Establishment Labs Holdings Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing, not a standalone fourth-quarter report. The company develops and sells medical devices, principally Motiva silicone breast implants, in international markets; Motiva products generated about 95% of 2023 revenue. Motiva Implants were approved in 86 countries, but FDA approval to sell them in the United States remained pending at year-end.
Financial performance and position
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $165.2 million | $161.7 million |
| Gross profit / gross margin | $107.0 million / 64.8% | $106.6 million / 65.9% |
| Operating expenses | $172.0 million | $146.3 million |
| Operating loss | $65.0 million | $39.7 million |
| Net loss | $78.5 million | $75.2 million |
| Net loss per share | $3.07 | $3.08 |
| Cash and cash equivalents, year-end | $40.0 million | $66.4 million |
| Operating cash flow | $(88.5) million | $(52.2) million |
- Revenue increased 2.2%. By region, EMEA revenue rose to $80.2 million from $62.4 million; Asia-Pacific fell to $34.0 million from $45.8 million; Latin America declined to $48.9 million from $52.4 million.
- Gross margin declined 1.1 percentage points, reflecting higher inventory-obsolescence reserves and labor and overhead costs, partly offset by new product initiatives. SG&A rose 15.6% to $145.6 million, and R&D increased 30.0% to $26.4 million.
- Operating cash use increased, including a $42.2 million inventory cash outflow. Investing cash use was $24.5 million, mainly for the Costa Rica manufacturing expansion. Financing provided $86.2 million, principally from the April 2023 share offering, which generated about $84.6 million net.
- Year-end current assets were $174.9 million and current liabilities $57.2 million. Inventory increased to $79.5 million from $36.6 million; accounts receivable rose to $46.9 million from $35.4 million.
- Oaktree debt had $192.6 million outstanding principal, including $17.6 million of interest added to principal; its balance-sheet carrying value, net of discount and issuance costs, was $188.7 million. The loan bears 9% interest, matures April 2027, and had no principal due before maturity. The company reported compliance with debt covenants at year-end.
Material changes and notable developments
- After record quarterly revenue in the first half, growth slowed in the second half, especially in distributor markets in Asia-Pacific and Latin America. Management attributed this to weaker elective-procedure demand, macroeconomic and geopolitical uncertainty, and seasonality.
- In January 2024, the company launched Motiva Implants in China and announced the first U.S. commercial procedure using the Motiva Flora tissue expander, which received FDA 510(k) clearance in October 2023. FDA PMA approval for Motiva breast implants was still pending.
- The company opened the first phase of its Sulàyöm Innovation Campus in Costa Rica. The approximately 100,000-square-foot phase is intended to add about 730,000 units of annual capacity; manufacturing was expected to begin in 2024. Estimated cost for the initial phase is $51.7 million, with most incurred by the filing date.
- A January 2024 securities offering raised approximately $50 million gross through common shares and pre-funded warrants. A February 2024 amendment extended availability dates for two undrawn Oaktree tranches, raised their interest rate from 9% to 10%, and revised funding milestones.
- FY2022 included a $19.0 million loss on extinguishment of the former Madryn debt; there was no comparable charge in 2023. Conversely, interest expense rose to $15.4 million from $11.8 million.
Outlook, risks, and controls
- Management expects losses to continue and does not expect profitability in 2024. It expects the softer demand environment to continue in 2024, with no numerical revenue or earnings guidance provided. The company said it was reducing headcount and operating expenses and managing inventory while prioritizing U.S. launch preparation, China, and Mia Femtech.
- Management stated that cash and anticipated operating cash flow should cover liquidity requirements for at least 12 months. This outlook is subject to uncertainty: 2023 operating cash use was $88.5 million, and the company may need additional financing. The January 2024 offering increased cash after year-end.
- Key business risks include the still-pending FDA PMA for Motiva Implants; dependence on breast implants and elective-procedure demand; competition; reliance on Avantor as sole supplier of implantable medical-grade silicone; manufacturing expansion and execution; foreign-exchange exposure; and product safety, regulatory, litigation, and reputational risks. The company reported no material legal proceedings and no material contingent liabilities at year-end.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2023. A material weakness remained in change-management controls for direct database changes in certain locations; remediation was expected during 2024. The auditor issued an adverse opinion on internal control effectiveness, while giving an unqualified opinion on the financial statements.
- The company held $40.0 million in cash at year-end, with most cash at two U.S. financial institutions and balances exceeding FDIC insurance limits. It does not hedge foreign-currency exposure.
Most important facts for investors to verify
- Progress and timing of FDA review of the Motiva Implants PMA, including any additional data, labeling, or post-approval requirements.
- Whether 2024 demand, especially in distributor markets, stabilizes and whether the planned expense reductions translate into lower cash burn.
- Cash runway after the January 2024 financing, capital spending needs, and ability to meet Oaktree covenant and interest obligations.
- Manufacturing start-up, regulatory readiness, costs, and capacity ramp at the new Costa Rica facility; inventory levels and obsolescence reserves.
- Completion and independent validation of remediation for the remaining material weakness in financial reporting controls.
- Exposure to the sole-source silicone supplier and concentration of uninsured cash deposits.