
and 2017, respectively.
(5) Accrued Expenses
Accrued expenses consisted of the following (in thousands):
Compensation and related benefits
Interest
Professional fees
Accrued milestone payments
Research and development expenses
Other
December 31,
2019
2,310 $
41
641
—
35
506
3,533 $
2018
1,760
42
552
2,500
133
166
5,153
$
$
(6) Debt
Long‑term debt consisted of the following at December 31, 2019 and 2018 (in thousands):
OrbiMed Term Loan (related party)
End of term charge
Unamortized end of term charge and issuance costs
Long-term debt with related party
OrbiMed Term Loan (Related Party)
December 31,
2019
2018
$ 30,000 $ 30,000
3,000
(3,267)
$ 30,243 $ 29,733
3,000
(2,757)
In November 2018, the Company entered into a senior secured term loan facility (“OrbiMed Credit Facility”) with
OrbiMed Royalty Opportunities II, LP (“OrbiMed”), a related party as the lender is affiliated with a stockholder of the
Company, which consists of up to $35.0 million in term loans (“OrbiMed Term Loans”). The OrbiMed Term Loans consist
of two tranches, a $30.0 million Tranche 1 (“Tranche 1”) and a $5.0 million Tranche 2 (“Tranche 2”). In
F-15
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
November 2018, the Company borrowed $30.0 million of Tranche 1 and used a portion of the proceeds to repay the
MidCap Credit Facility (described below) and will use the remaining proceeds to fund operations and capital expenditures.
The Company elected not to borrow Tranche 2 prior to its expiration on December 31, 2019.
Pursuant to the OrbiMed Credit Facility, the Company provided a first priority security interest in all existing and future
acquired assets, excluding intellectual property and certain other assets, owned by the Company. The OrbiMed Credit
Facility contains a negative pledge on intellectual property owned by the Company. The OrbiMed Credit Facility also
contains customary indemnification obligations and customary events of default, including, among other things,
(i) nonpayment, (ii) breach of warranty, (iii) nonperformance of covenants and obligations, (iv) default on other
indebtedness, (v) judgments, (iv) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) key
permit events, (x) key person event, (xi) regulatory matters, (xii) and key contracts. In addition, the Company must
maintain a minimum cash balance of $2.0 million. In the event of default under the OrbiMed Credit Facility, the Company
would be required to pay interest on principal and all other due and unpaid obligations at the current rate in effect plus 3%.
The OrbiMed Term Loan matures on November 16, 2023 and bear interest at a rate equal to 7.75% plus the greater of
one‑month LIBOR or 2.0%. At December 31, 2019, the interest rate was 9.75%. The Company is required to make
60 monthly interest payments beginning on November 30, 2018, with the entire principal payment due at maturity. The
OrbiMed Term Loans have a prepayment penalty equal to 10.0% of the prepaid principal amount prior to the
second anniversary of the Term Loans, 5.0% of the prepaid principal amount after the second anniversary but prior to the
third anniversary and 2.5% of the prepaid principal amount after the third anniversary. The Company is also required to pay
an exit fee at the time of maturity or prepayment event equal to 10.0% of all principal borrowings (the “End of Term
Charge”) and an administration fee equal to $10,000 on the last day of each quarter until all obligations have been paid in
full. In conjunction with the closing of the OrbiMed Term Loans, the Company incurred $0.3 million of third party and
lender fees, which along with the End of Term Charge of $3.0 million were recorded as debt issuance costs, and are being
recognized as interest expense over the term of the loan using the effective‑interest method. Interest expense associated
with the OrbiMed Credit Facility recorded during 2019 and 2018 was $3.6 million and $0.6 million, respectively.
MidCap Credit Facility
In April 2018, the Company entered into a $14.0 million debt financing transaction (“MidCap Credit Facility”) with
MidCap Financial (“MidCap”), which consisted of a $3.5 million revolving credit facility (“Revolver”) and $10.5 million
in term loans (“MidCap Term Loans”). The Term Loans consisted of two tranches, an $8.0 million Tranche 1 (“MidCap
Tranche 1”) and a $2.5 million Tranche 2 (“MidCap Tranche 2”). In April 2018, the Company borrowed $8.0 million of
MidCap Tranche 1 and used the majority of the proceeds to repay the note payable outstanding. In conjunction with the
closing of the MidCap Tranche 1 term loans, the Company issued MidCap warrants to purchase 206,897 shares of the
Company’s Series B redeemable convertible preferred stock at an exercise price of $1.16 per share. The warrants have a
contractual term equal to the earlier of a change in control or 10 years. The estimated fair value of the warrants of
$0.2 million (determined using the Black‑Scholes option pricing model), along with $0.8 million of third‑party and lender
fees (including $0.4 million of End of Term Charge) incurred with the issuance of the debt, were recorded as the End of
Term Charge and debt issuance costs and were being recognized as interest expense over the life of the Tranche 1 term loan
using the effective‑interest method.
The MidCap Term Loans and the Revolver bore interest at a rate equal to one‑month LIBOR plus 7.0% and one‑month
LIBOR plus 3.75%, respectively, until the aggregate principal, interest, and End of Term Charge totaling $0.4 million were
paid with part of the proceeds received from the OrbiMed Credit Facility. As a result of these payments, a $1.2 million loss
on extinguishment was recorded during the year ended December 31, 2018. Interest expense associated with the Midcap
Credit Facility recorded during 2018 was $0.6 million.
F-16
Table of Contents
Note Payable
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
In March 2017, the Company entered into a Loan and Security Agreement (“Loan Agreement”) and borrowed $5.0 million
(“Note A”). Note A bore interest at 9.45% until the aggregate principal, interest, and other termination fees were paid with
part of the proceeds received from the MidCap Credit Facility. As a result of these payments, a $0.6 million loss on
extinguishment was recorded during the year ended December 31, 2018. Interest expense associated with Note A recorded
during both the years ended December 31, 2018 and 2017 was $0.4 million. In connection with the Loan Agreement, the
Company granted 387,932 Series B warrants with an original term of 10 years with an exercise price of $1.16 per share.
Convertible Promissory Note
In January 2017, the Company issued $7.4 million of secured, convertible promissory notes (the “Convertible Notes”),
together with warrants, primarily to holders of the Company’s Series B redeemable convertible stock (“Series B”). The
Convertible Notes bore interest at the rate of 12%.
The Convertible Notes were secured by a lien on all assets of the Company, including intellectual property and cash, and
were scheduled to mature in October 2017. The principal amount of the Convertible Notes and accrued interest thereon of
$0.7 million converted into 6,951,175 shares of the Company’s Series B in connection with the sale of Series B to a new
investor in October 2017 (Note 7).
The purchasers of the Convertible Notes also received a 10‑year warrant to purchase shares of the Company’s Series B,
with the number of shares issuable upon warrant exercise equal to 25% of the note principal divided by $1.16, or 1,591,864
warrants. The exercise price of the warrants is $1.16 per share. The estimated fair value of the warrants of $1.4 million
(determined using the Black‑Scholes option pricing model) was recorded as a debt discount and was fully amortized to
interest expense during 2017 over the term of the Convertible Notes. In addition, in accordance with the applicable FASB
accounting guidance, after considering the allocation of a portion of the proceeds to the warrants, the Company determined
that the Convertible Notes contained a beneficial conversion feature (“BCF”). The BCF existed at the date of the issuance
of the Convertible Notes due to the fact that the original carrying value of the Convertible Notes, after allocation of the
proceeds, would be less than the purchase price of the series of preferred stock paid by investors in the next qualified or
nonqualified financing, as defined. During the year ended December 31, 2017, the BCF of $1.4 million was fully
recognized as additional interest expense.
Debt issuance costs of $0.1 million were incurred and were recorded as a discount on the carrying value of the debt, and
amortized to interest expense in 2017 through the date of conversion of the Convertible Notes.
(7) Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Initial Public Offering
In November 2019, the Company closed its IPO in which the Company issued and sold 4,398,700 shares of its common
stock at a public offering price of $13.00 per share, including 398,700 shares of the Company’s common stock sold
pursuant to the underwriters’ option to purchase additional shares. The Company received net proceeds of $50.6 million
after deducting underwriting discounts, commissions and other offering expenses. In addition, immediately prior to the
closing of the IPO, all of the Company’s outstanding shares of redeemable convertible preferred stock, including accrued
dividends payable converted into an aggregate of 6,708,649 shares of common stock and the Company’s outstanding
warrants to purchase shares of preferred stock were automatically converted into warrants to purchase an aggregate of
88,556 shares of common stock.
