Good afternoon, ladies and gentlemen, and welcome to the TELA Bio's Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared comments. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Stuart Henderson, Vice President of Corporate Development and Investor Relations for TELA Bio.

Thank you, Victor and good afternoon everyone. Earlier today TELA Bio released financial results for the quarter ended September 30, 2020. A copy of the press release is available on the company's website. Joining me on today's call are Tony Koblish, President and CEO; and Nora Brennan, CFO. Before we begin, I'd like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including without limitation the company's Form 10-K, filed on March 30, 2020; and 10-Q filed on August 15, 2020, 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, product potential, the regulatory environment, sales and marketing strategies, capital resources, operating performance or potential impact of COVID-19. With that, I will now turn the call over to Tony.

Thanks, Stuart and good afternoon everyone. We hope you are safe and healthy. Thank you for joining us today. Before I review the highlights of our strong third quarter performance, I would like to talk about the past 12 months for TELA Bio. Just over a year ago, TELA Bio became a public company and while much has changed in the world since that time, the fundamentals of our business are sound and we remain well positioned to drive growth. Our OviTex and OviTex PRS products represent and advancement in soft tissue reconstruction and are designed to improve clinical outcomes and reduce costs of care for hernia repair, abdominal wall reconstruction, and plastic and reconstructive surgery. These markets combined represent a $2 billion U.S. potential addressable market opportunity, and we believe TELA Bio is uniquely positioned to lead innovation in these markets through our close collaboration with surgeons, our adaptable technology platform, our organizational flexibility, and our focused on advancing our mission of bringing the benefits of natural repair solutions to more patients. Hernia repair is one of the most common surgeries in the U.S. with an estimated 1.2 million repairs performed annually in the U.S. Hernia repairs range from inguinal hernias on the more simple end of the spectrum to the repair of large complex, eventual hernia defects and abdominal wall reconstruction. Approximately 90% of all hernias are repaired using reinforcing material or mesh designed to provide long-term support at the repair site. Legacy meshes include permanent synthetic meshes, biologic meshes and resorbable synthetic meshes, and each have their associated advantages and shortcomings. Synthetic mesh has dominated the market due to its low cost, strength and ease of use, and is the primary product used today for inguinal hernia, and more simple ventral hernias. However, over the past several…

Thanks Tony and hello, everyone. Please refer to our press release issued earlier today for a summary of our financial results for the third quarter of 2020. Revenues for the third quarter increased 34% year-over-year to $5.3 million. Total revenue increased over the prior year period elective procedures are still being impacted by the rise in COVID-19 cases. Gross profit as a percentage of revenue in the third quarter was 52%, which was lower compared to the prior year period, primarily due to a charge for excess and obsolete inventory in our latest quarter. Sales and marketing expenses were $6.3 million in the third quarter of 2020 compared to $4.7 million in the same period in 2019. The increase is primarily due to higher salary benefits and maintenance costs as a result of an expansion of our commercialization activities including an increase in headcount, which was partially offset by lower travel and consultant expenses resulting from the effects of the COVID-19 pandemic G&A expenses were $2.6 million in the third quarter of 2020 compared to $1.2 million in the same period in 2019. The increase was primarily due to higher costs associated with being a public company, including compensation, benefits and stock-based compensation expense. R&D expenses were $1.2 million in the third quarter of 2020, compared to $0.5 million in the same period in 2019. This increase was due to higher salaries and increase outside development costs. Loss from operations was $6.9 million in the third quarter of 2020 compared to $3.9 million in the prior year period. We ended the third quarter of 2020 with at $81.5 million in cash and cash equivalents, which is a decrease of $4 million from last quarter. The net loss was offset by some improvements in working capital this quarter due to the ongoing process improvements in inventory management and demand planning. Based on our current plans, we believe that our existing cash resources will be sufficient to meet our capital requirements, and fund our operations for the long-term. Now turning to 2020 guidance, due to the continued uncertainty from the impact of COVID-19 on our business, we will continue with the suspension of our full year 2020 guidance. And with that, I'll turn the call now over to Tony.

