Good afternoon, ladies and gentlemen, and welcome to the TELA Bio Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. A question-and-answer session will follow the prepared remarks. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Louisa Smith from Gilmartin Group.

Thank you, Marvin, and good afternoon, everyone. Earlier today, TELA Bio released financial results for the second quarter of 2024. A copy of the press release is available on the company's website. Joining me on today's call are Tony Koblish, President and Chief Executive Officer; and Roberto Cuca, Chief Operating Officer and Chief Financial Officer. Before we begin, I'd like to remind you that during this conference call, the company may make projections and forward-looking statements regard future events. We encourage you to review the company's past and future filings with the SEC including, without limitation, the company's annual report on Form 10-K and quarterly reports on Form 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, statements regarding product development and pipeline opportunities, product potential, the impact of various macroeconomic conditions identified in our filings, changes in surgical procedure volumes, the regulatory environment, sales and marketing strategy is capital resources or operating performance. With that, I'd now like to turn the call over to Tony.

Thanks, Louisa, and good afternoon, everyone. Thank you for joining TELA Bio second quarter 2024 earnings call. During the call, I'll provide updates on our business and strategic initiatives, after which Roberto will elaborate further on Q2 results before we open the call up for questions. During the quarter, TELA faced some transient challenges that we were able to manage through and still grow revenue 11% to $16.1 million. Demand for our products remained strong in the second quarter, and we do not expect these adverse issues to persist into the second half of 2024. The biggest challenge in the quarter was a ransomware attack at our most recently added and consequently fastest-growing GPO customer that consists of approximately 150 separate hospitals. The customer detected the attack in the second week of May and resolved it two weeks later, but it appears that the return to normal operations may have taken a couple of additional weeks. As a result, this customer has substantially reduced surgeries for about a month of the quarter affecting usage of both our hernia and PRS products. We estimate that this negatively affected our revenues by $1.25 million to $1.75 million during the quarter. Separately, one of our largest single hospital customers in our most successful territory also experienced a similar but independent cybersecurity event during the quarter, which we believe reduced surgical volumes and adversely affected our sales by at least 250,000. Finally, like some other market participants, we saw some lightness in procedure volumes in the second quarter which was exacerbated in our case, by the departure via retirement or in one case, a death of several surgeons who are reliable users of our PRS product. We believe that these challenges were confined to the second quarter and sales in July bolstered this conclusion.…

Thanks, Tony. Revenue for the second quarter of 2024 grew 11% year-over-year to $16.1 million, with revenue from OviTex growing 11% and OviTex PRS growing 9% in the period. The double-digit growth was primarily driven by an increase in unit sales of products due to the addition of new customers, increased penetration within existing customer accounts and growing international sales under our expanded commercial organization. This is partially offset by a decrease in average selling prices caused by a shift in product mix as our strategy to more broadly penetrate the inguinal and minimally invasive hernia repair markets showed success. As Tony mentioned, there was one larger and a couple of smaller adverse dynamics effect in the quarter, but we do not expect to meaningfully affect revenue in the second half of 2024. Growth for the first half of 2024 was up 24% over the first half of 2023, reflecting more general commercial performance before the customer-focused adoptions in the second quarter. Gross margin was 69% for the second quarter compared to 70% in the prior year period. The decrease was primarily due to higher charges for excess and obsolete inventory as a percentage of revenue as a result of inventory purchases during the quarter. Sales and marketing expense was $16.7 million in the second quarter of 2024 compared to $14.6 million in the same period in 2023. This increase was mainly due to higher compensation costs as a result of our expanded commercial organization, increased travel expenses and a marketing distribution fee, which offset lower marketing expense. General and administrative expense was $3.6 million compared to $3.5 million in the same period of 2023. R&D expense was $2.3 million in the second quarter compared to $2.5 million in the prior year. The decrease is primarily due to lower study…

Thanks, Roberto. I'm pleased by the company's progress and resilience in the second quarter. and I'm excited by the enormous opportunity in front of us. I believe that TELA Bio has never been better positioned for success for several reasons. First, I've been very impressed by Greg's leadership of our seasoned commercial team so far, and I'm confident that he will do an excellent job in driving adoption of our portfolio of products. Second, we possess broad GPO coverage and have products that position us well for the ongoing shift to robotic hernia repair. Finally, and most importantly, our products offer patients and surgeons unparalleled clinical outcomes at a competitive price. We are confident that this combination of essential factors for success can drive solid growth for TELA for years to come. So, with that, I'll now ask Marvin to open the line for your questions. Please go ahead.

