TELA US Equity☆

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 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 providing innovative soft-tissue reconstruction solutions that optimize clinical outcomes by prioritizing the preservation and restoration of the patient’s own anatomy. Our growing product portfolio is purposefully designed to leverage the patient’s natural healing response while minimizing long-term exposure to permanent synthetic materials. We are committed to delivering our advanced technologies with a strong economic value proposition to assist surgeons and institutions in providing next-generation soft-tissue repair solutions to more patients worldwide.

Our first portfolio of products, the OviTex Reinforced Tissue Matrix (“OviTex”), addresses unmet needs in hernia repair and abdominal wall reconstruction by combining the benefits of biologic matrices and polymer materials while minimizing their shortcomings, at a cost-effective price. Our OviTex products have received 510(k) clearance from the U.S. Food and Drug Administration (“FDA”), which clearance was obtained and is currently held by Aroa Biosurgery Ltd. (“Aroa”), our exclusive manufacturer and supplier. Interim results of our single arm, multicenter post-market clinical study, which we refer to as our BRAVO study, were recently published in the Journal of Clinical Medicine. The interim analysis of patients reaching 12-month follow-up suggests that OviTex is safe and clinically effective for treatment of ventral hernias. The recurrence rate was 2.7% at 12 months. Twenty-four month follow-up has been completed for all possible patients in our BRAVO study, and the recurrence rate remains below 5%. Final analysis is underway and full results will be presented in a future peer-reviewed publication. 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.

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We began commercialization of our OviTex products in the U.S. in July 2016. Our OviTex portfolio consists of multiple products for hernia repair and abdominal wall reconstruction, inguinal hernia repair and hiatal hernia repair. In addition, to address the significant increase in the number of robotic-assisted hernia repairs over the last several years, we have designed an OviTex product line for use in laparoscopic and robotic-assisted surgery (“OviTex LPR”), which we began commercializing 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. We commenced a limited launch in May 2019 and have gathered clinical feedback from our initial surgeon users. Based on this feedback, we expanded our commercial launch in June 2020 and expect to continue to expand our surgeon network. We have also engaged in discussions with the FDA regarding an Investigational Device Exemption protocol to study the safety and effectiveness of our OviTex PRS product for an indication in breast reconstruction surgery. The FDA has stated that a premarket approval, rather than a 510(k) clearance, will be required for such an indication.

We market our products through a single direct sales force, predominantly in the U.S., augmented by distributors in certain European countries. We have invested in our direct sales and marketing infrastructure to expand our presence and to promote awareness and adoption of our products. As of December 31, 2021, we had 46 sales territories in the United States. As part of our commercial strategy, we plan to continue to invest in our commercial organization by hiring additional account managers, clinical development specialists and administrative support staff to support and service new accounts for soft-tissue reconstruction procedures. Additionally, we believe we can enhance the productivity of our

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sales force by improving customer segmentation and targeting, leveraging digital channels to engage customers and utilizing engagement analytics to support development.

We announced, in November 2021, that we entered into a distribution agreement with Next Science Technologies Pty Limited (“Next Science”), a medical technology company, granting us the exclusive rights to sell and market Next Science’s proprietary antimicrobial surgical wash with XBIO® technology across the U.S. plastic reconstructive market. We will commence private label marketing of the solution for plastic surgery in 2022. Next Science’s XBIO Technology delivers an advanced option for surgical infection control by addressing the biofilms that make bacteria more resistant to traditional antimicrobial agents, disinfectants and host immune defenses. We believe the infection control solution will expand our service offerings and diversify our supplier base as we continue to create a soft-tissue restoration portfolio.

We are currently devoting research and development resources to develop additional versions of our OviTex hernia product lines, including self-adhering technology to further enhance product compatibility in robotic procedures, as well as additional versions of our OviTex PRS product lines. We are also working to develop new product features and designs for both our existing OviTex and OviTex PRS products. Additionally, we are exploring new packaging technology to increase the shelf life of our OviTex and OviTex PRS products. We intend to continue to make investments in research and development efforts to develop improvements and enhancements. We are also assessing strategic partnerships with medical device companies whereby we may enter into distribution, product development and/or licensing agreements for products complimentary to, or related to, existing and future products in our distribution channel, which could result in the payment of low single digit royalties or other product acquisition costs.

Our products are manufactured by Aroa at their FDA registered and ISO 13485 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.

The vast majority of our revenue to date has been generated by the sale of our OviTex products. Our revenue for the years ended December 31, 2021 and 2020 was $29.5 million and $18.2 million, respectively, an increase of $11.3 million, or 62%. Net loss increased from $28.8 million for the year ended December 31, 2020 to $33.3 million for the year ended December 31, 2021, an increase of $4.5 million, or 16%. We have not been profitable since inception and as of December 31, 2021, we had an accumulated deficit of $229.9 million. We expect to incur losses for the foreseeable future.

