Establishment Labs Holdings Inc. — Q3 2023 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2023. The company manufactures and sells medical devices for aesthetic and reconstructive surgery; Motiva silicone breast implants generated over 96% of revenue for the nine-month period. Products were sold internationally, and Motiva Implants had not yet received U.S. marketing approval.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $38.5 million | $38.2 million | $133.6 million | $117.9 million |
| Gross profit | $26.1 million | $26.0 million | $86.4 million | $78.4 million |
| Gross margin | 67.7% | 68.1% | 64.7% | 66.5% |
| Operating expenses | $47.1 million | $36.6 million | $129.3 million | $104.9 million |
| Operating loss | $21.0 million | $10.5 million | $42.9 million | $26.5 million |
| Net loss | $29.3 million | $18.6 million | $58.0 million | $61.6 million |
| Basic and diluted loss per share | $1.12 | $0.76 | $2.28 | $2.53 |
Cash flow and liquidity: Cash was $52.2 million at September 30, 2023, down from $66.4 million at December 31, 2022. Nine-month operating cash use was $80.4 million, compared with $38.2 million a year earlier; investing cash use was $19.9 million, and financing provided $86.2 million, principally from the April share offering. Cash used for construction and property purchases totaled approximately $19.6 million. The company reported $30.5 million of shareholders’ equity, versus an $8.2 million deficit at year-end 2022, and an accumulated deficit of $339.6 million.
Debt: Oaktree debt had $189.7 million outstanding principal, including accrued interest added to principal; its balance-sheet carrying value, net of discount and issuance costs, was $185.3 million. The loan bears 9% annual interest, matures April 2027, and has no scheduled principal payments before maturity. The company stated it was compliant with financial covenants at quarter-end. Debt terms include a minimum liquidity covenant of $25 million following the second-tranche funding.
Changes versus comparable periods
- Q3 revenue was essentially flat year over year, while nine-month revenue grew 13.3%. Management attributed year-to-date growth to global market share gains, new products, strong first-half EMEA and Asia-Pacific demand, and expansion of direct sales.
- Q3 operating loss widened as SG&A rose 27.8% and R&D rose 34.0%; nine-month operating loss also widened. SG&A growth reflected sales and marketing, personnel, freight, facilities, software, and compliance costs; R&D growth was principally personnel-related.
- Gross margin fell in both comparisons, which management attributed to higher inventory obsolescence reserves and manufacturing costs, including labor and overhead costs affected in part by the Costa Rican colón, partly offset by new product initiatives.
- Nine-month net loss improved from 2022, despite the larger operating loss, primarily because 2022 included a $19.0 million loss on extinguishing Madryn debt. The 2022 period also included a derivative fair-value gain.
- Operating cash use increased substantially, with major working-capital uses including increases in inventory and accounts receivable. Inventory rose to $67.9 million from $36.6 million at year-end; accounts receivable rose to $54.7 million from $35.4 million.
Outlook, developments, and risks
- Management reported slower Q3 growth, particularly in distributor markets in Asia-Pacific and, to a lesser degree, Latin America. It cited seasonality and macroeconomic uncertainty, including inflation, interest rates, and pressure on discretionary spending, and expected these factors to continue affecting demand in Q4 2023. The filing gives no numeric revenue or earnings guidance.
- In response to weaker demand, the company said it was downsizing its global workforce, reducing operating expenditures, and managing inventory. It identified U.S. and Chinese market launches and Mia Femtech promotion as priority growth initiatives.
- The company expects continued near-term losses and said it may need additional capital. It believed cash and operating cash flows would meet liquidity needs for at least 12 months, while cautioning that assumptions could prove incorrect. The April 2023 public offering generated approximately $84.6 million net proceeds.
- The company was completing a new Costa Rica manufacturing facility and expected manufacturing to begin in fiscal 2024. The first project phase was estimated to require $48 million in cash expenditures and add approximately 730,000 units of annual capacity.
- The four modules of the U.S. Motiva Implants PMA submission had been submitted by February 2023; FDA approval remained uncertain. In October 2023, after quarter-end, FDA granted 510(k) clearance for the Motiva Flora SmoothSilk Tissue Expander. The company also reported October product and clinical-study announcements.
- Key risks include continued losses and cash consumption; demand sensitivity to economic conditions and elective procedures; regulatory and clinical uncertainty; reliance on a sole-source medical-grade silicone supplier (Avantor); foreign-exchange exposure; competition and implant-safety concerns; and manufacturing expansion execution. The company reported no material legal proceeding required to be disclosed and no material contingent liabilities at quarter-end.
- Disclosure controls were deemed ineffective at September 30, 2023 because of a previously identified material weakness involving user access controls and segregation of duties in financially relevant systems. Management reported remediation progress but said more time was needed to demonstrate manual-control effectiveness, with remediation expected by year-end 2023.
Investor verification priorities
- Track quarterly revenue by region and channel, especially whether Q3’s demand slowdown persists and whether growth resumes in Asia-Pacific and Latin America.
- Assess cash burn, receivables and inventory growth, and whether the stated 12-month liquidity outlook remains credible after workforce and spending reductions.
- Monitor the $189.7 million Oaktree principal balance, interest and liquidity covenant headroom, and conditions for any remaining loan tranches.
- Verify the timing and cost of the new manufacturing facility’s start-up, regulatory readiness, and expected capacity utilization.
- Follow FDA progress for the Motiva Implants PMA and any post-approval requirements; distinguish that process from the separate tissue-expander clearance.
- Confirm completion and testing of the internal-control remediation plan, and evaluate potential dilution from equity financing and outstanding equity awards.