F-17
Table of Contents
Preferred Stock
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
Prior to the IPO, all of the Company’s redeemable convertible preferred stock was classified outside of stockholders’
deficit because the shares contain certain redemption features that were not solely within the control of the Company. At
the time of issuance, the redeemable convertible preferred stock was recorded at its issuance price, less issuance costs.
Throughout 2019, the Company entered into various stock purchase agreements with new and existing investors pursuant
to which the Company sold an aggregate 12,527,956 shares of the Company’s Series B at $1.16 per share for aggregate
gross proceeds of $14.5 million. Transaction fees of $0.2 million were recorded as a reduction of the carrying value of the
Series B.
Throughout 2018, the Company entered into various stock purchase agreements with new and existing investors pursuant
to which the Company sold an aggregate 3,607,069 shares of the Company’s Series B at $1.16 per share for aggregate gross
proceeds of $4.2 million. Transaction fees of $0.2 million were recorded as a reduction of the carrying value of the
Series B.
In October 2017, the Company entered into a stock purchase agreement with a strategic corporate investor pursuant to
which the Company sold 12,931,034 shares of the Company’s Series B at $1.16 per share for aggregate gross proceeds of
$15.0 million. Transaction fees of $0.3 million were recorded as a reduction of the carrying value of the Series B.
Concurrent with this financing, a total of 6,951,175 shares of Series B were issued upon conversion of the Convertible
Notes plus accrued interest on such notes (Note 6).
Warrants
The Company had the following warrants outstanding to purchase common stock at December 31, 2019:
Common stock warrants issued to MidCap
Common stock warrants issued to note payable holders
Common stock warrants issued to convertible promissory note holders
(8) Stock‑Based Compensation
Outstanding
8,379
$
15,712
64,465
88,556
$
Exercise Expiration
price
28.65
28.65
28.65
dates
2028
2027
2027
The Company has two equity incentive plans: the 2012 Stock Incentive Plan and the 2019 Equity Incentive Plan. New
awards can only be granted under the 2019 Equity Incentive Plan (the “Plan”). At December 31, 2019, 323,715 shares were
available for future issuances. 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’s stock options vest based on the terms in each award
agreements and generally vest over four years and have a term of 10 years. 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 on a straight‑line basis over the vesting period of the award. The Company recorded stock‑based
F-18
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
compensation expense in the following expense categories of its accompanying consolidated statements of operations (in
thousands):
Sales and marketing
General and administrative
Research and development
Total stock‑based compensation
The following table summarizes stock option activity for the Plan:
Year ended December 31,
2018
2019
2017
164
225
68
457
$
$
68 $
115
33
216 $
44
116
37
197
$
$
Outstanding at January 1, 2017
Granted
Exercised
Early exercised
Canceled/forfeited
Outstanding at December 31, 2017
Granted
Exercised
Early exercised
Canceled/forfeited
Outstanding at December 31, 2018
Granted
Exercised
Early exercised
Canceled/forfeited
Outstanding at December 31, 2019
Vested and expected to vest at December 31, 2019
Exercisable at December 31, 2019
Weighted
Number of average exercise contractual term
price per share
(years)
Weighted
average
remaining
shares
282,331 $
84,587
(404)
(830)
(14,770)
350,914
152,016
(1,377)
(427)
(11,904)
489,222
978,415
(2,527)
(471)
(43,697)
1,420,942 $
1,317,047 $
345,881 $
5.77
5.93
5.19
5.93
5.87
5.81
5.93
5.57
5.93
5.93
5.84
12.51
5.93
5.93
8.58
10.35
10.23
5.87
8.75
8.68
6.18
The 2012 Stock Incentive Plan and the 2019 Equity Incentive Plan provide 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 is the lesser of the original exercise price or the then fair value of the common stock. At
December 31, 2019, $4,000 of proceeds from early exercised options are recognized as a current liability in other current
liabilities in the accompanying consolidated balance sheet.
F-19
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
The following table summarizes activity relating to early exercise of stock options:
Unvested balance at January 1, 2017
Early exercised
Vested
Unvested balance at December 31, 2018
Early exercised
Vested
Unvested balance at December 31, 2018
Early exercised
Vested
Unvested balance at December 31, 2019
Number of
shares
7,159
830
(6,955)
1,034
427
(549)
912
471
(628)
755
The weighted average grant‑date fair value per share of options granted was $6.81, $1.08 and $0.54 for the years ended
December 31, 2019, 2018 and 2017, respectively. The aggregate intrinsic value of options exercised was nominal for
the year ended December 31, 2019. As of December 31, 2019, the total unrecognized compensation expense related to
unvested employee and nonemployee stock option awards was $5.7 million, which is expected to be recognized in expense
over a weighted‑average period of approximately 3.4 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 company‑specific historical or implied
volatility, the expected volatility assumption was determined by examining the historical volatilities of a group of industry
peers whose share prices are publicly available.
Risk‑free interest rate – The risk‑free rate assumption is based on the 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 weighted average assumptions in the table below:
Expected dividend yield
Expected volatility
Risk‑free interest rate
Expected term
Year ended December 31,
2019
2018
—
—
55.9 %
56.5 %
2.77 %
1.82 %
6.24 Years 6.25 Years 6.25 Years
2017
—
50.0 %
2.07 %
F-20
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
(9) Employee Benefit Plans
401(k) Defined Contribution Plan
The Company sponsors a 401(k) defined‑contribution plan covering all employees. Participants are permitted to contribute
up to 100% of their eligible annual pretax compensation up to an established federal limit on aggregate participant
contributions. Discretionary profit‑sharing contributions made by the Company, if any, are determined annually by the
board of directors. To date, the Company has not made discretionary profit‑sharing contributions under the 401(k) plan but
effective January 1, 2020, the Company will match 50% of employees’ contributions up to 6%, subject to a maximum
annual amount. Participants are immediately vested in their own contributions to the plan and are fully vested in
discretionary profit sharing made by the Company after three years of service.
2019 Employee Stock Purchase Plan
In November 2019, the Company adopted the 2019 Employee Stock Purchase Plan (the “ESPP”) with a total of 107,887
shares reserved for future issuance under the ESPP. In addition, subject to prior approval by the Company’s board of
directors, the number of shares authorized and reserved for issuance under the ESPP will be increased annually equal to the
least of (i) 107,887 shares of common stock, (ii) 1% of the shares outstanding on the final day of the immediately preceding
calendar year, and (iii) such smaller number of shares as determined by the board of directors. The ESPP provides the
opportunity to purchase the Company’s common stock at a 5% discount to the market price through payroll deductions. As
of December 31, 2019, no shares have been issued under the ESPP.
(10) Income Taxes
The Company has incurred losses since inception. Deferred tax assets and liabilities are determined based on the
differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect for years in which differences are expected to reverse.
Significant components of the Company’s deferred tax assets for federal income taxes as of December 31, 2019 and 2018
consisted of the following (in thousands):
Deferred tax assets
Net operating loss carryforwards
Research and development credits
Depreciation and amortization
Accrued LifeCell settlement
Accrued expenses and other
Inventory reserve
Gross deferred tax asset
Valuation allowance
Net deferred tax asset
December 31,
2019
2018
$
$
32,704 $
853
578
—
259
417
34,811
(34,811)
— $
26,993
701
825
252
191
425
29,387
(29,387)
—
The Company does not have unrecognized tax benefits as of December 31, 2019 and 2018. The Company recognizes
interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
F-21
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
The Company’s net operating loss (“NOL”) carryforwards for federal and state income tax purposes consisted of the
following (in thousands):
NOL carryforwards
Federal
State
December 31,
2019
2018
$
122,925 $
106,062
99,939
91,797
The NOL carryforwards begin expiring in 2032 for federal purposes and in 2026 for state income tax purposes. The
Company recorded a valuation allowance on the deferred tax assets as of December 31, 2019 and 2018 because of the
uncertainty of their realization. The valuation allowance increased by $5.4 million for the year ended December 31, 2019
mainly due to losses incurred and by $5.5 million for the years ended December 31, 2018, mainly due to losses incurred
and the reduction in the tax rate.
In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act includes a number of changes to
existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 34%
to 21% for tax years beginning after December 31, 2017. The Tax Act also provided for a onetime transition tax on certain
foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017 as well
as prospective changes beginning in 2018, including repeal of the domestic manufacturing deduction, acceleration of tax
revenue recognition, capitalization of research and development expenditures, additional limitations on executive
compensation, and limitations on the deductibility of interest.