Business Update Regarding COVID-19

Our business, results of operations and commercial operations has been impacted by the ongoing COVID-19 pandemic and the development of variants of COVID-19. We continue to closely monitor developments related to the ongoing COVID-19 pandemic and our decisions will continue to be driven by the health and well-being of our employees, our customers, and their patients while maintaining operations to support our customers and their patients in the near-term. These developments include:

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We continue to closely monitor local, regional and global COVID-19 surges as well as new variants of the virus for any potential impact on procedures during the first quarter of 2022 and beyond.

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Components of Our Results of Operations

Revenue

Substantially all 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 increasing revenue from product sales due to our expanding customer base, although it is unclear at this point what long-term effect the ongoing COVID-19 pandemic will have on our ability to continue to generate revenue and expand our customer base.

Cost of Revenue

Cost of revenue primarily consists of the costs of licensed products, charges related to excess and obsolete inventory adjustments, current and potential royalties 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 although it is unclear at this point what long-term effect, if any, the ongoing COVID-19 pandemic will have on our product demand which could lead to additional charges to excess and obsolete inventory.

Amortization of Intangible Assets

Amortization of intangible assets relates to the amortization of capitalized milestone amounts paid or probable to be paid to Aroa related to license fees or commercialization rights after future economic benefit has been established for a product. These capitalized milestone amounts relate to regulatory clearances, the receipt of certain supply quantities of product, and amounts based upon aggregate net sales thresholds within a specified territory, and are amortized over the remaining useful life of the intellectual property.

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, current and potential royalties and excess and inventory obsolescence costs. Our gross profit may increase to the extent our revenue grows.

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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. It is unclear at this point, however, what long-term effect, if any, the ongoing COVID-19 pandemic will have on these expansion plans. We expect our sales and marketing expenses to 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 execute our growth initiatives and expand our business and headcount to support these initiatives. It is unclear at this point, however, what long-term effect, if any, the ongoing COVID-19 pandemic will have on these expansion plans. We expect our general and administrative expenses to 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 although it is unclear at this point what long-term effect, if any, the ongoing COVID-19 pandemic will have on these development plans. We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing of new product development initiatives.

Interest Expense

Interest expense consists of cash interest under our credit facilities and non-cash interest attributable to the amortization of final payment fees and deferred financing costs related to our indebtedness.

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 upon our IPO.

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Other (Expense) Income

Other (expense) income consists primarily of miscellaneous tax expenses and foreign currency exchange gains and losses offset by income earned on our cash and cash equivalents.

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Results of Operations

Comparison of the Year Ended December 31, 2021 and 2020

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31, ​ Change

​ ​ (in thousands, except percentages)

Amortization of intangible assets ​ 304 ​ 304 ​ — — ​

Gross margin ​ 64 % 62 % ​ ​ ​

Operating expenses: ​ ​ ​ ​ ​

Other (expense) income: ​ ​ ​ ​ ​ ​

Revenue

Revenue increased by $11.3 million, or 62%, to $29.5 million for the year ended December 31, 2021 from $18.2 million for the year ended December 31, 2020. 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 and stronger international sales. During the year ended December 31, 2021, we sold 7,516 units of OviTex compared to 4,794 units of OviTex during the year ended December 31, 2020, a 57% increase in unit sales volume. Additionally, we sold 1,260 units of OviTex PRS compared to 663 units during the year ended December 31, 2020, a 90% increase in unit sales volume.

Cost of Revenue

Cost of revenue (excluding amortization of intangible assets) increased by $3.7 million to $10.3 million for the year ended December 31, 2021 from $6.7 million for the year ended December 31, 2020. The increase in cost of revenue was primarily the result of an increase in products purchased to support our higher unit sales and an increase in our provision for excess and obsolete inventory.

Amortization of Intangible Assets

Amortization of intangible assets was $0.3 million for both the years ended December 31, 2021 and 2020.

Gross Margin

Gross margin increased to 64% for the year ended December 31, 2021 from 62% for the year ended December 31, 2020. The increase was primarily due to a lower expense recognized for excess and obsolete inventory adjustments as a percentage of revenue due to longer shelf life and inventory management during the year ended December 31, 2021 as compared to the prior year.