[Operator Instructions]. Our first question comes from the line of Frank Takkinen of Lake Street Capital. Your line is now open.

I was hoping to start with a follow-up on some of the cyber-attack commentary. Can you just help us understand a little bit better of what's really occurring at the account level when these cyber-attacks occurred? And really what I'm trying to understand is when this occurred, are these procedures in backlog? Were the physicians able to use a different mesh? Were they using no mesh? And kind of how does that lead into the confidence behind the guide and backlog and those types of things to think about the second half of the year?

Yes, Frank, I'll start that off. So, to the best of our understanding, what was happening is the patient records are basically getting held hostage. So, what that does is it creates a situation where to treat the patient, a lot of things that are done on the EMR are done by hand now. So, prescriptions, note dictation. I mean, you name it, every aspect of a surgical procedure is impacted. So, it makes the hospitals think deeply about which procedures they have to do and which procedures they don't have to do. From what we've heard, they've shipped patients off to other facilities. That's not great for us if we don't have those other facilities up and running yet, right, as part of our implementation. So, to the best of our knowledge, the attacks -- even the secondary attack outside of the GPO system that there may have been others, but that's the one -- those are the ones that affected us the most, were primarily tied to the patient medical records and sort of just locking up the hospital and their ability to function day in and day out.

Yes. And so, Frank, what I'd add is if you do some research, you'll see some accounts where the affected hospital system was redirecting ambulances to alternative hospitals. So, it's not to have them arrive at their emergency departments. So, for at least two weeks, they were doing very, very few procedures, if any. When they were able to lift the ransomware attack and regain access to their systems, they began getting up to speed somewhat slowly. It sounds like it took another couple of weeks before they were back where they were before. And so, the procedures that we are involved in were either delayed or redirected to other locations. As in the COVID-19 experience, we expect that probably the PRS type procedures were sent to other hospitals are difficult to reschedule, but that the hernia surgeries were simply delayed. We don't think there's going to be a big backlog. It's about a month worth of surgery and hernia repairs in particular, are rescheduled one approach other than to the biggest eventual hurt repairs is watchful waiting. So, you can't delay those for a month. Our expectation though is that as the hospital system gets up to speed as to the hospitals in COVID-19, we want to prioritize more remunerative surgeries before the less remunerated ones, which means that premium may take a little bit longer to get up to speed at those hospitals. All that said, we do have indications, particularly from the performance in July that this is something that's been isolated to the second quarter and that things are pretty close to back to normal. And added to that, the initiatives that Greg has kicked off and the morale that we see in our sales force as a result of all that work, we feel very strongly about being able to perform in the second half and recoup the lost procedures that we got in the second quarter.

I'm just going to add a little bit more, Frank, to that color. I mean, keep in mind, or if you recall, this GPO is super important to us, right? It's not the biggest, that's for sure. But the structure of the contract is the most favorable to us, right? Dual-source contract us and another player and that other player was not the market leader, right? So, the contract had not annualized yet over the year, and so it's also our fastest growing. So acutely painful for us.

Okay. That's helpful color. And I'll -- maybe I'll sneak two in, and I'll ask them both at the same time. How should we think about the split of revenue in Q3 versus Q4 to get to the guided range of $74.5 million to $76.5 million. And then how should we think about kind of a blended OviTex ASP with IHR now in the mix?

So, I'll start with the first question. So, we expect more of the revenue to be in the fourth quarter. If you think about the way -- what we think will be driving it, our ability to regain it is the initiatives that Greg is kicking off, and those have some ramping effects. So, you'll see more of an effect in the fourth quarter than the third quarter, although we expect to see it in both. As regards ASP, we do expect ASP to begin to average down as we get more volume in the IHR space. As a general matter, we've always expected that our ASPs will on average be lower in the longer term. because we entered the market at the larger end of the hernia repair spectrum. So, with the large ventral repairs with big pieces. And we've always expected that we'd be moving into the rest of the markets by entering with smaller pieces. So, we don't view this as a bad thing. It's an outcome of gaining greater share across the range of different repairs.

