Establishment Labs Holdings Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Establishment Labs manufactures and sells medical devices, with substantially all revenue from Motiva silicone breast implants. Products were sold internationally; Motiva Implants were not approved for commercial sale in the United States.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $20.8 million | $14.8 million |
| Gross profit / gross margin | $11.3 million / 54.2% | $7.9 million / 53.4% |
| Operating expenses | $19.6 million | $10.8 million |
| Operating loss | $8.4 million | $2.9 million |
| Net loss | $10.8 million | $6.5 million |
| Basic and diluted loss per share | $0.53 | $0.45 |
| Cash used in operating activities | $8.0 million | $5.9 million |
Revenue increased 40.2%, primarily from greater Motiva sales in existing markets and new European direct markets. Gross margin improved 0.8 percentage points; management attributed the increase mainly to higher-priced direct-market sales, partly offset by acquired-inventory amortization, which reduced quarterly gross margin by 7%. SG&A rose 85.7% to $16.1 million, reflecting higher personnel, consulting and audit, marketing, freight, commission and insurance costs. R&D rose 66.9% to $3.6 million, including U.S. clinical-trial costs. Net loss widened as operating expenses grew faster than revenue.
Financial position and liquidity
- Cash was $43.1 million at March 31, 2019, down from $52.6 million at December 31, 2018. Total assets were $109.0 million; current assets were $91.7 million and current liabilities $16.6 million.
- Operating cash outflow was $8.0 million; investing outflow was $1.5 million, including $0.7 million of property and equipment purchases and $0.8 million for an asset acquisition. Financing cash outflow was $16,000.
- Accumulated deficit was $99.8 million. Shareholders’ equity was $61.0 million.
- Madryn debt principal was $40.0 million, with a net carrying value of $23.2 million after unamortized discounts and issuance costs. The weighted-average interest rate was approximately 13.8%; principal payments begin in 2021, with maturity in 2023. The company reported compliance with financial debt covenants at quarter-end.
Outlook, risks and notable items
- Management expects continued losses in the intermediate term while investing in sales, manufacturing, R&D and U.S. regulatory approval. It stated available cash, operating cash and IPO proceeds should fund requirements for at least 12 months from issuance of the statements, while cautioning that assumptions could prove incorrect. No revenue or earnings guidance was provided.
- The U.S. FDA investigational-device study is intended to support a future PMA submission. Aesthetic-cohort enrollment targets had been reached; the company expected to meet remaining enrollment targets in Q2 2019. Management estimated total trial costs of $30–$40 million over ten years.
- Key risks include regulatory approval and clinical-study outcomes, dependence on Motiva implants, competition and market acceptance, international and foreign-exchange exposure, and reliance on NuSil as the sole supplier of medical-grade silicone. NuSil represented 62.9% of purchases in Q1 2019; the supply agreement expires in December 2021.
- Cash-flow and earnings include noncash share-based compensation of $1.8 million. The company recorded a $0.4 million foreign-currency transaction loss. Fair-value movements included a $32,000 derivative loss and a $225,000 gain on contingent consideration.
- In January 2019, the company acquired Austrian distribution assets for reported total consideration of $1.1 million, principally inventory. A lawsuit against Keller Medical and Allergan was settled March 29, 2019, alongside a supply agreement through December 31, 2022; the case was dismissed with prejudice on April 2.
- Disclosure controls were deemed ineffective due to a material weakness in review of the manual consolidation process, which resulted in audit adjustments. The company described remediation efforts, including improved procedures and additional accounting support.
Important facts for investors to verify
- Whether revenue growth can continue while SG&A and R&D spending rise, and whether gross-margin gains persist after acquired-inventory effects.
- Cash runway and funding needs against operating cash burn, the planned clinical-trial investment and high-cost Madryn debt.
- Progress, costs and results of the FDA study, including remaining enrollment and follow-up obligations.
- Continuity and terms of silicone supply from NuSil, as well as resolution of the disclosed insertion-sleeve supplier dispute.
- Remediation and independent validation of the material weakness; the filing does not report that remediation was complete.
- Share-count figures: 20,395,733 shares were outstanding at March 31, while the cover reports 20,409,223 as of May 13, 2019.