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Sales and Marketing

Sales and marketing expenses increased by $7.0 million, or 31%, to $29.1 million for the year ended December 31, 2021 from $22.1 million for the year ended December 31, 2020. The increase was primarily due to higher salaries, benefits and commission costs as a result of an expansion of our commercialization activities, including an increase in headcount and increased travel and consulting expenses. The prior year period also included cost containment actions taken in response to the COVID-19 pandemic including salary reductions and reduced traveling which were not repeated in 2021.

General and Administrative

General and administrative expenses increased by $2.3 million, or 23%, to $12.5 million for the year ended December 31, 2021 from $10.1 million for the year ended December 31, 2020. The increase was primarily due to higher salaries and benefits, increased professional, consulting and legal fees, higher stock-based compensation expense, increased insurance expense, higher recruiting fees and additional facilities expenses. The prior year period also included cost containment actions taken in response to the COVID-19 pandemic including salary reductions which were not repeated in 2021.

Research and Development

Research and development expenses increased by $2.5 million, or 58%, to $6.7 million for the year ended December 31, 2021 from $4.3 million for the year ended December 31, 2020. The increase in research and development expense primarily relates to a non-cash stock-based compensation expense of $0.7 million related to amendments to certain equity award agreements following the death of our co-founder and former Chief Medical Officer, higher salaries and benefits, increased testing and development expenses and increased consulting expenses. The prior year period also included cost containment actions taken in response to the COVID-19 pandemic including salary reductions which were not repeated in 2021.

Interest Expense

Interest expense was $3.6 million for both the years ended December 31, 2021 and 2020.

Other (Expense) Income

Other (expense) income decreased by $0.3 million, or 607%, to an expense of $0.2 million for the year ended December 31, 2021 primarily due to a decrease in interest income.

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Comparison of the Year Ended December 31, 2020 and 2019

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31, ​ Change

​ ​ (in thousands, except percentages)

Amortization of intangible assets ​ 304 ​ 304 ​ — — ​

Gross margin ​ 62 % 60 % ​

Operating expenses: ​ ​ ​ ​

Other (expense) income: ​ ​ ​ ​ ​

Revenue

Revenue increased by $2.8 million, or 18%, to $18.2 million for the year ended December 31, 2020 from $15.4 million for the year ended December 31, 2019. 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. During the year ended December 31, 2020, we sold 4,794 units of OviTex compared to 3,779 units of OviTex during the year ended December 31, 2019, a 27% increase in unit sales volume. Additionally, we sold 663 units of OviTex PRS compared to 240 units during the year ended December 31, 2019, a 176% increase in unit sales volume.

Cost of Revenue

Cost of revenue (excluding amortization of intangible assets) increased by $0.8 million to $6.7 million for the year ended December 31, 2020 from $5.9 million for the year ended December 31, 2019. 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 provision for excess and obsolete inventory.

Amortization of Intangible Assets

Amortization of intangible assets was $0.3 million for both the years ended December 31, 2020 and 2019.

Gross Margin

Gross margin increased to 62% for the year ended December 31, 2020 from 60% for the year ended December 31, 2019. The increase was primarily due to a lower expense recognized for excess and obsolete inventory adjustments as a percentage of revenue due to longer shelf life and inventory management during the year ended December 31, 2020 as compared to the prior year.

Sales and Marketing

Sales and marketing expenses increased by $4.1 million, or 22%, to $22.1 million for the year ended December 31, 2020 from $18.1 million for the year ended December 31, 2019. The increase was primarily due to higher salaries, benefits

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and commission costs of $4.5 million as a result of an expansion of our commercialization activities, including an increase in headcount, which was partially offset by lower travel and consulting expenses and other cost containment actions taken in response to the ongoing COVID-19 pandemic.

General and Administrative

General and administrative expenses increased by $3.9 million, or 63%, to $10.1 million for the year ended December 31, 2020 from $6.2 million for the year ended December 31, 2019. The increase was primarily due to increased insurance costs of $1.7 million, increased professional, legal and consulting fees of $0.9 million, higher stock-based compensation expense of $0.8 million and higher salaries and benefits costs of $0.3 million which was partially offset by the cost containment actions taken in response to the ongoing COVID-19 pandemic.

Research and Development

Research and development expenses increased by $0.1 million, or 3%, to $4.3 million for the year ended December 31, 2020 from $4.2 million for the year ended December 31, 2019. The increase in research and development expense primarily relates to increased salaries and benefits offset by a decrease in licensing payments.

Interest Expense

Interest expense was $3.6 million for both the years ended December 31, 2020 and 2019.

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.

Other Income

Other income decreased by $0.3 million, or 87%, to $45,000 for the year ended December 31, 2020 from $0.4 million for the year ended December 31, 2019 due to a decrease in interest income as a result of the decrease in short-term investments.