Utilization of the net operating losses and general business tax credits carryforwards may be subject to a substantial
limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if changes in ownership of the
company have occurred previously or occur in the future. Ownership changes may limit the amount of net operating losses
and general business tax credits carryforwards that can be utilized annually to offset future taxable income and tax,
respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the
ownership of 5% shareholders in the stock of a corporation by more than 50 percentage points over a three‑year period. If
the Company experiences a Section 382 ownership change, the tax benefits related to the NOL carryforwards may be
further limited or lost. The Company has not performed an analysis under Section 382 and cannot predict or otherwise
determine whether there would be any limitation to the amount of net operating losses and general business tax credits
carryforwards that can be utilized.
F-22
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
A reconciliation of income tax benefit at the statutory federal income tax rate and as reflected in the consolidated financial
statements is as follows:
Rate reconciliation
Federal tax benefit at statutory rate
State rate, net of federal benefit
Permanent differences
Change in federal rate
Research and development
Change in valuation allowance
Other
Total tax provision
Year ended December 31,
2017
2018
2019
(21.0)%
(2.9)
0.4
—
(0.7)
24.2
—
— %
(21.0)% (34.0)%
(4.7)
0.5
—
(0.8)
26.3
(0.3)
— %
(5.2)
5.5
48.0
—
(15.1)
0.8
— %
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Tax years 2016 and
forward remain open for examination for federal tax purposes and tax years 2016 and forward remain open for examination
for the Company’s more significant state tax jurisdictions. To the extent utilized in future years’ tax returns net operating
loss carryforwards at December 31, 2018 will remain subject to examination until the respective tax year is closed.
(11) Contingencies and Commitments
Legal Proceedings
On November 18, 2016, the Company and LifeCell Corporation (“LifeCell”) agreed to settle litigation initiated by LifeCell
in March 2015 related to LifeCell’s complaints alleging (i) that the Company misappropriated LifeCell’s trade secrets and
proprietary information and hired various former LifeCell employees allegedly in violation of their noncompetition
covenants and nonsolicitation agreements and (ii) that the Company infringed U.S. Patent No. 6,143,293, (the 293 patent),
which LifeCell had recently purchased from Carnegie Mellon University. Both cases have been dismissed with prejudice.
As part of this settlement, LifeCell agreed not to sue the Company, either directly or through a person acting at its request
or with its involvement for patent infringement, trade secret misappropriation, breach of an assignment obligation, unfair
competition, unjust enrichment, tortious interference with contract and prospective economic advantage, civil conspiracy,
or like causes of action with respect to OviTex. Also, as part of this settlement agreement, among other provisions, the
Company agreed to pay LifeCell $1.0 million within 30 days of the execution of the settlement agreement and up to an
additional $3.0 million based upon the Company achieving set revenue milestones for its OviTex product family. As of
December 31, 2019, all amounts have been paid. The estimated present value of the future revenue milestone payments was
$1.0 million at December 31, 2018 was recorded in other current liabilities in the accompanying consolidated balance
sheets, based on when the payments were expected to be made at each respective balance sheet date. Noncash interest
expense of $20,000, $0.2 million and $0.3 million was recorded during 2019, 2018 and 2017 respectively, for the change in
estimated present value of the future revenue milestone payments.
Legal and other costs incurred in defense of the Company was charged to expense as incurred and totaled $0.4 million for
the year ended December 31, 2017 and were recorded in general and administrative expenses in the accompanying
consolidated statement of operations. No legal defense costs were incurred subsequent to December 31, 2017.
On February 12, 2016, the Company filed suit against National Union Fire Insurance Company of Pittsburgh, Pennsylvania
(“National Union”), the former carrier for the Company’s Directors & Officers and Employment Practices Liability
Insurance. The complaint charged National Union with breach of contract and failure to reimburse the
F-23
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
Company for defense costs it incurred in the LifeCell litigation discussed above that the Company believes are covered
under the insurance policy sold by National Union. The complaint sought reimbursement of $5.0 million, the full limit of
the policy, as well as reimbursement of the Company’s costs pursuing the action against National Union. In 2018, the
Company settled the suit and received $2.4 million and paid its broker $0.2 million and recognized the net amount of
$2.2 million as a gain on litigation settlement in the Company’s consolidated statement of operations during the year ended
December 31, 2018.
From time to time, the Company may be a party to various other lawsuits, claims, and other legal proceedings that arise in
the ordinary course of its business. While the outcomes of these matters are uncertain, management does not expect that the
ultimate costs to resolve these matters will have a material adverse effect on the Company’s financial position, results of
operations, or cash flows.
Agreements with Aroa
In August 2012, the Company entered into a License, Product Development, and Supply Umbrella Agreement (“Aroa
Agreement”) with Aroa. The Aroa Agreement provides the Company a license to patent rights and other intellectual
property related to Aroa’s products and technologies for use in certain indications and expires on the later of August 3,
2022 or expiration of the last patent covering the products (currently July 30, 2029). The Company has the right to extend
the term of the agreement by an additional 10 years following the expiration of the last patent covering the products on
commercially reasonable terms to be negotiated by the parties. This agreement initially limited the Company’s license
rights to the U.S. but was subsequently amended in March 2013 to include the European Union and certain former Union
of Soviet Socialist Republic satellite nations.
The financial terms of this Aroa Agreement, as amended, include (i) the payment of $1.0 million and the issuance of
74,316 shares of the Company’s common stock valued at $0.3 million concurrent with the closing of the December 2012
financing, (ii) the payment of $1.0 million upon the amendment of the Aroa Agreement in March 2013, and (iii) the
payment of $1.0 million upon the approval by the U.S. Food and Drug Administration (“FDA”) of the use of Aroa’s
product for certain indications (paid in June 2013). All amounts paid were recorded at the time within in‑process research
and development expense in the consolidated statements of operations as the Company believes that the technology
licensed from Aroa required substantial additional development efforts and had no alternative future uses to the Company.
In April 2014, the Company submitted a new 510(k) application to the FDA incorporating the licensed technologies, as
well as technology licensed from a second strategic partner. The Aroa Agreement also requires future payments
aggregating up to $4.0 million upon the achievement of U.S. and European cumulative product sales targets.
In 2018, it became probable that the Company would be issued CE Mark approval to sell OviTex in Europe by the
European Medical Agency, and the Company recognized a $1.0 million liability and a corresponding developed right
intangible asset related to this milestone payment owed to Aroa. Of this amount, $0.5 million was paid in 2018 and the
remaining $0.5 million was paid in 2019.
With respect to the sales milestone payments in the North American territory, a payment of $1.0 million and $2.0 million
are due when cumulative product sales in the North American territory reach certain amounts. In 2018, it became probable
that the Company would achieve the sales milestones in the North American territory, and, as such, the Company recorded
a liability of $3.0 million and a corresponding developed technology right intangible asset. The Company paid $1.0 million
to Aroa in 2018 related to one of the cumulative product sales targets and the remaining $2.0 million in 2019. With respect
to the sales milestone payments in the European territory, a payment of $1.0 million is due when cumulative product net
sales in the European territory reach certain amounts.
F-24
Table of Contents
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
Other key terms of the amended Aroa agreement in addition to those disclosed above are as follows:
·
·
·
·
The transfer price for product produced by Aroa was increased from 150% of Aroa’s cost of goods sold to
200% of the cost of goods sold, with the quarterly true‑up amount continuing to equal 27% of the Company’s
net sales of the licensed product reduced by transfer price payments previously made for the respective
quarter. The purchase commitments aggregate to $11.0 million for the North American territory over a
five‑year period, consisting of $2.0 million in total in years one and two, $2.0 million in year three,
$3.0 million in year four, and $4.0 million in year five. The purchase commitments aggregate to $2.8 million
for the European territory over a five‑year period, consisting of $0.5 million in total in years one and two,
$0.5 million in year three, $0.8 million in year four, and $1.0 million in year five. In addition, the Company
continues to be required to pay a make whole payment if the required minimum purchase commitments for
each territory for the corresponding contract years are not made. As of December 31, 2019, the Company has
met its purchase commitments and no make whole payments are required for those periods. The period for the
purchase commitments for the North American territory for years four and five end in June 2020 and
June 2021, respectively. Upon a change in control of the Company (as defined in the amended agreement),
the annual minimum amounts will be extended for a sixth year with a $5.0 million minimum amount for the
North American territory and $1.0 million minimum amount for the European territory. If a change in control
of the Company occurs prior to the first product launch in the applicable territory, then the annual minimum
requirements shall commence upon such change in control. If the make whole payments, if any, are not made
by the Company after a notice and cure period, then the license will convert to a nonexclusive basis in the
territory for which the payment was required but not made.
Separate product development/launch goals and extension rights exist for a breast reconstruction product, as
well as other products in specified indications for use. With respect to the breast reconstruction product, the
goal was to file an investigational device exemption with the FDA for the North American territory by
December 28, 2017, 18 months after the commercial launch of OviTex in the North American territory. The
Company met this deadline with the filing of an investigational device exemption (IDE) application with the
FDA on November 22, 2017. The Company extended the European deadline and paid $0.5 million.
