Establishment Labs Holdings Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited consolidated results, compared with Q1 2022. The company manufactures and sells medical devices, principally Motiva silicone gel-filled breast implants. It sells internationally and had not received U.S. approval to commercially sell Motiva Implants.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $46.5 million | $38.5 million |
| Gross profit / gross margin | $30.1 million / 64.7% | $24.9 million / 64.8% |
| Operating expenses | $38.2 million | $30.5 million |
| Operating loss | $8.2 million | $5.6 million |
| Net loss / diluted loss per share | $11.9 million / $0.48 | $5.9 million / $0.24 |
| Cash used in operating activities | $20.6 million | $4.8 million |
| Cash used in investing activities | $4.3 million | $5.7 million |
At March 31, cash was $42.8 million, down from $66.4 million at year-end 2022. Current assets were $142.0 million and current liabilities $41.5 million. Total liabilities were $225.4 million, including $178.6 million of net carrying value on the Oaktree term loan; shareholders’ equity was negative $16.0 million. Inventory increased to $46.1 million from $36.6 million. Operating cash use reflected working-capital investment, including higher inventory and receivables, as well as the net loss.
Changes versus prior-year quarter
- Revenue rose 21.0%, which management attributed mainly to market-share gains, especially in EMEA and Asia-Pacific, supported in part by expanded direct sales. Asia-Pacific revenue increased to $14.0 million from $8.0 million; Latin America declined to $11.6 million from $12.2 million.
- Gross margin was nearly unchanged. SG&A rose 17.8% to $31.7 million, driven by higher personnel, sales and marketing, freight, and facility costs. R&D increased 81.6% to $6.5 million, principally from personnel and U.S. clinical-trial spending.
- Net loss approximately doubled. Higher operating expenses and interest expense contributed; other income declined to $0.7 million from $2.7 million, mainly because foreign-currency transaction gains were lower.
- Operating cash use increased substantially year over year. Capital spending included $3.8 million for construction in progress, primarily the Costa Rica manufacturing project.
Outlook, risks, and notable items
- Management expects near-term losses and does not expect profitability in 2023. It expects continued investment in sales, marketing, manufacturing capacity, R&D, U.S. regulatory work, and public-company infrastructure; no specific revenue or earnings guidance is provided.
- Management said available cash and operating cash flow should meet liquidity needs for at least 12 months. The company was compliant with Oaktree financial covenants at quarter-end. The loan bears 9% annual interest, has no scheduled principal payments before its April 2027 maturity, and is secured by substantially all personal property of the company and certain subsidiaries. Its minimum-liquidity covenant rose to $25 million after the second tranche funded.
- On April 24, 2023, the company issued 1.1 million shares and the underwriters exercised an option for 165,000 more. The offering generated approximately $85 million in net proceeds before offering expenses, increasing shares outstanding by 1.265 million after quarter-end.
- The final module of the U.S. Motiva PMA submission was filed with the FDA in February 2023. FDA approval remains uncertain; the company may face additional requirements, costs, or delays. Mia Femtech launched at two clinics in Japan in April; it was not yet commercially available in the European Union.
- Key risks include reliance on a single supplier for medical-grade silicone, currency and macroeconomic exposure, elective-procedure demand, product safety and reputation, regulatory approval, and manufacturing expansion. Management cited ongoing effects from the Ukraine conflict in the region, which accounted for 1.4% of Q1 revenue versus 1.7% a year earlier.
- Disclosure controls were deemed ineffective at quarter-end. A previously identified material weakness in user access controls and segregation of duties remained under remediation; the company expected remediation during 2023. The filing reports no material legal proceedings requiring disclosure.
Important facts for investors to verify
- Whether revenue growth can continue while operating expenses and losses rise, and whether cash use moderates.
- Current liquidity after the April offering, including compliance with the $25 million minimum-liquidity covenant and the company’s cash needs for debt interest and expansion.
- Progress and timing of FDA review, any additional clinical or post-approval requirements, and commercialization prospects in the United States.
- Manufacturing expansion costs, capacity, and execution, as well as continuity of supply from sole-source silicone supplier Avantor.
- Remediation and testing of the internal-control material weakness, and the impact of dilution from the April share offering and future financing needs.