Liquidity and Capital Resources

Overview

As of December 31, 2021, we had cash and cash equivalents of $43.9 million, working capital of $48.5 million and an accumulated deficit of $229.9 million. As of December 31, 2020, we had cash and cash equivalents of $74.4 million, working capital of $76.6 million and an accumulated deficit of $196.7 million.

We have incurred operating losses since our inception, and we anticipate that our operating losses will continue in the near term as we seek to invest in our sales and marketing initiatives to support our growth in existing and new markets and in additional research and development activities. As of December 31, 2021, we had $30.0 million of borrowings outstanding under our credit facility (the “OrbiMed Credit Facility”). This credit facility matures in November 2023 and 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 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. In December 2020, we entered into an Equity Distribution Agreement (the “Equity Agreement”) with Piper Sandler & Co (the “Agent”) in connection with the establishment of an

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at-the-market offering program under which we may sell up to an aggregate of $50.0 million of shares of our common stock, from time to time through the Agent, as sales agent. No sales were made under the Equity Agreement during the years ended December 31, 2021 or 2020. 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 because of market volatility following the COVID-19 pandemic. 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:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

Cash (used in) provided by investing activities ​ (627) ​ 9,122 ​ (11,981)

Effect of exchange rate on cash ​ 11 ​ 17 ​ (4)

Operating Activities

During the year ended December 31, 2021, we used $30.4 million of cash in operating activities, resulting from our net loss of $33.3 million and the change in operating assets and liabilities of $3.5 million offset by non-cash charges of $6.3 million. Our non-cash charges were comprised of stock-based compensation expense of $3.7 million, our excess and obsolete inventory charge of $1.4 million, interest expense of $0.7 million and depreciation and amortization expense of $0.5 million. The change in our operating assets and liabilities was primarily related to an increase in our inventory and prepaid expenses and other assets partially offset by increases in accrued expenses and other current and long-term liabilities.

During the year ended December 31, 2020, we used $24.5 million of cash in operating activities, resulting from our net loss of $28.8 million and the change in operating assets and liabilities of $0.2 million offset by non-cash charges of $4.5 million. Our non-cash charges were comprised of stock-based compensation expense of $2.1 million, our excess and obsolete inventory charge of $1.3 million, interest expense of $0.6 million and depreciation and amortization expense of $0.5 million.

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 and depreciation and amortization expense of $0.6 million. The change in our operating assets was primarily related to increases in accounts receivable, inventory and prepaid expenses and other assets.

Investing Activities

During the year ended December 31, 2021, cash used in investing activities was $0.6 million consisting of purchases of property and equipment.

During the year ended December 31, 2020, cash provided by investing activities was $9.1 million consisting primarily of the proceeds from the sale and maturity of short-term investments.

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During the year ended December 31, 2019, cash used in investing activities was $12.0 million consisting primarily from the purchase of short-term investments of $9.3 million and payments made for our intangible assets of $2.5 million.

Financing Activities

During the year ended December 31, 2021, cash provided by financing activities was $0.6 million, consisting primarily of the proceeds received from the exercise of stock options.

During the year ended December 31, 2020, cash provided by financing activities was $44.4 million, consisting primarily of the net proceeds received from a follow-on public offering of our common stock.

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.

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. 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 events, (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 may become obligated to immediately pay all outstanding principal and interest 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 after the third anniversary. We are also required to pay an exit fee at the time of maturity or prepayment event equal to 10% of all principal borrowings and an administration fee equal to $10,000 on the last day of each quarter until all obligations have been paid in full.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2021 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Payments due by Period

​ ​ ​ ​ ​ Less than ​ ​ ​ ​ ​ ​ ​ More than

(in thousands) Total 1 year 1 to 3 years 3 to 5 years 5 years

Principal payments on long-term debt ​ $ 30,000 ​ $ — ​ $ 30,000 ​ $ — ​ $ —

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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 and accounts receivable. We limit our credit risk associated with cash equivalents by placing investments in highly-rated money market funds. 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 of December 31, 2021, LIBOR was below 1.0%. Therefore, a 1.0% increase in LIBOR would not increase the annual interest payments.

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 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.

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Revenue Recognition

We account for revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). 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.

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.

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-22 hereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

​

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the

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reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2021.

Management’s Report on Internal Control Over Financial Reporting

​

Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

​

Internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are achieved. Further, the design of a control system must be balanced against resource constraints, and therefore the benefits of controls must be considered relative to their costs. Given the inherent limitations in all systems of controls, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a 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 management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Accordingly, given the inherent limitations in a cost-effective system of internal control, financial statement misstatements due to error or fraud may occur and may not be detected. Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance of achieving their objectives. We conduct periodic evaluations of our systems of controls to enhance, where necessary, our control policies and procedures.

