ESTA

Business Context and Reporting Period

Company: Establishment Labs Holdings Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2018
Business Overview: A global medical device company manufacturing and marketing silicone breast implants (Motiva Implants) and related aesthetic products. The company operates manufacturing facilities in Costa Rica and sells primarily in Europe, Latin America, the Middle East, and Asia. It is currently pursuing FDA approval for the U.S. market via a clinical trial initiated in March 2018.

Key Financial Metrics (Six Months Ended June 30, 2018)

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 83.5% to $28.5 million from $15.5 million in the prior year period, driven by market penetration in existing geographies and new sales in Brazil.
• Margin Expansion: Gross margin improved to 56.6% from 48.5% due to higher production volumes spreading fixed costs and higher average selling prices in direct markets.
• Operating Expenses: Total operating expenses rose 49.3% to $25.3 million. SG&A increased 39.4% due to personnel hiring and consulting fees. R&D expenses surged 96.1% to $5.9 million, primarily due to the initiation of the U.S. PMA clinical trial.
• Net Loss Reduction: Net loss decreased to $11.9 million from $17.1 million, aided by a $4.5 million gain from the change in fair value of derivative instruments (Madryn debt options).
• Debt Reclassification: Following an amendment to the Madryn Credit Agreement in June 2018 to remove restrictive covenants, the Madryn debt was reclassified from current to long-term liabilities.

Guidance, Outlook, and Risks

• Outlook: Management expects to continue incurring net losses in the intermediate term as it expands operations, invests in R&D, and pursues U.S. regulatory approval. The company estimates the U.S. PMA clinical trial will cost between $30 million and $40 million over ten years.
• Liquidity: As of June 30, 2018, cash was $11.6 million. Management believes this, combined with proceeds from the July 2018 IPO (approx. $71.5 million net), is sufficient for operations for at least 12 months.
• Subsequent Event: The company completed its IPO on July 23, 2018, selling 4.27 million shares at $18.00 per share.
• Key Risks:
  • Regulatory Approval: Failure to obtain FDA approval for the U.S. market would severely limit growth potential.
  • Internal Controls: The company disclosed material weaknesses in internal controls over financial reporting related to debt accounting and inventory costing, as well as staffing at the Brazilian subsidiary.
  • Supply Chain: Reliance on a single-source supplier (NuSil) for medical-grade silicone.
  • Competition: Intense competition from larger multinational companies with established clinical data.

Investor Verification Checklist

• Internal Control Remediation: Verify the progress of remediation efforts for the disclosed material weaknesses in internal controls over financial reporting.
• U.S. Clinical Trial Progress: Monitor enrollment rates and safety data for the ongoing FDA Investigational Device Exemption (IDE) trial.
• Debt Covenants: Confirm continued compliance with the amended Madryn Credit Agreement covenants, specifically regarding revenue and liquidity thresholds.
• Supply Chain Security: Assess the stability of the relationship with NuSil and the availability of alternative suppliers for medical-grade silicone.
• Post-IPO Liquidity: Review the utilization of the $71.5 million IPO proceeds against the projected burn rate and capital expenditure plans.