Thanks. In closing, I want to thank everyone again for your time this afternoon and for your interest in TELA Bio. I would also like to thank our team in TELA Bio for their commitment and dedication through these challenging times. Because of their hard work, and perseverance, I'm confident we will continue our success and achieve sustainable growth in the long-term. I'll now turn the call back over to Victor and open it up for questions.

[Operator Instructions] Your first question comes from the line of Raj Denhoy from Jefferies. Your line is open.

Wanted to ask little bit about the sales ads in the quarter. If I think I heard you correctly sorry, Tony, I think you said you're at 44 reps now I think it was 36 last quarter. So wanted if you can confirm that? And then I guess that pace of hiring seems like it's picked up a little bit should we expect you're going to continue to add people here into the fourth quarter?

Yes, let me just clarify Raj. So, we've got 44 territories carved out and set up based on all the criteria that we use, right. Where the talent is, where the IDN and GPO access is. We only have about 40 reps, maybe 42 reps plugged in to those 44 territories, right. So, we're a little bit low compared to the territories by a couple of reps. So we're really in the low 40s right now. Our target is to continue sort of the strategic thoughtful recruitment of reps until we get to about 48 reps. That should happen at some point next year. I mean, we're - right now we're sort of feeling pretty good about the team we have, the productivity, the TELA LIVE being a good jump off point to get the reps primed and started. And we're starting to really figure out how to make use of our clinical development specialists and business managers that support them in the field. So, I think 48 feels like the right number of reps for us, at some point early next year. And then we're just going to focus on productivity and driving that group. And then, we'll see where it goes right it will allow us to monitor, how COVID is going, how we're feeling about supply chain access, and we will remain vigilant and will retain the right to hire faster or sort of hold based on what we're seeing. But either way, we're going to drive this thing with growth, either doing more with the current footprint or doing more with the current footprint and adding to the footprint.

Right, that makes sense. But it does sound like you did add people if I'm not mistaken?

Yes.

It was particularly end of last quarter, right. So you did add even - 40, 42?

Yes, I think you're right on the money. Yes, yes that's right Raj perfect.

Okay. And I appreciate you don't want to give as much in the fourth quarter, but I'm just curious last quarter, I believe you gave us a little bit in terms of the kind of monthly progression in terms of the quarter?

Yes.

How are things shaking out? I mean, are you seeing any sort of softness now that the case volumes are increasing? I realized it short-term and not really it remains kind of the long-term growth story, but just so we can calibrate kind of the near-term expectations?

Yes, that's an interesting question that we're trying to figure out ourselves. If you look at Q3, coming off of a highly anomalous quarter in Q2, Q3 seems to have snapped back to a more normal cadence right on a month-by-month basis. The biggest contribution to the quarter is in the last month of the quarter, September, which historically has been about 40% to 45% of that quarterly revenue. And that exactly was the case in Q3. So it's interesting that we had sort of a normalized cadence per month. We had a normalized, set of procedures. It felt very normalized other than the ups and downs that we've seen, regionally in the market due to COVID patchiness. In Q4, we're dealing with a whole different ball game, right. Hopefully, we see similar normality in terms of performance and certainly October our first month in the quarter was hitting the mark well. But I've never been through a COVID situation in the middle of holidays, Thanksgiving and Christmas. If you look historically at our business, even though we were immature last couple of years, our best months of the year tend to be that October, November, December, somewhere in that ball park our best month. So, I believe we should be able to keep that up, but we do see this patchwork effect that's constantly shifting, and right now, it feels like it's the Midwest, particularly the upper Midwest where we're seeing some impact. But like I said before, I think we're nimble, we're agile, we're mobile, we can figure out how to keep this thing growing. But Q4 is going to be a little strange with the holidays baked into this as well, but so far, so good Raj.

Understood, and maybe just lastly, just in terms of access, right? So, anything you want to offer, I mean any new GPO contracts or anything that might be pending that we could hear about anytime soon?