​

Management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting. Based on its evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2021.

​

Changes in Internal Control over Financial Reporting

​

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During the fourth quarter ended December 31, 2021, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM9B.OTHER INFORMATION

The disclosure set forth below is provided in lieu of a separate Form 8-K filing pursuant to Item 5.02 of Form 8-K.

On March 22, 2022, the Board approved a reduced work schedule for E. Skott Greenhalgh, Ph.D., the Chief Technology Officer of the Company, effective immediately. Dr. Greenhalgh’s annual base salary was reduced from $360,500 to $90,125. Subject to the conditions and provisions of the Company’s equity incentive plans, equity awards held by Dr. Greenhalgh will continue to vest and become exercisable according to their respective terms.

ITEM9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.

​

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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 2022 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 2022 annual meeting of stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER 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 2022 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 2022 annual meeting of stockholders.

ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

Our independent registered public accounting firm is KPMG LLP, Philadelphia, PA, Auditor Firm ID: 185.

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 2022 annual meeting of stockholders.

PART IV

ITEM 15.EXHIBITS AND 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 96 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.

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ITEM 16.FORM 10-K SUMMARY

None.

​

​

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TELA BIO, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

​ ​

​ Page

​ ​

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets F-3

Consolidated Statements of Operations and Comprehensive Loss F-4

Consolidated Statements of Cash Flows F-6

Notes to Consolidated Financial Statements F-7

​

​

​

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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 subsidiary (the Company) as of December 31, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, 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 (United States) (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

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 auditor since 2013.

Philadelphia, Pennsylvania

March 23, 2022

​

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TELA Bio, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

c ​ ​ ​ ​ ​ ​

​ ​ December 31,

Assets ​ ​

Current assets: ​ ​

Prepaid expenses and other assets ​ 3,232 ​ 2,241

Property and equipment, net ​ 1,186 ​ 626

​ ​ ​ ​ ​ ​ ​

Liabilities and stockholders’ equity ​ ​

Current liabilities: ​ ​

Accrued expenses and other current liabilities ​ 8,161 ​ 5,953

Long‐term debt with related party ​ 31,491 ​ 30,827

Other long‐term liabilities ​ 380 ​ —

​ ​ ​ ​ ​ ​ ​

Commitments and contingencies (Note 11) ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​

Stockholders’ equity: ​ ​

Accumulated other comprehensive loss ​ (52) ​ (71)

Total liabilities and stockholders’ equity ​ $ 62,544 ​ $ 86,458

​

See accompanying notes to consolidated financial statements.

​

​

​

​

​

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TELA Bio, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​

​ Year ended December 31,

Amortization of intangible assets 304 ​ 304 ​ 304

Operating expenses: ​ ​

Other (expense) income: ​ ​

Change in fair value of preferred stock warrant liability ​ — ​ ​ — ​ ​ (5)

Net loss per common share, basic and diluted $ (2.30) ​ $ (2.23) ​ $ (17.10)

Comprehensive loss: ​ ​ ​ ​ ​

Foreign currency translation adjustment 19 ​ ​ (52) ​ (15)

Unrealized loss on short-term investments ​ — ​ ​ — ​ ​ (4)

​

See accompanying notes to consolidated financial statements.

​

​

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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 ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ other ​ ​ ​ ​ ​ ​

​ Shares Amount Shares Amount Shares Amount capital income (loss) deficit Total

Exercise of stock options ​ — ​ — — ​ — ​ 2,527 ​ — ​ 14 ​ — ​ — ​ ​ 14

Stock‐based compensation expense ​ — ​ — — ​ — ​ — ​ — ​ 457 ​ — ​ — ​ 457

Net loss ​ — ​ — — ​ — ​ — ​ — ​ — ​ — ​ (22,425) ​ (22,425)

Exercise of stock options — ​ — — ​ — ​ 27,783 ​ — ​ 175 ​ — ​ — ​ 175

Stock‐based compensation expense — ​ — — ​ — ​ — ​ — ​ 1,976 ​ — ​ — ​ 1,976

Net loss — ​ — — ​ — ​ — ​ — ​ — ​ — ​ (28,794) ​ (28,794)

Exercise of stock options — ​ — — ​ — ​ 77,154 ​ 1 ​ 546 ​ — ​ — ​ 547

Foreign currency translation adjustment — ​ — — ​ — ​ — ​ — ​ — ​ 19 ​ — ​ 19

Net loss — ​ — — ​ — ​ — ​ — ​ — ​ — ​ (33,276) ​ (33,276)

​

See accompanying notes to consolidated financial statements.

