Establishment Labs Holdings Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are with FY2017. This is an annual report, not a standalone fourth-quarter report, and the filing does not provide clear standalone Q4 financial results.
Business context
Establishment Labs is a medical technology company whose principal business is silicone gel-filled Motiva breast implants, sold internationally through distributors and direct sales. Motiva Implants generated approximately 92% of revenue in 2018. The company sold in more than 60 countries but did not have U.S. commercial approval; its U.S. IDE clinical trial began enrolling in April 2018.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $61.2 million | $34.7 million |
| Gross profit / gross margin | $36.1 million / 59.0% | $17.7 million / 51.0% |
| Operating expenses | $60.0 million | $37.7 million |
| Operating loss | $23.9 million | $20.0 million |
| Net loss | $21.1 million | $34.9 million |
| Net cash used in operating activities | $33.9 million | $32.0 million |
| Net cash used in investing activities | $5.7 million | $0.8 million |
| Cash at year-end | $52.6 million | $10.9 million |
- Revenue grew 76.5%, primarily from higher Motiva sales, deeper penetration in existing markets, new geographies, and direct sales in Brazil, Germany and Spain.
- Gross margin improved by 8 percentage points, attributed to higher production volumes spreading fixed costs and a greater contribution from direct markets with higher average selling prices.
- SG&A rose 53.5% to $47.3 million; R&D rose 84.8% to $12.7 million, reflecting expansion and clinical-trial investment.
- The net loss narrowed despite a larger operating loss. A $15.9 million gain from changes in derivative fair value was a significant favorable item; FY2017 had a $2.4 million derivative loss. FY2018 also included a $1.7 million loss on contingent consideration and a $2.4 million foreign-currency transaction loss.
- Financing cash flow was $81.5 million, principally reflecting IPO proceeds. The July 2018 IPO raised approximately $70.1 million net of underwriting discounts and offering costs. Operating cash burn remained substantial.
- At December 31, 2018, total assets were $116.6 million and total liabilities were $47.1 million. The Madryn facility had $40.0 million principal outstanding, with a $22.3 million net carrying amount after discounts and issuance costs, plus a $4.8 million put-option liability. The loan bears interest at three-month LIBOR plus 11%; the reported weighted-average rate was approximately 13.4%. Principal repayments begin in 2021, and maturity is June 2023.
- Year-end current assets were $99.4 million and current liabilities $16.4 million. Management said cash, operating cash flow and IPO proceeds were expected to cover liquidity needs for at least 12 months, while warning that assumptions could prove incorrect and additional capital might be needed.
Material changes, outlook and risks
- Management expects continued losses in the intermediate term and does not expect profitability in 2019. It expects R&D, sales and marketing, and public-company costs to continue rising; no specific revenue or earnings guidance was provided.
- The company estimated the U.S. PMA clinical trial would cost $30–$40 million over ten years. In March 2019 it reported reaching enrollment targets for aesthetic cohorts—450 primary augmentation and 100 revision subjects—and expected to meet remaining cohort targets in Q2 2019. Completion, results and FDA approval remain uncertain.
- The company’s claimed low post-market complication rates are based on self-collected surveillance outside the U.S., not mandatory follow-up or an FDA PMA study. The filing cautions that these data are not directly comparable with competitors’ prospective trials.
- Madryn debt technical defaults occurred in January and February 2018; a June 2018 amendment removed the restrictive covenants that caused them. The company reported compliance with all financial debt covenants at year-end. The debt is secured by substantially all company and certain subsidiary assets, including intellectual property.
- Key operating risks include lack of U.S. market approval, clinical and regulatory uncertainty, dependence on Motiva sales, competition, currency exposure, and reliance on NuSil as the sole supplier of medical-grade silicone. NuSil represented 63.4% of purchases in 2018; its supply agreement runs through December 2021.
- The company disclosed litigation against Keller Medical and Allergan concerning a distribution agreement, as well as a counterclaim by Keller for alleged non-payment. Mediation had not produced a settlement; the company made no prediction on the outcome.
- Management concluded disclosure controls were ineffective at year-end because of a material weakness in review of the manual consolidation process, which resulted in audit adjustments. Previously identified 2017 weaknesses were reported as remediated. The independent auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal control effectiveness.
- The filing reports no contingency requiring accrual at year-end. It also notes a Costa Rican 0% corporate income-tax holiday through 2026, subject to continued qualification, and that the company does not anticipate paying dividends in the foreseeable future.
Most important facts for investors to verify
- Whether revenue growth and improved gross margin persist as direct sales expand, and whether operating expenses can grow more slowly than revenue.
- Cash burn, working-capital needs, the actual liquidity runway, and potential need for additional financing.
- Madryn debt terms, covenant compliance, high interest cost, collateral package, and scheduled repayments beginning in 2021.
- IDE trial enrollment and follow-up progress, clinical outcomes, total trial costs, and the timeline and requirements for U.S. PMA approval.
- Evidence and comparability supporting Motiva safety claims, including surveillance methodology and future regulatory findings on breast-implant risks.
- Continuity of silicone supply and resolution of the insertion-sleeve supplier dispute, along with outcomes of the Keller/Allergan litigation.
- Remediation and testing of the disclosed internal-control weakness and whether future filings report effective controls.