Concurrent with the extension payment, the Company agreed to assume responsibility in obtaining regulatory
approval in Europe with a new regulatory filing deadline of June 30, 2020. The Company expects to meet the
filing deadline and that no further extension payments will be required.
Provisions exist for the Company to step in and operate Aroa’s plant if a supply failure occurs and is not
cured within a set timeframe. Under the amended agreement, the criteria for a supply failure was modified to
mean a failure by Aroa to timely supply, during any consecutive 60‑day period, at least 75% of the products
ordered by the Company under binding purchase orders. During the period that the Company steps in and
assumes manufacturing responsibility, it shall not be required to purchase product from or pay transfer prices
to Aroa, the annual minimums shall be proportionately reduced to reflect the lack of supply responsibility by
Aroa and the Company shall pay a royalty of 6% of net sales in lieu of 27% of net sales of the licensed
products.
The Company is responsible for the payment of 50% of the capital costs of any manufacturing expansion plan
agreed upon by the parties, provided that any such payments made by the Company will be offset against
future revenue sharing amounts payable (revenue share of 27% of the Company’s net sales of the licensed
product).
The Company expects to enter into similar milestone‑based agreements with its strategic partner for both product territories
and new products in order to expand and extend its product portfolio.
As of December 31, 2019, the Company had $8.3 million in purchase commitments with Aroa.
F-25
Table of Contents
Employment Agreements
TELA BIO, INC.
Notes to Consolidated Financial Statements (continued)
The Company entered into employment agreements with key personnel providing for compensation and severance in
certain circumstances, as defined in the respective employment agreements.
Operating Leases
The Company leases office and laboratory space in Malvern, Pennsylvania under a noncancelable lease, which expires in
May 2021. The facility lease agreement has annual scheduled payment increases. The Company is recognizing the rent
expense on a straight‑line basis over the lease term. The Company recognized rent expense of $0.3 million for each of
the years ended December 31, 2019, 2018 and 2017.
The future minimum lease payments under the facility operating lease agreement as of December 31, 2019 are as follows
(in thousands):
2020
2021
(12) Related‑Party Transactions
$
$
217
92
309
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 further described in more detail in Note 6.
F-26
Table of Contents
Item 6. Exhibits.
The following exhibits are being filed herewith:
Exhibit No.
EXHIBIT INDEX
Exhibit
3.2
3.3
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Fourth Amended and Restated Certificate of Incorporation (incorporated by reference to exhibit 3.1 of the
Company’s Current Report on Form 8-K filed on November 19, 2019).
Second Amended and Restated Bylaws (incorporated by reference to exhibit 3.2 of the Company’s Current Report
on Form 8-K filed on November 19, 2019).
Specimen Common Stock Certificate of the Company (incorporated by reference to exhibit 4.1 to the Company’s
Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019).
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of
1934 (filed herewith).
Form of Indemnification Agreement by and between the Company and its individual directors and officers
(incorporated by reference to exhibit 10.1 to the Company’s Registration Statement on Form S-1 (File No. 333-
234217), dated November 7, 2019).
TELA Bio, Inc. 2012 Stock Incentive Plan (incorporated by reference to exhibit 10.2 to the Company’s
Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019)
Amendment to the TELA Bio, Inc. 2012 Stock Incentive Plan (incorporated by reference to exhibit 10.3 to the
Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019)
Second Amendment to the TELA Bio, Inc. 2012 Stock Incentive Plan (incorporated by reference to exhibit 10.4
to the Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019)
Third Amendment to the TELA Bio, Inc. 2012 Stock Incentive Plan (incorporated by reference to exhibit 10.5 to
the Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019)
Fourth Amendment to the TELA Bio, Inc. 2012 Stock Incentive Plan (incorporated by reference to exhibit 10.6 to
the Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019)
Fifth Amendment to the TELA Bio, Inc. 2012 Stock Incentive Plan (incorporated by reference to exhibit 10.7 to
the Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019)
Form of Incentive Stock Option Agreement pursuant to the 2012 Stock Incentive Plan (incorporated by reference
to exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7,
2019)
Form of Nonstatutory Stock Option Agreement pursuant to 2012 Stock Incentive Plan (incorporated by reference
to exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7,
2019)
TELA Bio, Inc. 2019 Equity Incentive Plan (incorporated by reference to exhibit 10.10 to the Company’s
Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019).
Form of TELA Bio, Inc. 2019 Equity Incentive Plan Stock Option Grant Notice and Stock Option Agreement
(incorporated by reference to exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-
234217), dated November 7, 2019).
TELA Bio, Inc. 2019 Employee Stock Purchase Plan (incorporated by reference to exhibit 10.12 to the
Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019).
TELA Bio, Inc. Non-Employee Director Compensation Policy (incorporated by reference to exhibit 10.13 to the
Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019).
Amended and Restated Employment Agreement, dated October 25, 2019, by and between the Company and
Antony Koblish (incorporated by reference to exhibit 10.16 to the Company’s Registration Statement on Form S-1
(File No. 333-234217), dated November 7, 2019).
Amended and Restated Employment Agreement, dated October 25, 2019, by and between the Company and
Maarten Persenaire, M.D. (incorporated by reference to exhibit 10.19 to the Company’s Registration Statement on
Form S-1 (File No. 333-234217), dated November 7, 2019).
Amended and Restated Employment Agreement, dated October 25, 2019, by and between the Company and Skott
Greenhalgh (incorporated by reference to exhibit 10.21 to the Company’s Registration Statement on Form S-1
(File No. 333-234217), dated November 7, 2019).
Amended and Restated Employment Agreement, dated October 25, 2019, by and between the Company and Nora
Brennan (incorporated by reference to exhibit 10.31 to the Company’s Registration Statement on Form S-1 (File
No. 333-234217), dated November 7, 2019).
92
Table of Contents
10.18
10.19*
10.20*
10.21*
10.22*
10.23
10.24
10.25
10.26
Credit Agreement, dated November 16, 2018, by and between the Company and OrbiMed Royalty Opportunities
II, LP (incorporated by reference to exhibit 10.22 to the Company’s Registration Statement on Form S-1 (File No.
333-234217), dated November 7, 2019)
Second Amended and Restated License, Product Development and Supply Umbrella Agreement, dated July 16,
2015, by and between the Company and Aroa Biosurgery Ltd. (incorporated by reference to exhibit 10.23 to the
Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019)
Amendment to Second Amended and Restated License, Product Development and Supply Umbrella Agreement,
dated November 26, 2015, by and between the Company and Aroa Biosurgery Ltd. (incorporated by reference to
exhibit 10.24 to the Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7,
2019)
Amendment to Second Amended and Restated License, Product Development and Supply Umbrella Agreement,
dated January 3, 2019, by and between the Company and Aroa Biosurgery Ltd. (incorporated by reference to
exhibit 10.25 to the Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7,
2019)
Addendum to the Second Amended and Restated License, Product Development and Supply Umbrella
Agreement, dated August 27, 2019, by and between the Company and Aroa Biosurgery Ltd. (filed herewith).
Lease between the Company and Liberty Property Limited Partnership, dated January 31, 2013 (incorporated by
reference to exhibit 10.26 to the Company’s Registration Statement on Form S-1 (File No. 333-234217), dated
November 7, 2019)
First Amendment to Lease between the Company and Liberty Property Partnership, dated June 19, 2014
(incorporated by reference to exhibit 10.27 to the Company’s Registration Statement on Form S-1 (File No. 333-
234217), dated November 7, 2019)
Second Amendment to Lease between the Company and WPT Land 2 LP (as successor in interest to Liberty
Property Limited Partnership), dated January 17, 2018 (incorporated by reference to exhibit 10.28 to the
Company’s Registration Statement on Form S-1 (File No. 333-234217), dated November 7, 2019)
Employment Agreement, dated January 17, 2020, by and between the Company and Peter Murphy (filed
herewith).
23.1 Consent of KPMG LLP (filed herewith).
31.1
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (furnished herewith).
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith).
31.2
32.1
32.2
101 INS XBRL Instance Document (filed herewith).
101 SCH XBRL Taxonomy Extension Schema Document (filed herewith).
101 CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101 DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101 LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101 PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
* Certain confidential portions (indicated by brackets and asterisks) have been omitted from this exhibit.
93
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly authorized in the Borough of Malvern,
Commonwealth of Pennsylvania, on the 30th day of March, 2020.
TELA BIO, INC.