​

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TELA Bio, Inc.

Consolidated Statements of Cash Flows

(In thousands)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year ended December 31,

Cash flows from operating activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Amortization of intangible assets ​ 304 ​ 304 ​ 304

Inventory excess and obsolescence charge ​ 1,439 ​ 1,327 ​ 1,591

Change in fair value of warrants ​ ​ — ​ ​ — ​ ​ 5

Loss on disposal of fixed assets ​ ​ 2 ​ ​ — ​ ​ —

Change in operating assets and liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Prepaid expenses and other assets ​ (992) ​ 66 ​ (1,977)

Foreign currency remeasurement loss ​ ​ 12 ​ ​ (70) ​ ​ (21)

Cash flows from investing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Purchases of short-term investments ​ ​ — ​ ​ — ​ ​ (9,284)

Payment for intangible asset ​ — ​ — ​ (2,500)

Purchase of property and equipment ​ (627) ​ (167) ​ (197)

Net cash (used in) provided by investing activities ​ (627) ​ 9,122 ​ (11,981)

Cash flows from financing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Payment of initial public offering costs ​ ​ — ​ ​ (522) ​ ​ —

Proceeds from exercise of stock options ​ 547 ​ 175 ​ 14

Effect of exchange rate on cash and cash equivalents ​ 11 ​ 17 ​ (4)

Supplemental disclosure of cash flow information: ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash paid during the period for interest ​ $ 2,933 ​ $ 2,980 ​ $ 3,086

Accretion of redeemable convertible preferred stock ​ $ — ​ $ — ​ $ 7,783

Conversion of outstanding preferred stock warrants ​ $ — ​ $ — ​ $ 1,645

Property and equipment in accounts payable ​ $ 166 ​ $ 3 ​ $ —

Issuance of common stock for early exercised stock options ​ $ 1 ​ $ 3 ​ $ 4

Unrealized loss on short-term investments ​ $ — ​ $ — ​ $ 4

​

See accompanying notes to consolidated financial statements.

​

​

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TELA BIO, INC.

Notes to Consolidated Financial Statements

(1) Background

TELA Bio, Inc. (the “Company”) was incorporated in the state of Delaware on April 17, 2012 and wholly owns TELA Bio Limited, a company incorporated in the United Kingdom. The Company is commercial-stage medical technology company focused on providing innovation soft-tissue reconstruction solutions that optimize clinical outcomes by prioritizing the preservation and restoration of the patient’s own anatomy. OviTex Reinforced Tissue Matrix (“OviTex”), the Company’s first portfolio of products, addresses unmet needs in hernia repair and abdominal wall reconstruction by combining the benefits of biologic matrices and polymer materials while minimizing their shortcomings, at a cost-effective price. OviTex PRS Reinforced Tissue Matrix (“OviTex PRS”), the Company’s second portfolio of products, addresses unmet needs in plastic and reconstructive surgery. The Company’s principal corporate office and research facility is located in Malvern, Pennsylvania.

The Company has been impacted by the pandemic resulting from the novel coronavirus and the disease it causes, including variants thereof (“COVID-19”). To date, among other impacts on its business related to the pandemic, physicians and their patients are required by state mandates, or are choosing to defer elective surgery procedures in which its products otherwise would be used. There remains uncertainty and lack of visibility regarding the Company’s near-term revenue growth prospects and product development plans due to the rapidly evolving environment and continued uncertainties resulting from the ongoing COVID-19 pandemic. While certain regions are experiencing a reduction in COVID-19 cases and a relaxing of governmental restrictions, at this time, the full extent of the impact of the ongoing COVID-19 pandemic on its business, results of operations and financial condition, including revenue, expenses, manufacturing capability, supply chain integrity, research and development costs and employee-related compensation, will depend on future developments that are highly uncertain, including new information that may emerge concerning COVID-19 and the actions taken to mitigate the spread of or treat COVID-19, the emergence of new variants of COVID-19, as well as the economic impact on local, regional, national and international customers and markets.

(2) Risks and Liquidity

The Company’s operations to date have focused on commercializing products, developing and acquiring technology and assets, business planning, raising capital and organization and staffing. The Company has incurred recurring losses and negative cash flows from operations since inception and has an accumulated deficit of $229.9 million as of December 31, 2021. The Company anticipates incurring additional losses until such time, if ever, it can generate sufficient revenue from its products to cover its expenses.

The operations of the Company are subject to certain risks and uncertainties including, among others, uncertainty of product development, the impact of COVID-19 and the development of any variants, on the business, ongoing economic uncertainty, including as a result of geopolitical factors such as hostilities and the conflict between Russia and Ukraine, technological uncertainty, commercial acceptance of any developed products, alternative competing technologies, dependence on collaborative partners, uncertainty regarding patents and proprietary rights, comprehensive government regulations, and dependence on key personnel.

