Establishment Labs Holdings Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; financial statements are unaudited. The company manufactures and sells medical devices, principally Motiva silicone gel-filled breast implants, in international markets. It had not received U.S. commercial approval for its implants.
Key financial results
Amounts in millions of U.S. dollars except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $22.9 | $16.3 | $65.3 | $44.8 |
| Gross profit | $14.2 | $10.1 | $38.5 | $26.2 |
| Gross margin | 62.3% | 62.1% | 58.9% | 58.6% |
| Operating expenses | $23.0 | $16.2 | $65.0 | $41.5 |
| Operating loss | $(8.8) | $(6.0) | $(26.5) | $(15.2) |
| Net income (loss) | $(12.8) | $1.3 | $(32.6) | $(10.6) |
| Basic loss per share | $(0.62) | $0.07 income | $(1.59) | $(0.66) |
Q3 revenue rose 40.3%; nine-month revenue rose 45.8%, principally from greater penetration in existing markets and sales in new geographies, including European direct markets. Motiva Implants generated over 94% of nine-month revenue. SG&A increased 65.4% year to date to $53.7 million, mainly from personnel, consulting, commissions and marketing; R&D rose 25.9% to $11.4 million, including U.S. clinical-trial costs. Management attributed modest gross-margin improvement to higher-priced direct-market sales, partly offset by acquisition-related inventory amortization, which reduced year-to-date margin by 4.9 percentage points.
Cash, debt and liquidity
- Cash was $42.6 million at September 30, 2019, down from $52.6 million at December 31, 2018. Current assets were $97.9 million and current liabilities $20.3 million, representing $77.6 million of working capital.
- Nine-month operating cash use was $26.0 million, versus $25.4 million in 2018. Investing cash use was $6.4 million, including $5.6 million of property and equipment purchases and $3.2 million to acquire the Costa Rican manufacturing facility. Financing provided $22.4 million, principally from Madryn borrowings.
- Madryn principal was $65.0 million; its balance-sheet carrying value, net of discounts and issuance costs, was $47.8 million. The June 2019 amendment lowered the stated rate to three-month LIBOR plus 8% absent default, eliminated scheduled principal payments and extended maturity to September 30, 2025. The filing reports a 12.7% weighted-average rate and an 18.4% effective rate at quarter-end. Debt is secured by substantially all company and certain subsidiary assets; covenants require minimum revenue and liquidity. The company reported compliance at September 30.
- Management said available cash, operating cash and borrowing capacity were expected to meet liquidity needs for at least 12 months from issuance of the statements, while cautioning that assumptions may prove incorrect and additional capital may be needed.
Notable changes, outlook and risks
- Losses widened despite strong sales growth: nine-month net loss increased to $32.6 million from $10.6 million. The prior-year comparison included a $15.9 million derivative fair-value gain, versus $2.8 million in 2019; these non-cash valuation changes affect reported earnings.
- Management expects losses to continue in the intermediate term as it invests in sales, manufacturing, R&D and U.S. regulatory work. The U.S. IDE study planned for 800 patients across 40 sites; aesthetic-cohort surgeries were complete by August 2019, while reconstruction enrollment continued. Estimated total study costs are $30–$40 million over ten years. Approval is uncertain and the implants were not approved for U.S. commercial sale.
- Foreign-currency transaction losses were $2.6 million for the first nine months; the company said it had no currency hedges. Brazil accounted for 16.3% of nine-month revenue. NuSil was the sole supplier of medical-grade silicone and represented 60.3% of purchases; the supply agreement expires in December 2021.
- Other material risks include dependence on distributors and international regulatory approvals, product safety and market acceptance, and the cost and execution of clinical trials. The filing stated that no BIA-ALCL cases had been reported in Motiva patients as of the report, while warning that wider breast-implant safety concerns could affect demand. The company also disclosed litigation against an insertion-sleeve supplier over alleged failure to fulfill contractual supply obligations.
- Disclosure controls were deemed ineffective because of a material weakness in review of the manual consolidation process, which resulted in audit adjustments. Remediation efforts included improving controls and procedures, adding accounting personnel and engaging technical consultants.
Important facts for investors to verify
- Whether revenue growth can outpace rising SG&A, R&D spending and cash consumption.
- Cash runway, future financing needs, Madryn covenant compliance and the economics of the amended debt.
- Progress, enrollment, cost and results of the U.S. IDE study, and the timing and requirements of any FDA submission.
- Continuity of silicone and insertion-sleeve supply, and the outcome of the supplier dispute.
- Remediation and independent validation of the material weakness in financial reporting controls.