By: /s/ ANTONY KOBLISH
Name: Antony Koblish
Title: President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature
Title
Date
/s/ ANTONY KOBLISH
Antony Koblish
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 30, 2020
/s/ NORA BRENNAN
Chief Financial Officer
Nora Brennan
(Principal Financial Officer and Principal
Accounting Officer)
March 30, 2020
/s/ KURT AZARBARZAN
Kurt Azarbarzin
/s/ VINCE BURGESS
Vince Burgess
/s/ RONALD ELLIS
Ronald Ellis
/s/ ASHLEY FRIEDMAN
Ashley Friedman
/s/ FEDERICA O’BRIEN
Federica O’Brien
/s/ ADELE OLIVA
Adele Oliva
/s/ MATT ZUGA
Matt Zuga
Chairman, Board of Directors
March 30, 2020
Director
Director
Director
Director
Director
Director
94
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
Exhibit 4.2
DESCRIPTION OF CAPITAL STOCK
TELA Bio, Inc. (the “Company”) has one class of securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s common stock, $0.001 par value
per share (“Common Stock”) is registered under Section 12(b) of the Exchange Act. The following
description of our Common Stock is a summary and does not purport to be complete. It is subject to and
qualified in its entirety by reference to our fourth amended and restated certificate of incorporation and our
second amended and restated bylaws, each of which is incorporated by reference as an exhibit to the
Annual Report on Form 10-K of which this Exhibit 4.2 is a part. We encourage you to read our fourth
amended and restated certificate of incorporation and our second amended and restated bylaws and the
applicable provisions of the Delaware General Corporation Law (“DGCL”), for additional information.
General
Our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.001 per share,
and 10,000,000 shares of preferred stock, par value $0.001 per share. All of our outstanding shares of
common stock are fully paid and nonassessable.
Common Stock
Voting Rights
Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of
the stockholders, including the election of directors. Our stockholders do not have cumulative voting rights
in the election of directors. Accordingly, holders of a majority of the voting shares are able to elect all of the
directors. In addition, the affirmative vote of holders of 66 /3% of the voting power of all of the then
outstanding voting stock is required to take certain actions, including amending certain provisions of our
fourth amended and restated certificate of incorporation, such as the provisions relating to amending our
second amended and restated bylaws, procedures for our stockholder meetings, the classified board,
director liability, and exclusive forum for proceedings.
Dividends
2
Subject to preferences that may be applicable to any then outstanding preferred stock, holders of our
common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of
directors out of legally available funds.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to
share ratably in the net assets legally available for distribution to stockholders after the payment of all of our
debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any
then outstanding shares of preferred stock.
Rights and Preferences
Holders of our common stock have no preemptive, conversion, subscription or other rights, and there are no
redemption or sinking fund provisions applicable to our common stock. The rights, preferences and
privileges of the holders of our common stock are subject to and may be adversely affected by the rights of
the holders of shares of any series of our preferred stock that we may designate in the future.
Preferred Stock
Our board of directors is authorized to direct us to issue shares of preferred stock in one or more series
without stockholder approval. Our board of directors has the discretion to determine the rights, preferences,
privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges
and liquidation preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock and determine its rights and
preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of
preferred stock, while providing flexibility in connection with possible acquisitions, future financings and
other corporate purposes, could have the effect of making it more difficult for a third-party to acquire, or
could discourage a third-party from seeking to acquire, a majority of our outstanding voting stock.
We have no present plans to issue any shares of preferred stock.
Warrants
We have warrants to purchase an aggregate of 88,556 shares of our Common Stock outstanding with an
exercise price of $28.65 per share. These warrants may be exercised at any time and from time to time, in
whole or in part.
Anti-Takeover Provisions of Delaware Law and Our Charter Documents
Our fourth amended and restated certificate of incorporation and our second amended and restated bylaws
contain provisions that could make the following transactions more difficult: acquisition of us by means of a
tender offer; acquisition of us by means of a proxy contest or otherwise; or removal of our incumbent
officers and directors. It is possible that these provisions could make it more difficult to accomplish or could
deter transactions that stockholders may otherwise consider to be in their best interest or in our best
interests, including transactions that might result in a premium over the market price for our shares.
These provisions, summarized below, are expected to discourage coercive takeover practices and
inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire
control of us to first negotiate with our board of directors. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation
of these proposals could result in an improvement of their terms.
Section 203 of the Delaware General Corporation Law
We are subject to Section 203 of the DGCL, which prohibits persons deemed "interested stockholders" from
engaging in a "business combination" with a publicly-held Delaware corporation for three years following the
date these persons become interested stockholders unless the business combination is, or the transaction
in which the person became an interested stockholder was, approved in a prescribed manner or another
prescribed exception applies. Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns, or within three years prior to the determination of interested stockholder status did
own, 15% or more of a corporation's voting stock. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. The
existence of this provision may have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, such as discouraging takeover attempts that might result in a premium
over the market price of our common stock.
Elimination of Stockholder Action by Written Consent
Our fourth amended and restated certificate of incorporation provides that all stockholder actions must be
effected at a duly called meeting of stockholders and not by consent in writing. A special meeting of
stockholders may be called only by a majority of our board of directors, the chair of our board of directors,
or our chief executive officer.
Undesignated Preferred Stock
The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue
preferred stock with voting or other rights or preferences that could impede the success of any attempt to
change control of us. These and other provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of our company.
2
Amendment of Charter Provisions
Our fourth amended and restated certificate of incorporation provides that the affirmative vote of holders of
at least 66 /3% of the voting power of all of the then outstanding shares of voting stock, voting as a single
class, are required to amend certain provisions of our fourth amended and restated certificate of
incorporation, including provisions relating to the size of the board, removal of directors, special meetings,
actions by written consent and cumulative voting. The affirmative vote of holders of at least 66 /3% of the
voting power of all of the then outstanding shares of voting stock, voting as a single class, are required to
amend or repeal our second amended and restated bylaws, although our second amended and restated
bylaws may be amended by a simple majority vote of our board of directors.
2
Classified Board; Election and Removal of Directors
Our fourth amended and restated certificate of incorporation provides that our board of directors is divided
into three classes, Class I, Class II and Class III, with each class serving staggered terms, and gives our
board of directors the exclusive right to expand the size of our board of directors and to elect directors to fill
a vacancy created by the expansion of the board of directors or the resignation, death or removal of a
director.
Choice of Forum
Our fourth amended and restated certificate of incorporation provides that, unless our board of directors
consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware
(or, if the Court of Chancery does not have jurisdiction, the United States District Court for the District of
Delaware) is the sole and exclusive forum for: (i) any derivative action or proceeding brought on behalf of
us; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or
other employees or agents to us or our stockholders; (iii) any action asserting a claim against us arising
pursuant to any provision of the DGCL or our fourth amended and restated certificate of incorporation and
our second amended and restated bylaws; or (iv) any action asserting a claim against us governed by the
internal affairs doctrine, except, in each case, (A) any claim as to which such court determines that there is
an indispensable party not subject to the jurisdiction of such court (and the indispensable party does not
consent to the personal jurisdiction of such court within 10 days following such determination), (B) which is
vested in the exclusive jurisdiction of a court or forum other than such court, or (C) for which such court
does not have subject matter jurisdiction.
Exhibit 10.22
[***] Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10). Such
excluded information is not material and would likely cause competitive harm to the registrant if publicly
disclosed.
ADDENDUM TO THE SECOND AMENDED AND RESTATED LICENSE, PRODUCT
DEVELOPMENT AND SUPPLY UMBRELLA AGREEMENT
TELA Bio, Inc. (“TELA Bio”) and Aroa Biosurgery Limited (“Aroa ’) entered into the Second Amended
and Restated License, Product Development and Supply Umbrella Agreement (the “Umbrella
Agreement”) on 16 July 2015.
1
This addendum to the Umbrella Agreement (“Addendum”), is made as of the 27 day of August, 2019,
and sets out the terms of the parties’ agreements with respect to the OviTex LPR Low Profile Robotic
Product (“LPR Product”).
th
1. TELA Bio and Aroa will, effective as of the date of this Addendum, enter into Product Exhibits 7
and 8 for the LPR Product (“LPR Product Exhibits”), for the purposes of the Umbrella Agreement.
2. Section 8.5(b) of the Umbrella Agreement shall be amended by adding the following paragraph at
the end of that Section as follows:
[***]
3.
[***]
4. For the avoidance of doubt, the Revenue Sharing Amount with respect to Net Sales of all of the
LPR Product (including the 12x18 LPR Product) shall be calculated using the 27% Revenue
Sharing Percentage and no provisions of this Addendum shall be deemed to amend such
calculation.
Capitalised terms used but not defined in this Addendum have the meanings given to those terms in
the Umbrella Agreement.
Except as agreed herein, the provisions of the Umbrella Agreement are not amended and continue to
be in full force and effect.