​

(3) Summary of Significant Accounting Policies

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.

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TELA BIO, INC.

Notes to Consolidated Financial Statements (continued)

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 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 and cash equivalents. The Company places its cash with high-credit-quality financial institutions and primarily invests in money market funds. 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 Biosurgery Ltd. (“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 based on quoted market prices.

Inventory

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, 2021 and 2020, the Company had $1.7 million and $1.4 million, respectively, in finished goods 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.

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TELA BIO, INC.

Notes to Consolidated Financial Statements (continued)

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 2021, 2020 and 2019, the Company recorded $0.3 million of amortization expense in each year related to intangible assets. At December 31, 2021, the remaining life of intangible assets was 7.6 years. The Company anticipates recognizing amortization expense of $0.3million for the nextfiveyears and $0.8 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 years ended December 31, 2021, 2020 or 2019.

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.

Revenue Recognition

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

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

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

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TELA BIO, INC.

Notes to Consolidated Financial Statements (continued)

Payment terms with customers do not exceed one year and, therefore, the Company does not account for a financing component in 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):

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year ended December 31,

​

Sales outside of the U.S. were immaterial for the years ended December 31, 2021, 2020 and 2019.

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 well as costs incurred with Aroa under development agreements related to technology transfer, laboratory materials and supplies. 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 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.

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TELA BIO, INC.

Notes to Consolidated Financial Statements (continued)

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 income tax expense.

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 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. All outstanding warrants to purchase shares of preferred stock were converted into warrants to purchase shares of common stock after our IPO.

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:

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TELA BIO, INC.

Notes to Consolidated Financial Statements (continued)

The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020 (in thousands):

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Fair value measurement at reporting date using

​ ​ Quoted prices in ​ ​ ​ ​ ​ ​

​ ​ active markets ​ Significant other ​ Significant

​ ​ for identical ​ observable ​ unobservable

​ ​ assets ​ inputs ​ inputs

​ (Level 1) (Level 2) (Level 3)

December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash equivalents – money market fund ​ $ 41,396 ​ $ — ​ $ —

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

December 31, 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash equivalents – money market fund ​ $ 72,889 ​ $ — ​ $ —

​

A rollforward of the warrant liability (Level 3 measurement) was as follows (in thousands):

​

​ ​ ​ ​

Change in fair value of warrants ​ ​ 5

Conversion into common stock warrants ​ ​ (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:

​

​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ Convertible ​ ​ ​

​ ​ MidCap Credit ​ promissory ​ ​ ​

​ Facility notes Notes payable

Expected dividend yield — — — ​

Remaining contractual term in years 8.4 7.2 7.4 ​

​

Net loss per share

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.

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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, 2021, 2020 and 2019, as they would be antidilutive.

​

​ ​ ​ ​ ​ ​ ​

​ ​ Year ended December 31,

Unvested restricted stock units ​ 163,043 ​ — ​ —

​

Recently Issued Accounting Pronouncements

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

In February 2016, the FASB issued ASU No. 2016-02, Leases, 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, 2022, with early adoption permitted. The Company plans to adopt this standard on January 1, 2022 and anticipates the recognition of a right-of-use asset of approximately $1.2 million to $1.6 million and a lease liability of approximately $1.5 million to $1.9 million. The Company is continuing its assessment of potential changes to its disclosures under the standard.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This guidance applies to all entities and aims to reduce the complexity of tax accounting standards while enhancing reporting disclosures. This guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein. The adoption of this guidance did not have any impact on the Company’s consolidated financial statements and related disclosures.

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TELA BIO, INC.

Notes to Consolidated Financial Statements (continued)

(4) Property and Equipment

Property and equipment consisted of the following (in thousands):

​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ December 31,

Asset description Estimated useful lives 2021 2020

Furniture and fixtures 5 Years ​ 242 ​ 118

Computer equipment and software 3 Years ​ 468 ​ 577

Leasehold improvements Lesser of useful life or lease term ​ 1,881 ​ 1,360

Less accumulated depreciation and amortization ​ (3,757) ​ (3,733)

Property and equipment, net ​ $ 1,186 ​ $ 626

​

The cost of property and equipment at both December 31, 2021 and 2020 includes $0.2 million of equipment located at Aroa. Depreciation expense was $0.2 million, $0.2 million and $0.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.