Yes, so the big GPO there is not many big GPO players, right. We've got the big one in hand as you know HealthTrust. And there's a couple of others that we're going to work on when the time comes, they're not ready yet in terms of the process. So we're grinding away at the IDN's and it's working. If you look at the performance and contribution of what we're doing here, we're up within the HealthTrust accounts. I think in Q3, we had somewhere between 80 and 85 accounts, and if you compare a year ago, HealthTrust - we were down in the 40. So, even though we went sideways a little bit in Q2 due to COVID we're making traction and right now all the HealthTrust accounts are looking like about 35% of our business up well over 10%, year-over-year. So even though it's been difficult getting traction and supply chain, we've seen a good improvement. And then 50% of our business is from, not 50% but the rest of the business is from IDNs and if you look at our IDN contracts, Raj, that we're knocking down sort of piecemeal. They're all contributors to those final big GPOs, which we still have to work on getting. So right now the plan is, is execute against HealthTrust the best we can, and knock down all the IDNs that ladder up to busy and premier and those guys, and that's exactly what's happening right now.

Perfect. Thank you.

Yes, and just to finish that Raj little bit extra color about 50% of our top 20 IDNs do ladder up to those national contract GPOs. So I feel like, we're getting there, across all the different systems that are out there, by hook or by crook.

Your next question comes from the line of Matthew O'Brien from Piper Sandler. You may proceed.

Yes so thanks for taking the questions. I guess just to follow-up on Raj's last question on supply chain access at the hospitals. Can you elaborate a little bit more, as far as what the challenges are just you can't get into CDs folks, you can't really sell the merits of OviTex or is there something else that we should be aware of?

It's not that complicated, right, it's availability and distraction. It's just not ideal, it's not impossible, as you can see, we're executing, but it's not ideal, right. So, we've seen, the employees either working from home for a load, in some cases, what have you, but they come back, just like we have the TELA LIVE program for presenting to and engaging deeply with surgeons which is working. We also, have our B2B program, which predates COVID, which is, becoming super, super important. And that allows us to use a team of logistics, and customer service folks, to engage with the supply chain people, if the reps can't get into the hospital. So, we're seeing some situations where non-essential personnel, just to do administrative stuff. Reps particularly aren't encouraged to be in the hospital, if they've got to be there for a clinical reason that's a different story. So, we're employing our B2B program, which is mostly virtual by email by zoom calls by all the usual tools. So it's working, but it's a bit more, frictional force, I would say, it's not it's not ideal. I think in Matt in principle, if you are a large incumbent its easier right to deal with sort of a fractured employee base across supply chain. If you are a newcomer, it just takes a little bit more time, a little bit more friction, and you just got to be relentless, and persistent, and flexible, which we are, it's working, but it's a little tougher. And that does have some impact on our product range, right. I mean, we can, that we're more established on the hernia side. So, our live programs are able to drive deeper penetration and more usage, where we have access and where we are. Whereas on the PRS side, we're still establishing ourselves, we're newer on that product range. So that probably has a little bit of a bigger impact on PRS, although we're doing well with PRS, than it does on hernia. But I think this concept of incumbent versus newcomer probably, we have a little more friction to go through that.

Okay. And this may be an unanswerable question, but is there a way to kind of quantify what that may be is it costing you 10% of revenues in a quarter?

Yes, I don't know. It's costing us I think it's hard to quantify that. I mean, I have - I feel frustration, right. Because I feel like I see what's working, and it is working right, the new reps that we've hired in 2020 are 20, 20 plus percent of revenue, right. So they're getting, that's what we want to see, we want to see these reps get productive more quickly. The live programs, we can see it working right, we've got 160 surgeons that we've, run through the live program. And their productivity on a monthly basis is up 125%. So, you think what could we be doing? If everything was normalized and we were in normal situation I'm going to say it's more, right, but we're having good success. I told our team, and I'll say this to everyone, our job is to grow and establish the company, no matter what the situation is out there in the market and in the playing field and we're doing that. And if we just have that mindset, we'll just continue to do better and better as the frictional forces ease off and COVID becomes past memory. So yes, we could be doing more. We don't know exactly how much more it's not possible.

Okay.

But I feel like we could be for sure.

Okay. Well, I mean I guess it's good to see that you beat number so handily, and [you got three]?

Yes.

