Establishment Labs Holdings Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; financial statements are unaudited. Establishment Labs manufactures and sells medical devices, with revenue primarily from Motiva silicone breast implants. Its products are registered in 86 countries; Motiva Implants were not yet approved for sale in the United States.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $37.2 million | $46.5 million |
| Gross profit / gross margin | $24.4 million / 65.6% | $30.1 million / 64.7% |
| Operating expenses | $33.2 million | $38.2 million |
| Loss from operations | $8.8 million | $8.2 million |
| Net loss / diluted loss per share | $16.2 million / $0.58 | $11.9 million / $0.48 |
| Cash used in operating activities | $11.2 million | $20.6 million |
| Cash used in investing activities | $6.6 million | $4.3 million |
Cash was $73.0 million at March 31, 2024, versus $40.0 million at year-end. The increase reflected $49.7 million of net proceeds from a January share and pre-funded warrant offering. Management believes cash and operating cash flows will meet liquidity needs for at least 12 months, while noting assumptions could prove incorrect. The accumulated deficit was $376.3 million.
Long-term debt had a net carrying value of $192.2 million; reported outstanding principal, including interest accrued into principal, was $195.5 million. The Oaktree term loans mature April 26, 2027, with no principal payments due before maturity. The effective interest rate is 10.4%; the company reported compliance with financial covenants at quarter-end. Current liabilities were $48.0 million and total liabilities were $244.9 million.
Changes versus the prior-year quarter
- Revenue declined 20.0%, mainly from weaker demand in distributor markets, particularly Asia-Pacific and, to a lesser extent, Latin America; European revenue was stable. Regional revenue was EMEA $20.6 million, Latin America $7.9 million, Asia-Pacific $8.6 million, and Other $0.1 million.
- Gross margin improved by 0.9 percentage points, attributed to geographic mix and modestly higher average selling prices, partly offset by higher labor and overhead costs.
- SG&A fell 8.8% to $28.9 million; R&D fell 33.8% to $4.3 million, including lower personnel costs and IDE trial spending. Operating losses nevertheless increased.
- Net loss widened by $4.3 million. Other income/expense was adversely affected by a $3.0 million foreign-currency transaction loss, compared with a $0.9 million gain in Q1 2023. Interest expense increased to $4.4 million from $3.8 million.
- Operating cash use improved year over year, but the quarter’s positive cash movement was principally supported by equity financing rather than operating cash generation.
Outlook, developments, and risks
- Management said markets were stabilizing and reported sequential improvement across regions in Q1, with expectations for demand to improve during 2024. It also warned that inflation, higher interest rates, recession concerns, geopolitical uncertainty, and constrained discretionary spending continued to weigh on demand and could do so through 2024. The company does not expect to be profitable in 2024 and expects losses in the foreseeable future.
- The Costa Rica manufacturing expansion is estimated to cost $55.5 million, with most costs incurred; management expects the new facility to begin manufacturing in the second half of 2024. The planned capacity increase is approximately 730,000 units annually.
- The FDA scheduled a PMA preapproval inspection of the Costa Rica facility for Q2 2024. Motiva Implants’ U.S. PMA approval remains pending. The company reported preliminary four-year IDE follow-up results in May 2024; these are subsequent to the quarter.
- The February 2024 Oaktree amendment extended availability dates for remaining loan tranches and changed their interest rate to 10%. Tranche C availability is conditional on FDA approval for U.S. augmentation use; Tranche D is conditional on funding of Tranche C and meeting a reduced trailing-12-month gross-sales threshold of $195 million.
- Key risks include continuing losses and dependence on Motiva Implants, regulatory and clinical uncertainty, reliance on a single supplier for medical-grade silicone, foreign-exchange exposure, demand sensitivity to economic conditions, and the need for potential additional capital. Cash balances at two U.S. financial institutions exceeded FDIC insurance limits.
- Disclosure controls were assessed as ineffective at the reasonable-assurance level. A material weakness in change-management controls for direct database changes persisted; management expected remediation by the end of 2024, subject to operating effectiveness and testing.
- The filing reported no material legal proceedings and no material contingent liabilities. The company also disclosed a Rule 10b5-1 plan adopted by its CEO that may permit sales of up to 45,000 shares beginning July 1, 2024.
Important facts for investors to verify
- Whether demand stabilizes as management expects, particularly in Asia-Pacific and Latin America, and whether revenue recovers without relying on increased discounting.
- Progress and timing of the FDA inspection and Motiva Implants PMA decision, including any added requirements or delays.
- Completion, cost, regulatory readiness, and planned production start of the new manufacturing facility.
- Cash burn, available liquidity, covenant compliance, and the conditions and cost of accessing Oaktree’s remaining tranches or raising further capital.
- Remediation and independent testing of the disclosed material weakness, alongside ongoing financial-reporting controls.
- Exposure to currency movements and the continuity, pricing, and quality of the sole-source silicone supply.