This Addendum shall be governed by and construed in accordance with the laws of the State of
Delaware, without regard to any conflict of law provisions.
This Addendum may be executed in separate counterparts, each of which shall be an original and all
of which taken together shall constitute one and the same agreement.
Executed signature pages to this Addendum may be delivered by facsimile or electronic mail and any
signature page so delivered shall be deemed to be an original.
IN WITNESS WHEREOF, each of the parties has caused this Addendum to be executed by its duly
authorized representative as of the date first above written.
TELA BIO, INC.
AROA BIOSURGERY LIMITED
By: /s/ Antony Koblish
Name: Antony Koblish
By: /s/ Brian Ward
Name: Brian Ward
Title: President & CEO
Title: Chief Executive Officer
EMPLOYMENT AGREEMENT
Exhibit 10.26
THIS EMPLOYMENT AGREEMENT (the "Agreement "), dated as of January 17, 2020 is made and entered into by and
between TELA Bio, Inc., a Delaware corporation "Company"), and Peter C. Murphy (the " Executive").
WHEREAS, the Company desires to employ Executive and Executive desires to be employed by the Company as the Chief
Commercial Officer on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and
intending to be bound hereby, the parties agree as follows:
I. Duration of Agreement. The Executive's term of employment by the Company under this Agreement shall commence on
January 27, 2020 (the " Effective Date"). Unless terminated or amended in writing by the parties, this Agreement will govern the
Executive's continued employment by the Company until that employment ceases in accordance with Section 5 hereof.
2. Position; Duties. The Executive will be employed as the Company's Chief Commercial Officer, reporting directly to the
Company’s President and Chief Executive Officer. In such position, the Executive shall perform such duties and shall have such
authority consistent with such position as may be assigned to him from time to time by the Company's President and Chief Executive
Officer. The Executive shall devote his best efforts and all of his business time and services to the Company and its Affiliates. The
Executive shall not, in any capacity, engage in other business activities or perform services for any other Person without the
prior written consent of the Board; provided, however, that without such consent, the Executive may engage in charitable or public
service, so long as such activities do not interfere with the Executive's performance of his duties and obligations hereunder.
3. Place of Performance. The Executive may perform his services hereunder at, among other locations, the principal
executive offices of the Company, the Executive's home office and/or during business related travel.
4. Compensation.
4.1. Base Salary. The Executive's annual salary will be $350,000 (the "Base Salary"). The Company shall pay the
Base Salary, less such withholdings and deductions as required by applicable law, to the Executive in accordance with the Company's
usual payroll practices as in effect from time to time. The Base Salary shall be reviewed on an annual basis by the Board and may
adjusted from time to time by the Board; provided, however, that any decrease in the Base Salary shall be made only if the Company
contemporaneously decreases the salaries of all senior executives and vice presidents of the Company and the Executive's Base Salary
is decreased by a percentage that is not greater than the average percentage by which the salaries of such other senior executives and
vice presidents are decreased.
4.2. Annual Bonus. Executive will be eligible to participate in an annual incentive program established by the
Board. Executive's annual incentive compensation under
such incentive program (the "Annual Bonus") shall be targeted at 50% of Executive's Base Salary (the "Target Bonus"). The Annual
Bonus payable under the incentive program shall be based on the achievement of performance goals to be determined by the Board.
Any Annual Bonus earned will be paid at the same time annual bonuses are paid to other executives of the Company generally, subject
to Executive's continuous employment through the date of payment, except as otherwise provided in Section 5.
4.3. Sign-On Equity Grant. On or following the Effective Date, subject to approval by the Compensation Committee
of the Board (the "Compensation Committee"), the Company will grant to Executive a stock option intended to constitute an incentive
stock option (to the maximum extent permitted by applicable law) to purchase 60,000 common shares of the Company's common
stock at a price per share equal to the fair market value on the date of grant, as determined by the Compensation Committee, subject to
Executive's continued employment through the date of grant (the (cid:0) Stock Option"). The Stock Option will be subject to the terms of
the Company's 2019 Equity Incentive Plan and an applicable award agreement providing for 25% of the shares subject to the Stock
Option being eligible to vest and become exercisable on the first anniversary of the date of grant and the remaining 75% of the shares
subject to the Stock Option being eligible to vest and become exercisable in equal monthly installments on the last day of each of the
36 calendar months immediately following the first anniversary of the grant date, subject in each case to Executive's continued
employment with the Company through the applicable vesting date.
4.4. Employee Benefits. The Executive will be eligible to participate in the employee benefit plans, policies or
arrangements maintained by the Company for its senior executive employees generally, subject to the terms and conditions of such
plans, policies or arrangements; provided, however, that this Agreement will not limit the Company's ability to amend, modify or
terminate such plans, policies or arrangements at any time for any reason.
4.5. Paid Time Off Subject to the terms and conditions of the Company's policy, as may be amended from time to
time, the Executive will be eligible for four weeks of paid time off each calendar year.
4.6. Reimbursement of Expense .The Company will pay or reimburse the Executive for all reasonable business
expenses incurred or paid by the Executive in the performance of his duties and responsibilities for the Company in accordance with
the business expense reimbursement policies of the Company, as may be amended from time to time.
5. Termination; Severance. The Executive's employment hereunder shall terminate (i) on the date specified in a
written notice from the Company that Executive's employment with the Company will be terminated, (ii) on the date not less than 30
days following written notice from the Executive that he is resigning from the Company, (iii) on the date of his death or (iv) on the
date of his Disability, as reasonably determined by the Company. Upon cessation of his employment for any reason, unless otherwise
consented to in writing by the Board, the Executive shall resign immediately from any and all officer, director and other positions he
then holds with the Company and/or its Affiliates. Upon any cessation of his employment with the Company, the Executive shall be
entitled only to such compensation and benefits as described in this Section 5.
-2-
5.1. Termination without Cause or upon Good Reason. If the Executive's employment by the Company ceases due
to a termination by the Company without Cause (as defined below) or a termination by the Executive for Good Reason (as defined
below), the Company shall:
Base Salary would otherwise be paid according to the Company's usual payroll practices;
5.1.1.pay to the Executive all accrued and unpaid Base Salary through the termination date at the time such
5.1.2.pay to the Executive any accrued and unpaid Annual Bonus for the year preceding the year in
which the termination date occurs at the time such Annual Bonus would otherwise be paid in accordance with Section 4.2, but in
no event later than March 15 of the year immediately following the year in which the termination date occurs;
5.1.3.make severance payments to the Executive in the form of continuation of the Executive's then current
Base Salary for a period of nine (9) months following the termination date (or, if the termination occurs within the Change of Control
Period, for a period of twelve (12) months following the termination date), in accordance with the Company's normal payroll practices
(such 9- or 12-month period, as applicable, the "Severance Period");
5.1.4.provide to the Executive a continuation of health, dental and vision insurance during the Severance
Period and, to the extent that the continuation of such insurance coverage is not permitted under the Company's insurance policies, pay
to the Executive a cash amount equal to the monthly cost of continued coverage under the Consolidated Omnibus Budget
Reconciliation Act(" COBRA"); and
5.1.5.in the event that the termination occurs on or within the Change of Control Period, (i) pay to the
Executive an amount equal to 100% of the Executive's then current Target Bonus, payable in the form of cash payments in regular
installments over the Severance Period in accordance with the Company's normal payroll practices, (ii) pay to the Executive a pro-
rated portion (based on the number of days Executive was employed by the Company during the calendar year in which the
termination date occurs) of the Annual Bonus that Executive would have earned for the year of termination had Executive remained
employed, as determined by the Board in good faith; provided that such pro-rated Annual Bonus shall be paid out at the same time
annual bonuses are paid generally to other executives of the Company for the relevant year, but in no event later than March 15
of
the year immediately following that in which the termination date occurs, and (iii) the vesting and, if applicable, exercisability shall be
accelerated (and, if applicable, all restrictions and rights of repurchase on such awards shall lapse) effective as of immediately prior to
the termination date with respect to l 00% of the shares subject to Executive's then outstanding equity awards; provided, however, that
for any awards that vest in whole or in part based on the attainment of performance-vesting conditions, only the service vesting
conditions (if any) of such award shall be deemed satisfied, while the performance vesting conditions of such award shall remain
eligible to be achieved based upon actual performance over the remainder of the applicable performance period.
th
-3-
5.1.6.Except as otherwise provided in this Section 5.1. all compensation and benefits will cease at the time
of the Executive's cessation of employment and the Company will have no further liability or obligation by reason of such cessation of
employment. The payments and benefits described in this Section S. l are in lieu of, and not in addition to, any other severance
arrangement maintained by the Company. Notwithstanding any provision of this Agreement, the payments described in Section 5.1
(other than Section 5.1. 1) are conditioned on:
(a) the Executive's execution and delivery to the Company of a general release of claims against the Company and its Affiliates
substantially in form and substance satisfactory to the Company (the "Release' ) and on such Release becoming irrevocable by the
60th day following the effective date of the Executive ' s cessation of employment; and (b) the Executive's continued compliance with
the provisions of the Restrictive Covenant Agreement (as defined below). Subject to Section 5.3 below, to the extent that any
payments under this Section 5.1 (other than Section 5.1.1) are delayed pending the Release becoming irrevocable, the delayed amounts
will be paid in a lump sum as soon as administratively practicable after the Release becomes irrevocable, provided that if the 60 day
period described above begins in one taxable year and ends in a second taxable year, the payment of the delayed amounts and the
commencement of the remaining payments shall not occur until the second taxable year.