And it might be a little choppy, Frank, as we sort out the mix between the large complex cases with large pieces and the slope of the ramp rate of the IHR, both products should grow, but it may be out of sync every now and then. But I think definitely, what Roberto said is correct. We want the volume at some point.

Our next question comes from the line of Caitlin Cronin of Canaccord Genuity. Your line is now open.

Thank you for taking my question. Cash burn was still pretty high this quarter. Was this mostly just due to not getting the leverage lost the revenue growth or anything else to really call out here?

Sure. That's exactly it. If you think about the revenue having been higher -- had it been higher. We learned of the disruption partway through May towards the end of May, even though it began earlier in May. So, there was not much opportunity to adjust expense within the second quarter. We did make some small minor changes in timing of expenses to try and offset it and give ourselves more flexibility as we are doing the analysis to determine exactly what was happening during the quarter. But had -- we had additional revenue on top of the OpEx that you saw in the second quarter that should have all dropped to the bottom line, but we expect to get back on track with that as we indicated with the guidance. And then one thing that we believe investors may not be sensitized to in the third quarter, we'll start getting that revenue share payment, which will be equivalent to 100% gross margin depending on how quickly that ramps. It could be more or less front-loaded over the coming eight months and quarters, excuse me. And that will obviously contribute to our cash position.

Great. And then just on gross margins, what are your expectations really going forward given the IHR launch more broadly?

So, IHR, the way we pay for the product that we manufacture from our manufacturers with a revenue share. So, we give them 27% of the revenue. That's true across our portfolio. with very minor adjustments in certain cases. So even though those products are lower ASP, they should be fairly close to that standard 27% revenue share. We split the cost of shipping. So that takes about a percentage point or 2 off. And so, the long-term goal of gross margin is about 70%, plus or minus a little bit.

Awesome. And then just a quick one. What was the split this quarter between OviTex and PRS?

So, this quarter, PRS was 30% of the total revenue, right. A little bit down.

Our next question comes from the line of Matthew O'Brien from Piper Sandler. Your line is now open.

Just one clarification question. What was the split U.S. versus OUS? Did I hear you right? OUS was $2.4 million in the quarter, up about 60%?

Correct. Correct. Yes.

Okay. Got it. And then -- and I'm sorry to push your guys, but I'm looking at the guide for the year and the low end of the range assumes about $42 million for the rest of the year, so $21 million on average per quarter. Obviously, Q3 is going to be slower than Q4. It's just hard to get the model all the way up to that level. So, what did you see in July from a growth rate, I don't know what you can share? And then why is even the low end of the range, the right number? It seems like we should probably go a little bit below that, just given the disruptions that you saw and the fact that some of those cases, you're not going to be able to get now because they went to other hospitals. So again, why is even the bottom end of the range, the right number?

So, thanks for the question. So first, let me start with July. So, as you know, our quarters to be slightly backloaded. So, the first quarter -- first month of the quarter tends to be the lowest of the quarter, below 33% of the quarter. So, one of the things we look at on a quarterly basis is how that first month of the quarter looks compared to other first months or quarters. So, what I can tell you is that July was the highest first month of a quarter that we've had in our history. So that suggests that we are back on track for growth and that, in particular, because had the disruption that you've seen in the second quarter lasted into the third quarter that should have suppressed the July, you wouldn't have seen that kind of performance in the first month of the quarter. The second thing that makes us comfortable about achieving the amount over the second half that we need to, to hit our guidance is the plans that we had in place even at the beginning of the year, which we felt strongly about. And then what Greg has been doing since he took over a little bit less than three months ago. So, he was one of that he was instrumental in structuring our response to our disruption in the third quarter of last year in which we revamped our education of our sales forces in which we retargeted our compensation system and has extended that into this year and then took over in May at the end of May, and has extended that and expanded it. And so, what we're seeing with our sales force and how they're responding to it and the morale they're exhibiting as a result, gives us a lot of confidence about being able to make up the shortfall that we saw in the second quarter.

Yes. That said, I think, Matt, is going to be weighted a little bit more towards the fourth quarter once all the programs and all the training and all the elements kick in.

Okay. I guess how much wiggle room did you really factor in? Does everything have to go perfectly for you to get to the low end? And -- or are there some other factors that we're deciding to considering to get you all the way there?

