Business context and reporting period
Establishment Labs Holdings Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company manufactures and sells medical devices, with more than 92% of first-half revenue from Motiva silicone breast implants. Products were sold internationally; Motiva Implants were not approved for commercial sale in the United States.
Financial performance and condition
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $21.7m | $13.7m | $42.5m | $28.5m |
| Gross profit / margin | $13.0m / 60.0% | $8.2m / 59.9% | $24.3m / 57.1% | $16.1m / 56.6% |
| Operating expenses | $22.4m | $14.5m | $42.0m | $25.3m |
| Operating loss | ($9.4m) | ($6.3m) | ($17.8m) | ($9.2m) |
| Net loss | ($9.0m) | ($5.4m) | ($19.8m) | ($11.9m) |
| Basic and diluted loss per share | ($0.44) | ($0.35) | ($0.97) | ($0.79) |
- Q2 revenue rose 58.2%; first-half revenue rose 48.9%, driven by market penetration and new geographies, including European direct-sales markets.
- First-half SG&A increased 76.9% to $34.5m, primarily from hiring, consulting and stock compensation, commissions, and marketing. R&D increased 29.6% to $7.6m, including U.S. clinical-trial spending.
- Gross margin improved modestly year over year, though acquired-inventory amortization reduced it by 5.9 percentage points in Q2 and 6.5 points year to date.
- At June 30, cash was $31.9m, down from $52.6m at year-end 2018. Current assets were $84.2m and current liabilities $21.4m. Total assets were $104.8m; shareholders’ equity was $53.8m.
- First-half operating cash outflow was $15.1m; investing outflow was $5.7m, including $3.2m to buy the Costa Rica manufacturing facility. Net cash decreased $20.8m.
- Madryn debt principal was $40.0m and its net carrying value was $24.1m. The June amendment lowered the stated rate from LIBOR plus 11% to LIBOR plus 8% absent default, removed scheduled principal payments, and extended maturity to September 30, 2025. The company borrowed an additional $25.0m on August 12, 2019, after quarter-end.
Outlook, commentary, and notable risks
- Management expects continued losses in the intermediate term while investing in sales, marketing, manufacturing, R&D, and U.S. regulatory work; it did not provide specific revenue or earnings guidance. It said available cash, operating cash, and the subsequent $25m borrowing should fund requirements for at least 12 months, while cautioning that assumptions may prove incorrect.
- The U.S. IDE study is planned for 800 patients at 40 sites. As of August 2019, surgeries for the aesthetic cohorts were complete and enrollment continued for reconstruction cohorts. Estimated total trial cost is $30m–$40m over ten years; results are intended to support a PMA submission.
- Liquidity and execution risks include ongoing losses, debt covenants and collateral over substantially all assets, regulatory approval and clinical-trial uncertainty, and reliance on NuSil as the sole supplier of medical-grade silicone. NuSil represented 62.1% of first-half purchases.
- The company reported a material weakness in review of its manual consolidation process, resulting in audit adjustments. Management concluded disclosure controls were not effective at quarter-end and described remediation efforts, including improved procedures and additional accounting expertise.
- Other notable exposures include foreign-currency losses of $0.3m in the first half, no currency hedging, product-liability risk, and risks to implant demand from safety concerns affecting the breast-implant category. The company reported no BIA-ALCL cases in Motiva patients to date. A distribution-contract lawsuit was settled and dismissed with prejudice in April 2019; the filing also refers to litigation over an insertion-sleeve supplier.
Important facts for investors to verify
- Progress, endpoints, enrollment, cost, and funding needs for the U.S. IDE trial, and the timing and probability of FDA approval.
- Revenue growth, customer and geographic mix, direct-sales economics, and whether gross-margin gains persist as acquired-inventory amortization fades.
- Cash burn, availability and terms of the August 2019 Madryn draw, covenant compliance, interest burden, and any further financing needs.
- Remediation and independent validation of the material weakness in consolidation controls.
- Continuity of silicone and insertion-sleeve supply, related litigation status, and potential product-safety or regulatory developments.