5.2. Other Terminations. If the Executive' s employment with the Company ceases for any reason other than as
described in Section 5.1 above (including but not limited to
(a) termination by the Company for Cause, (b) resignation by the Executive without Good Reason, (c) termination as a result of
the Executive's Disability, or (d) the Executive's death), then the Company's obligation to the Executive will be limited solely to
the payment of accrued and unpaid Base Salary as described in Section 5.1.1 through the date of such cessation of employment and,
in the case of Executive's death or Disability, any Annual Bonus as described in Section 5.1.2. All compensation and benefits will
cease at the time of such cessation of employment and, except as otherwise provided by COBRA, the Company will have no further
liability or obligation by reason of such termination. The foregoing will not be construed to limit the Executive's right to payment or
reimbursement for claims incurred prior to the date of such termination under any insurance contract funding an employee benefit
plan, policy or arrangement of the Company in accordance with the terms of such insurance contract.
5.3. Compliance with Section 409A. Notwithstanding anything to the contrary in this Agreement, no portion of the
benefits or payments to be made under Section 5.1 will be payable until the Executive has a "separation from service" from the
Company within the meaning of Section 409A of the Code. In addition, to the extent compliance with the requirements of Treas.
Reg.§ l.409A-3(i)(2) (or any successor provision) is necessary to avoid the application of an additional tax under Section 409A of the
Code to payments due to the Executive upon or following his "separation from service", then notwithstanding any other provision of
this Agreement (or any otherwise applicable plan, policy, agreement or arrangement), any such payments that are otherwise due within
six months following the Executive's "separation from service" (taking into account the preceding sentence of this paragraph) will be
deferred without interest and paid to the Executive in a lump sum on the earlier of (i) the expiration of such six month period and (ii)
the date of Executive's death. This paragraph should not be construed to prevent the application of Treas. Reg. § 1.409A- l (b)(9)(iii)
(or any successor provision) to amounts payable hereunder. For purposes of the
-4-
application of Section 409A of the Code, each payment in a series of payments will be deemed a separate payment.
6. Restrictive Covenants. As a condition to the effectiveness of this Agreement, the Executive will execute and deliver to the
Company contemporaneously herewith a Confidential Information, Non-Competition and Assignment Agreement in the form attached
hereto as Exhibit A (the "Restrictive Covenant Agreement"). The Executive agrees to abide by the terms of the Restrictive Covenant
Agreement, which are hereby incorporated by reference into this Agreement. The Executive acknowledges that the terms of the
Restrictive Covenant Agreement shall continue to remain in full force and effect following the cessation of the Executive's
employment with the Company for any reason.
7. Certain Definitions. For purposes of this Agreement:
7.1. "Affiliate" means, with respect to any specified Person, any other Person that directly or indirectly, through one
or more intermediaries, Controls, is Controlled by, or is under common Control with, such specified Person, provided that, in any
event, any business in which the Company has any direct ownership interest shall be treated as an Affiliate of the Company.
7.2. "Cause" means (i) indictment, commission of, or the entry of a plea of guilty or no contest to, (A) a felony or
(B) any crime (other than a felony) that causes the Company or its Affiliates public disgrace or disrepute, or adversely affects the
Company's or its Affiliates' operations or financial performance or the relationship the Company has with its Affiliates, customers and
suppliers; (ii) commission of an act of gross negligence, willful misconduct, fraud, embezzlement, theft or material dishonesty with
respect to the Company or any of its Affiliates; (iii) a breach of the Executive's fiduciary duty of loyalty to the Company or any of its
Affiliates; (iv) alcohol abuse or use of controlled substances (other than prescription drugs taken in accordance with a physician's
prescription); (v) material breach of any agreement with the Company or any of its Affiliates, including this Agreement and the
Restrictive Covenant Agreement; (vi) a material breach of any Company policy regarding employment practices; or (vii) refusal to
perform the lawful directives of the Board, if not cured within 30 days following receipt by the Executive from the Company of
written notice thereof.
7.3. "Change of Control" means the occurrence, in a single transaction or in a series of related transactions, of any
one or more of the following events: (A) any sale, lease, exclusive license or other transfer of all or substantially all of the assets of
the Company and its Subsidiaries taken as a whole by means of a single transaction or series of related transactions, except where
such sale, lease, exclusive license or other transfer is to a wholly owned Subsidiary of the Company; or (B) any transaction or series
of transactions involving the Company, or its securities, whether by consolidation, merger, purchase of shares of capital stock or other
reorganization or combination or otherwise, in which the holders of the Company's outstanding shares of capital stock immediately
prior to such transaction or series of related transactions own, immediately after such transaction or series of related transactions,
securities representing fifty percent (50%) or less of the voting power of the entity surviving such transaction or series of related
transactions or the entity whose securities are issued pursuant to such transaction or series of related transactions.
-5-
Control and ending on the first anniversary of such date.
7.4. "Change of Control Period" means the period beginning on the date of the consummation of a Change in
7.5. "Code" means the Internal Revenue Code of 1986, as amended.
7.6. "Control" (including, with correlative meanings, the terms "Controlled by" and "under common Control with"),
as used with respect to any Person, means the direct or indirect possession of the power to direct or cause the direction of the
management or policies of such Person, whether through the ownership of voting securities, by contract or otherwise.
7.7. " Disability" means a condition entitling the Executive to benefits under the Company's long term disability
plan, policy or arrangement; provided, however, that if no such plan, policy or arrangement is then maintained by the Company and
applicable to the Executive, "Disability" will mean the Executive's inability to perform the essential duties of his position due to a
mental or physical condition (other than alcohol or substance abuse), with or without a reasonable accommodation. Termination as a
result of a Disability will not be construed as a termination by the Company "without Cause."
7.8. "Good Reason" means one or more of the following: (i) a material reduction in the Executive's title, duties,
authority or responsibilities, provided that a material reduction of the Executive's title, duties, authority or responsibilities hereunder
shall be deemed not to have occurred if, following a Change of Control, (A) if the Company remains a separate entity, Executive is the
most senior executive directly responsible for the Commercial functions of the Company, or (B) if the Company does not remain a
separate entity, Executive is the most senior executive directly responsible for the Commercial functions of the acquiring entity that are
comprised of the former business of the Company; (ii) a material breach of this Agreement by the Company; (iii) a material reduction
in Base Salary or Target Bonus opportunity by the Company to the Executive that is not in accordance with Section 4.1 and to which
the Executive has not provided written consent; or (iv) any requirement following a Change of Control that the Executive be based 50
or more miles from the facility where the Executive is based immediately prior to the Change of Control. The notice by the Executive
of the condition constituting Good Reason under this Agreement shall be provided to the Company in writing within ninety (90) days
of the initial existence of the condition constituting Good Reason, the Company shall then have thirty (30) days after receipt of such
written notice to remedy the condition, and in the event the Company fails to remedy the condition, the Executive's resignation based
on such Good Reason must be effective within thirty (30) days after the expiration of such remedy period.
association, governmental entity, unincorporated entity or other entity.
7.9. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, joint venture,
7.10. "Subsidiary" means any corporation, limited liability company, partnership or other entity of which a majority
of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company.
8. Miscellaneous.
-6-
8.1. Cooperation. The Executive further agrees that, subject to reimbursement of his reasonable expenses, he will
cooperate fully with the Company and its counsel with respect to any matter (including litigation, investigations, or governmental
proceedings) in which the Executive was in any way involved during his employment with the Company. The Executive shall render
such cooperation in a timely manner on reasonable notice from the Company, so long as the Company exercises commercially
reasonable efforts to schedule and limit its need for the Executive's cooperation under this paragraph so as not to interfere with the
Executive's other personal and professional commitments.