(5) Accrued Expenses and Other Current Liabilities

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

​ ​ ​ ​ ​ ​ ​

​ ​ December 31,

Compensation and related benefits ​ $ 4,976 ​ $ 3,666

Interest ​ — ​ 40

Third-party and professional fees ​ 2,233 ​ 1,626

Amounts due to Aroa ​ ​ 842 ​ ​ 498

Research and development expenses ​ ​ 31 ​ ​ 7

Total accrued expenses and other current liabilities ​ $ 8,161 ​ $ 5,953

​

​

(6) Debt

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

​ ​ ​ ​ ​ ​ ​

​ ​ December 31,

OrbiMed Term Loan (related party) ​ $ 30,000 ​ $ 30,000

Unamortized end of term charge and issuance costs ​ (1,509) ​ (2,173)

Long-term debt with related party ​ $ 31,491 ​ $ 30,827

​

OrbiMed Term Loan (Related Party)

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

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TELA BIO, INC.

Notes to Consolidated Financial Statements (continued)

consist of two tranches, a $30.0 million Tranche 1 (“Tranche 1”) and a $5.0 million Tranche 2 (“Tranche 2”). In November 2018, the Company borrowed $30.0 million of Tranche 1. 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 events, (xi) regulatory matters, (xii) and key contracts. In addition, the Company must maintain a minimum cash balance of $2.0 million. If an event of default occurs under the OrbiMed Credit Facility, the Company may become obligated to immediately pay all outstanding principal and interest 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 bears interest at a rate equal to 7.75% plus the greater of one-month LIBOR or 2.0%. At December 31, 2021, 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 each of 2021, 2020 and 2019 was $3.6 million.

(7) Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Public Stock Offerings

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. 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.

In June 2020, the Company completed a follow-on public offering in which the Company issued and sold 3,000,000 shares of its common stock at a public offering price of $16.00 per share. The Company received net proceeds of $44.7 million after deducting underwriting discounts, commissions and other offering expenses.

In December 2020, the Company entered into an Equity Distribution Agreement (the “Equity Agreement”) with Piper Sandler & Co (the “Agent”) in connection with the establishment of an at-the-market offering program under which it may sell up to an aggregate of $50.0 million of shares of the Company’s common stock, from time to time through the Agent as sales agent. No sales were made under the Equity Agreement during the years ended December 31, 2021 or 2020.

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TELA BIO, INC.

Notes to Consolidated Financial Statements (continued)

Preferred Stock

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 preferred stock 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 preferred stock.

Warrants

​

The Company had the following warrants outstanding at December 31, 2021:

​

​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ Exercise ​ Expiration

​ Outstanding ​ price dates

​

​

(8) Stock-Based Compensation

The Company has two equity incentive plans: the 2012 Stock Incentive Plan and the Amended and Restated 2019 Equity Incentive Plan. New awards can only be granted under the Amended and Restated 2019 Equity Incentive Plan (the “Plan”). At December 31, 2021, 1,299,218 shares were available for future issuances under the Plan. The Plan is subject to an annual increase, subject to prior approval by the Company’s board of directors, equal to the lesser of (i) 432,442 shares, (ii) 4% of the shares outstanding on the last day of the immediately preceding fiscal year and (iii) such smaller number of shares as determined by the board of directors. The Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units and/or stock appreciation rights to employees, directors, and other persons, as determined by the Company’s board of directors. The Company’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 ratably over the vesting period of the award. The Company recorded stock-based compensation expense in the following expense categories of its accompanying consolidated statements of operations (in thousands):

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year ended December 31,

Total stock‐based compensation ​ $ 3,661 ​ $ 2,058 ​ $ 457

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TELA BIO, INC.

Notes to Consolidated Financial Statements (continued)

The following table summarizes stock option activity for the Plan:

​

​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ Weighted

​ ​ ​ ​ ​ ​ ​ average

​ ​ ​ ​ Weighted ​ remaining

​ ​ Number of ​ average exercise ​ contractual term

​ shares price per share (years)

​

At December 31, 2021, the aggregate intrinsic value of outstanding options and exercisable options was $3.0 million and $2.8 million, respectively.

The 2012 Stock Incentive Plan provided the holders of stock options an election to early exercise prior to vesting. The Company had the right, but not the obligation, to repurchase early exercised options without transferring any appreciation to the employee if the employee terminates employment before the end of the original vesting period. The repurchase price is the lesser of the original exercise price or the then fair value of the common stock. At December 31, 2021, an immaterial amount of proceeds from early exercised options are recognized as a current liability in accrued expenses and other current liabilities in the accompanying consolidated balance sheet.

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

​

​ ​ ​

​ ​ Number of

​ shares

Early exercised 471

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TELA BIO, INC.

Notes to Consolidated Financial Statements (continued)