Yes, right so I guess Tony [technical difficulty] is there, it seems like TELA LIVE is probably slowing down, just given that these doctors are back to work and pretty busy. You still got some of these headwinds, as far as COVID kicking its increasing. And so getting access on the hospital side is going to be more challenging? Is there going to be and it's probably going to be more transient than anything but just a hole in your ability to really grow the business, as you kind of adjust to this environment or is there just so much momentum that you don't have if that will be the case?

No, I don't think so I think we can get these TELA LIVE programs moving. Our cadence has slowed down a little, but not that much, we're still doing them, we're still interacting, there's plenty of interest, there's a need out there for new products and technologies, and there's a particular need within the hospitals for cost savings. So, we have the right product at the right time for so many different reasons. And we mentioned this, we did this survey and to take a look at perceptions, and fully 60% of the surgeons are cognizant of problems with plastic mesh, and that's our opportunity, right. And 20% of the patients, that are coming in are cognizant of the risks associated with this just straight up permanent plastic mesh. So, you know we're in the early stages of natural repair being pretty attractive. And when we're on these live programs, it's really a benefit that we can, have the senior leadership team, including myself interacting with the surgeons, and it serves as market research and understanding as we go forward. And I could say that, we have the ability to present much more aggressively about the downsides of permanent plastic and the upsides of natural repair than we have in the past. So, there is so many, confounding puts and calls and ups and downs in this. I think - the upside of the live programs and the direct contact with the surgeons, they don't have to get on a plane, they can spend 30 minutes with us bang, I think we can continue to move forward with that. And don't forget, we're still penetrating in the LPR into the robotic procedures. And certainly PRS is going to be a great growth driver for us as we go forward. So there's a lot of, good tools and factors that we have that are coming together, that should be able to overcome all the chop and that's what we're playing for.

Our next question comes from Kyle Rose from Canaccord. You may begin.

So, I wanted to just run down a couple of questions here. You talked about the robotics and the LPR at the beginning, obviously, that's positive. But maybe can you help us understand how does that - how does the use maybe in the more simple hernias from a robotics perspective, translate into more of use in civil hernias broadly, just want to understand how much of the overall hernia repair market you think you realistically had access to now versus in the future? And then if you could also, from a high level, just breakdown OviTex versus PRS just from a revenue perspective, that will be very helpful?

All right, let's start with the last question first. So on a unit basis, we're still running about 90/10 hernia versus PRS. It's a little different on the revenue side, but we'll, it's a little higher in favor of PRS even the ASP is a bit higher. But we're going to report it out that way going forward. And I will say that PRS is going to grow, right, it's going the traction is going to come, we're sort of in that early, show me kind of adoption profile that we know so well and I've been through, with our other products. I think our portfolio right now, on the hernia side, Kyle has never been better positioned to be able to do anything and everything in the hernia market. Satisfy every type of surgeon preference, every type of patient needs and every type of technique, both open and minimally invasive. Our ventral hernia repair is running about 60% to 65% of the hernia procedures, but between inguinal and hiatal those are growing for us and somewhere between it looks like, 35% or so are split between those inguinal and hiatal procedures. A lot of those procedures on the inguinal and hiatal side are robotic. And I think a lot of the simple ventral are starting to turn robotic. So, I think as a simple proxy Kyle, whenever you hear about OviTex being used in a robotic procedure, you're probably talking about us displacing a permanent synthetic mesh more often than not, right. That's primarily, the type of product that gets used with the robot just for ease of use, it's very hard to use other natural repair products with the robot other than, what we have going on. So that robotic procedure is a proxy for synthetic replacement. And we're quite pleased with the growth of LPR. It's really coming on and if you look at our Q3 statistics, we're running about 50%, little over 50% being open procedures and the rest being split between robotic and laparoscopic with the bulk of those 30% plus, 35% being robotic. So, we have a very robust usage across our platform of natural repair with robotic, and I think it's fair to say most of those procedures would have been, plastic permanent mesh. Does that answer the question?

It absolutely does, that's very helpful. So I appreciate the additional color there. I just wanted to ask one more specifically about PRS. Maybe just help us understand what some of the feedback is from the early adopters or what we'll call it the dabblers here thus far? Are they trying to add one or two cases and then watching results happen, and then just the overall status or the health of the breast reconstruction market, as it stands now? We've heard from some of the - I mean more than implant companies that the recon market is lagging from a recovery standpoint, relative to the augmentation market, and kind of what you're seeing when you're talking to your customers? Do you think it's more pent-up demand that could potentially come into the market and people are more comfortable?

