Establishment Labs Holdings Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited; amounts below are in U.S. dollars unless noted. The company manufactures and sells medical devices, with substantially all revenue from Motiva silicone breast implants. Products were sold internationally; Motiva Implants were not yet approved for commercial sale in the United States.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $38.2m | $29.0m | $117.9m | $91.4m |
| Gross profit | $26.0m | $19.6m | $78.4m | $61.2m |
| Gross margin | 68.1% | 67.6% | 66.5% | 67.0% |
| Operating expenses | $36.6m | $28.7m | $104.9m | $77.0m |
| Loss from operations | $(10.5)m | $(9.0)m | $(26.5)m | $(15.8)m |
| Net loss | $(18.6)m | $(14.7)m | $(61.6)m | $(26.9)m |
| Basic and diluted loss per share | $(0.76) | $(0.61) | $(2.53) | $(1.13) |
- Cash and liquidity: Cash was $65.3m at September 30, 2022, versus $53.4m at December 31, 2021. Current assets were $138.2m and current liabilities $32.4m.
- Cash flows, nine months: Operating activities used $38.2m, investing activities used $24.4m, and financing activities provided $75.3m. Cash increased by $11.9m. Investing outflows included $20.7m for construction in progress, primarily the new Costa Rica manufacturing facility.
- Debt: Net carrying value of Oaktree debt was $148.2m; outstanding principal, including interest added to principal, was $153.9m. The facility has a five-year maturity in April 2027, a 9% stated rate (8.25% after specified milestones), and no scheduled principal payments before maturity. The company reported compliance with covenants at quarter-end.
- Balance sheet: Total liabilities were $186.1m and shareholders’ equity was $1.5m, compared with equity of $50.7m at year-end 2021. Accumulated deficit was $268.0m.
Changes versus comparable periods
- Revenue grew 31.7% in Q3 and 29.0% year to date. Management attributed growth mainly to market-share gains, recovery in global activity, and expansion of direct sales, particularly in Latin America and Asia-Pacific/Middle East.
- Q3 gross margin rose 0.5 percentage points, attributed to product mix and manufacturing efficiencies. Nine-month gross margin fell 0.5 points, reflecting geographic mix and inventory obsolescence; the Puregraft inventory charge reduced year-to-date gross profit by 0.9%.
- SG&A increased 26.2% in Q3 and 40.9% year to date, driven by headcount, sales and marketing, freight, public-company costs and, year to date, compliance-related consulting. R&D rose 36.2% in Q3 and 12.3% year to date.
- Nine-month net loss widened to $61.6m from $26.9m. The 2022 period included a $19.0m loss on extinguishment of Madryn debt, including a $6.5m early repayment penalty, as well as higher operating expenses, interest and foreign-currency losses.
- Europe revenue declined year to date to $36.4m from $38.4m; Latin America increased to $38.7m from $25.0m, and Asia-Pacific/Middle East increased to $42.0m from $27.3m. Management cited a weaker euro, seasonality and European economic uncertainty as factors affecting Q3 Europe.
Outlook, risks and notable items
- Outlook: The filing gives no numerical revenue or earnings guidance. Management expects near-term losses and elevated SG&A and R&D investment, but stated that available cash and operating cash flows should cover liquidity needs for at least 12 months. It expects macroeconomic conditions, particularly in Europe, to affect Q4 2022; the pandemic’s future impact remains uncertain.
- FDA pathway: The IDE trial enrolled 827 patients across 32 centers; all surgeries were complete by September 2022, and three-year follow-up for the aesthetic cohort was complete. The company submitted the third of four expected PMA modules in August 2022. U.S. commercial approval remains uncertain and would require FDA approval.
- Manufacturing investment: The first phase of the Costa Rica campus project is estimated at $45.6m and is expected to add about 730,000 units of annual capacity. The company exercised its option to purchase the land and shell building; it paid the remaining approximately $3.1m in October 2022, after quarter-end.
- Funding and covenants: Oaktree committed up to $225m across four tranches. At September 30, the company qualified to elect a further $25m tranche, subject to agreement terms; it was not reported as drawn. Debt has restrictive covenants, including minimum liquidity and gross-sales requirements.
- Key risks: The company expects continued losses and depends heavily on Motiva implants. Other principal risks include FDA approval and clinical outcomes, elective-procedure demand, economic and foreign-exchange volatility, competition, product liability and safety perceptions, and reliance on NuSil as sole supplier of medical-grade silicone. Brazil accounted for 17.5% of nine-month revenue; Russia and Ukraine together accounted for 1.2%.
- Controls and contingencies: Management concluded disclosure controls were not effective at quarter-end, citing an ongoing material weakness involving user access controls and segregation of duties. Remediation work was underway. The company reported no material legal proceedings and said contingent liabilities were not material.
Important facts for investors to verify
- Progress, timing, cost and outcome of the FDA PMA submissions and post-trial follow-up.
- Cash burn, facility investment requirements, and whether additional Oaktree tranches are elected or additional financing is needed.
- Performance against Oaktree liquidity and gross-sales covenants, and the cost of the debt, including PIK interest and fees.
- Whether revenue growth and margins persist amid Europe’s weaker conditions, foreign-exchange movements and inventory risks.
- Remediation and subsequent testing of the disclosed material weakness in internal controls.