Yes. So, as we've been describing over the course of this year, we view this tense range as a commitment to investors. So, we placed it in a place where we felt comfortable that we had all the leases to hit it. And what we did going through the years said if we learn over the course of the year to performance in any one of the quarters that there's additional upside, we would adjust that guidance number later rather than trying to express the full amount of what could be achieved early on before we had some data points. So, we feel very confident with that range, and we will be expending considerable efforts to make sure we hit not just the bottom at the end of the range but get pretty close to the top end of the range.

Our next question comes from the line of Michael Sarcone of Jefferies. Your line is now open.

Good afternoon, and thanks for taking my question. I guess, could you give us a little more color? You talked about bringing on Greg Firestone and then you mentioned the -- refining some of the training processes and the productivity metrics. Can you give us a little more color on what specifically Greg is doing in terms of making changes and how that's going to drive incremental productivity?

Absolutely. So, Greg has been with us for seven years, as you know. He's really been one of our commercial guys along the way, but more focused on GPO contracting, et cetera. So, I feel like we made a lot of progress in getting the GPOs. And now we've got to transition towards synthesizing that attainment with implementation into the GPOs. So, one of the things that Greg is deeply focused on is talk track and messaging and training, right? So, there are subtle differences in talk track when you talk to supply chain, right, at a contract at a hospital at a GPO. There's competitive dynamics with competitors, certainly. There's pricing and strategic dynamics, but the messaging is different. And I think the messaging is going to be inordinately important at the supply chain level as we go through this transition away from polypropylene, right? So polypropylene mesh has been the subject of these litigations. It's going to settle at some point in the future. And we're seeing lots of activity at the GPO level in transitioning for those companies that have polypropylene towards other more natural repair products. So, having Greg in the middle of this allows us to be strong when we need to be strong with GPO contracting messaging, right? It's with supply chain. The other factor is, Greg has been around for a long time. He's run sales organizations. He has a gravitas and credibility about him, which is very, very good for a young organization like ourselves. So, he is commanding and is going to demand accountability. And that's going to drive efficiency, leverage and part of that is training, right? So, one of the brilliant things that he's done since he started, he's moving very fast is rather than thinking in terms of…

Got it. And maybe one for Roberto. I think you did mention in the prepared commentary you've got your eye on profitability in the near future. So maybe you can elaborate more on that. What kind of profitability are you talking about and timing and what we need to see to really get there?

Sure. So, the goal is to keep OpEx flattish to declining over the course of this year. With revenue growing on top of that, obviously, that drops to the bottom line and reduces sequentially our cash consumption, although there is some seasonality to our cash usage. But we expect that even next year, we should be able to hold OpEx flat potentially even to declining next year. such that with additional year-on-year revenue growth next year on top of that OpEx savings. And then combined with the contribution from the NIVIS revenue share that can range from $3 million to $7 million. That, that together should get us to profitability. So, cash flow breakeven.

Our next question comes from the line of David Turkaly of Citizen JMP. Your line is now open.

Good afternoon. Tony, did you have a CCO that position in the past?

Yes, we did. Yes, he was more of a traditional VP of sales type of guy. Greg is a more senior executive who has more of a strategic full set of experiences.

And Chris Smith is still there?

No. VP of Sales has moved on. We focused the business around Greg and the senior leadership that's been in place now for the last couple of years. We have a group of area directors that report in to Greg, that are our most talented, most senior folks, they've been with us for years. So, it's a very tenured organization.

And one last one, just as we think about this NIVIS revenue share, I'm just trying to think about even just the back half of the year. I know it's over 8 quarters, but I mean could that be $1 million a quarter? Is that a possibility? Or is that too much?

Yes. So, the structure of it is that we -- for the first four quarters, we get 50% of -- in each quarter of what the new owner sells for NIVIS. And then in the second four quarters, we get 25%. So, depending on how quickly the new owner is able to ramp it, they could potentially sell $2 million in the third or fourth quarters, and then we would get half of that, which would be $1 million.

Yes, CEO has been quite optimistic in the past on the product uptake but it's just launching a month or so ago.

Yes. So, it launched in the second quarter, that triggered since the way the right. This agreement is structured is that it triggers for the first full quarter of launch, the [indiscernible].

I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.