Yes, no we're so small as a percent basis that, we're just still working our way through this early adoption phase. So, the fact that it lags augmentation, really, doesn't mean much to us at this point. We're still working surgeon-by-surgeon methodically through the process. I think, the feedback with the product is, it's interesting, it's a unique product, the different type of stretch, and the fact that it offers great support and control, I think, is very attractive. Certainly the price point and ease of use, also very attractive, I think that's, really where we are right now, in terms of the early experience. I think we have a wide mix of physicians from the early stages of the limited rollout. We probably came out of that with seven to 10 pretty robust users. And we're starting to, increase that number and the new users are - expand the range between, guys that do a few to guys that will jump in and do 10 or 15 or 20 - even and then monitor their results as they go forward. So, we're right where we should be in terms of, everyone gaining confidence in plastic and reconstruction program.

Next few quarters we'll see growth?

Yes, we'll see growth over the next few quarters. We had, and this make sense, right? We had our best units and dollars with PRS in Q3, so it's growing, slow but steady that's the mantra slow but steady.

[Operator Instructions] Our next question will come from the line of Dave Turkaly from JMP Securities. You may begin.

I'm wondering Tony, if you might comment a little bit on the pricing strategy. How you think that's working overall, and then any sort of commentary on ASPs in this current environment, love to hear any thoughts there?

Yes, I mean, our ASPs have been fairly consistent, I would say, over the last couple of years. We probably have a little bit of a tick up in the discounting as the percent of HealthTrust grows and grows, but nothing outside of too crazy in terms of magnitude. So, I think we priced our product range right, we priced it to be a very good value proposition, particularly with our high-performance clinical data. And, it's not requiring a whole ton of discounting. We have a wide array of pricing within the portfolio itself Dave right. So, we can pick our lowest technology level, and our highest technology level and - different ASP for all of those. On a blended basis, I think the ASP has been fairly consistent still over the last, year or so into say $3,000 range or so. And I think we priced it, right. We feel pretty good about the value proposition that we can provide to the hospitals, the LPR product is priced a little bit lower, to encourage, those high-volume usage in replacing the plastic but not ridiculously, not too much lower. So, we have some flexibility. I think we have different technology levels, and we had ASP that, seem to be hitting the sweet spot.

Great and I know, you talked a little bit in the past about million-dollar territories, and maybe a handful, maybe slightly more than that, that you had. You have some ads this quarter, I guess as we look at the 44. I mean, is that a target for the mall - I mean the ads that you made are they in big areas like, I guess thoughts on where those can go?

Yes, I mean that's the standard, right. I mean, every rep got to pull $1 million on an annualized basis. Before COVID happened, that's we were running - we were running about 10 reps that were $1 million reps, and we had a handful that were $2 million reps. So I think there's proof there that we can do it. What's interesting is not all of our pre COVID top performers have gotten back, which tells you some have, and some haven't, which speaks to the nature of the patchiness. But we've added, $1 million rep run rates, with new reps hired in this year. I think 20% or so of our revenue right now, is coming from reps that were brought on in 2020. So, that speaks to the power and success of the live program, the virtual B2B stuff that we're doing, because they don't have perfect access, and free and easy playing field at the hospital at the street level. But they're growing, they appear to be maybe two or three quarters ahead of where our historical guys were. And that makes perfect sense, Dave, because we've got better access, we got better data everything is starting to click and come together here. So we should be able to drive, that productivity and so far in 2020, we're doing it. So bringing on new reps are very attainable very, very attainable with this product set.

[Operator Instructions] And I'm not showing any questions at this time. I'd like to turn the call back over to Tony for any closing remarks.

All right thank you, Victor. So thank you, everybody, for catching us on the call today. We really appreciate following us. Business is strong, feels good. I wish we had a free and clear market. But we're going to get our piece with whatever the market gives us. So we look forward to meeting you next time and thanks a lot. Good night.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.