8.2. Section 409A.
8.2.1.Notwithstanding anything herein to the contrary or otherwise, except to the extent any expense,
reimbursement or in-kind benefit provided to the Executive does not constitute a "deferral of compensation" within the meaning of
Section 409A of the Code, and its implementing regulations and guidance, (i) the amount of expenses eligible for reimbursement or in-
kind benefits provided to the Executive during any calendar year will not affect the amount of expenses eligible for reimbursement or
in-kind benefits provided to the Executive in any other calendar year, (ii) the reimbursements for expenses for which the Executive is
entitled to be reimbursed shall be made on or before the last day of the calendar year following the calendar year in which the
applicable expense is incurred and (iii) the right to payment or reimbursement or in-kind benefits hereunder may not be liquidated or
exchanged for any other benefit.
8.2.2.Anything to the contrary herein notwithstanding, all benefits or payments provided by the Company to
the Executive that would be deemed to constitute "nonqualified deferred compensation" within the meaning of Section 409A of the
Code are intended to comply with Section 409A of the Code. Notwithstanding anything in this Agreement to the contrary, distributions
may only be made under this Agreement upon an event and in a manner permitted by Section 409A of the Code or an applicable
exemption.
8.3. Section 280G. Notwithstanding any other provision of this Agreement, in the event that any payment or benefit
by the Company or otherwise to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the
terms of this Agreement or otherwise (all such payments and benefits, including the payments and benefits under Section 5 above,
being hereinafter referred to as the "Total Payments"), would be subject (in whole or in part) to the excise tax imposed by Section
4999 of the Code (the "Excise Tax"), then the Total Payments shall be reduced to the minimum extent necessary to avoid the
imposition of the Excise Tax on the Total Payments, but only if (i) the net amount of such Total Payments, as so reduced (and after
subtracting the net amount of federal, state and local income and employment taxes on such reduced Total Payments and after taking
into account the phase out of itemized deductions and personal exemptions attributable to such reduced Total Payments), is greater
than or equal to (ii) the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal,
state and local income and employment taxes on such Total Payments and the amount of the Excise Tax to which Executive would be
subject in respect of such unreduced Total Payments and after taking into account the phase out of itemized deductions and personal
exemptions attributable to such unreduced Total Payments). The reduction of the Total Payments contemplated in this Section 8.3 shall
be
-7-
implemented by determining the Parachute Payment Ratio (as defined below), as determined in good faith by the Company (or its
successor), for each Total Payment and then reducing the Total Payments in order beginning with the Total Payment with the highest
Parachute Payment Ratio. For Total Payments with the same Parachute Payment Ratio, such Total Payments shall be reduced based on
the time of payment of such Total Payments, with amounts having later payment dates being reduced first. For Total Payments with the
same Parachute Payment Ratio and the same time of payment, such Total Payments shall be reduced on a pro rata basis (but not below
zero) prior to reducing Total Payments with a lower Parachute Payment Ratio. For purposes hereof, the term' Parachute Payment
Ratio" shall mean a fraction, (x) the numerator of which is the value of the applicable Total Payment (as calculated for purposes of
Section 2800 of the Code), and (y) the denominator of which is the intrinsic (i.e., economic) value of such Total Payment.
8.4. Other Agreements. The Executive represents and warrants to the Company that there are no restrictions,
agreements, including but not limited to confidentiality, non-compete, invention assignment, or consulting agreements, or
understandings whatsoever to which he is a party that would prevent or make unlawful his execution of this Agreement, that would be
inconsistent or in conflict with this Agreement or the Executive's obligations hereunder, or that would otherwise prevent, limit or
impair the performance by the Executive of his duties under this Agreement.
8.5. Successors and Assigns. The Company may assign this Agreement to any Affiliate or to any successor to its
assets and business by means of liquidation, dissolution, merger, sale of assets or otherwise. Upon such assignment, the rights and
obligations of the Company hereunder shall become the rights and obligations of such Affiliate or successor. For avoidance of doubt, a
termination of the Executive's employment by the Company in connection with a permitted assignment of the Company's rights and
obligations under this Agreement is not a termination "without Cause" so long as the assignee offers employment to the Executive
substantially on the terms herein specified (without regard to whether the Executive accepts employment with the assignee). The rights
and duties of the Executive hereunder are personal to Executive and may not be assigned by him.
8.6. Governing Law and Enforcement. This Agreement will be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania, without regard to the principles of conflicts of laws. Any legal proceeding arising out of
or relating to this Agreement will be instituted in a state or federal court in the Commonwealth of Pennsylvania, and the Executive and
the Company hereby consent to the personal and exclusive jurisdiction of such court(s) and hereby waive any objection(s) that they
may have to personal jurisdiction, the laying of venue of any such proceeding and any claim or defense of inconvenient forum.
8.7. Waivers. The waiver by either party of any right hereunder or of any breach by the other party will not be
deemed a waiver of any other right hereunder or of any other breach by the other party. No waiver will be deemed to have occurred
unless set forth in writing. No waiver will constitute a continuing waiver unless specifically stated, and any waiver will operate only as
to the specific term or condition waived.
-8-
8.8. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law. However, if any provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed,
construed and enforced as though the invalid, illegal or unenforceable provision had never been herein contained.
8.9. Survival. This Agreement will survive the cessation of the Executive's employment to the extent necessary to
fulfill the purposes and intent of this Agreement.
8.10. Notices. Any notice or communication required or permitted under this Agreement will be made in writing and
(a) sent by reputable overnight courier, (b) mailed by overnight U.S. express mail, return receipt requested or (c) sent by telefax. Any
notice or communication to the Executive will be sent to the address contained in his personnel file. Any notice or communication to
the Company will be sent to the Company's principal executive offices, to the attention of the Board. Notwithstanding the foregoing,
either party may change the address for notices or communications hereunder by providing written notice to the other in the manner
specified in this paragraph.
8.11. Withholding. All payments (or transfers of property) to the Executive will be subject to tax withholding to the
extent required by applicable law.
8.12. Section Headings. The headings of sections and paragraphs of this Agreement are inserted for convenience
only and will not in any way affect the meaning or construction of any provision of this Agreement.
8.13. Counterparts: Facsimile. This Agreement may be executed in multiple counterparts (including by facsimile
signature), each of which will be deemed to be an original, but all of which together will constitute but one and the same
instrument.
8.14. Entire Agreement: Amendments. This Agreement contains the entire agreement and understanding of the
parties hereto relating to the subject matter hereof, and supersedes all prior discussions, agreements and understandings of every nature
relating to that subject matter. This Agreement may not be changed or modified, except by an agreement in writing signed by each of
the parties hereto.
8.15. Policies. Executive acknowledges that Executive shall be subject to, and hereby agrees to abide by the terms
of, Company policies in effect from time to time, including, without limitation, any clawback or recoupment policies, securities trading
policies and stock ownership guidelines.
-9-
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the
Executive has executed this Agreement, in each case on the date first above written.
COMPANY:
TELA Bio, Inc.
By:
Name:
Title:
/s/ Antony Koblish
Antony Koblish
Chief Executive Officer
EXECUTIVE:
/s/ Peter C. Murphy
Peter C. Murphy
(Signature Page to Employment Agreement)
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
TELA Bio, Inc.:
We consent to the incorporation by reference in the registration statement (No. 333-235241) on Form S-8 of TELA Bio, Inc. of our report
dated March 30, 2020, with respect to the consolidated balance sheets of TELA Bio, Inc. as of December 31, 2019 and 2018, the related
consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ equity
(deficit), and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes, which report
appears in the December 31, 2019 annual report on Form 10-K of TELA Bio, Inc.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 30, 2020
CERTIFICATION
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.1
I, Antony Koblish, certify that:
1. I have reviewed this Form 10-K of TELA Bio, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 30, 2020
/s/ Antony Koblish
Antony Koblish
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.2
I, Nora Brennan, certify that:
1. I have reviewed this Form 10-K of TELA Bio, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 30, 2020
/s/ Nora Brennan
Nora Brennan
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.1
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), that: Antony Koblish, Chief Executive Officer of
TELA Bio, Inc. (the “Company”), hereby certifies that, to the best of his knowledge:
(1) The Company’s Annual Report on Form 10-K for the period ended December 31, 2019, to which this Certification is attached
as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange
Act; and
(2) The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 30, 2020
/s/ Antony Koblish
Antony Koblish
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.2
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), that: Nora Brennan, Chief Financial Officer of
TELA Bio, Inc. (the “Company”), hereby certifies that, to the best of her knowledge:
(1) The Company’s Annual Report on Form 10-K for the period ended December 31, 2019, to which this Certification is attached
as Exhibit 32.2 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange
Act; and
(2) The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 30, 2020
/s/ Nora Brennan
Nora Brennan
Chief Financial Officer
(Principal Financial Officer)