Establishment Labs Holdings Inc. — FY2019 Form 10-K
Business context and reporting period. The company develops and sells medical devices, principally Motiva silicone breast implants, and related products. This annual report covers the fiscal year ended December 31, 2019, with comparisons to FY2018. Motiva Implants generated approximately 94% of FY2019 revenue. Sales were made in more than 80 countries; the implants were not approved for commercial sale in the United States.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $89.6 million | $61.2 million |
| Gross profit / gross margin | $54.9 million / 61.3% | $36.1 million / 59.0% |
| Operating expenses | $85.8 million | $60.0 million |
| Operating loss | $30.9 million | $23.9 million |
| Net loss | $38.2 million | $21.1 million |
| Basic and diluted loss per share | $1.86 | $1.22 |
| Net cash used in operating activities | $30.0 million | $33.9 million |
| Cash at year-end | $37.7 million | $52.6 million |
- Cash used in investing activities was $7.8 million, principally for property and equipment. Financing activities provided $22.8 million, chiefly from Madryn borrowings.
- At December 31, 2019, current assets were $95.8 million and current liabilities were $23.2 million. Total assets were $116.5 million, total liabilities $76.9 million, and shareholders’ equity $39.6 million. Accumulated deficit was $127.1 million.
- Madryn principal outstanding was $65.0 million; its net balance-sheet carrying value was $48.1 million after unamortized discounts and issuance costs. The agreement is secured by substantially all assets, includes minimum revenue and liquidity covenants, and had no principal due until maturity on September 30, 2025. The company reported compliance with financial covenants at year-end.
Changes versus FY2018
- Revenue rose $28.4 million, or 46.3%, driven by increased sales and entry into new geographies. Brazil represented 15.7% of FY2019 revenue; Europe accounted for approximately 40%.
- Gross margin increased 2.3 percentage points, attributed to higher-margin direct sales and manufacturing efficiencies, partly offset by acquired-inventory amortization, which reduced year-to-date margin by 4.0 percentage points.
- SG&A rose 49.7% to $70.8 million, reflecting personnel, consulting and audit fees, commissions, marketing, and insurance costs. R&D increased 18.2% to $15.0 million, including higher U.S. clinical-trial costs.
- Net loss widened by $17.1 million. A smaller derivative fair-value gain ($3.1 million versus $15.9 million in FY2018) contributed to the deterioration, alongside higher operating expenses.
- Operating cash outflow improved by $3.9 million, but year-end cash declined $15.0 million. Madryn debt principal increased from $40.0 million to $65.0 million.
Outlook, risks, and notable items
- Management expected continued losses in the intermediate term and stated it did not expect profitability in 2020. It anticipated higher R&D and SG&A spending, including for U.S. clinical work and commercial expansion; no specific revenue or earnings guidance was provided.
- The U.S. IDE trial had completed surgeries in the primary and revision augmentation cohorts, with 450 and 100 subjects, respectively. The company planned to continue enrolling reconstruction cohorts, target 800 patients overall, and begin rolling PMA data submissions for the aesthetic cohorts in Q1 2021. Estimated total PMA trial costs were $30–$40 million over ten years.
- After year-end, the company completed a February 2020 follow-on offering that generated approximately $63.9 million net proceeds. Management said available cash, operating cash flows, and offering proceeds were expected to fund liquidity needs for at least 12 months from the financial-statement issuance date.
- COVID-19 was identified as a developing risk that could reduce elective procedures, disrupt sales and clinical trials, and affect manufacturing or supply chains; the filing said its impact could not then be forecast.
- Key business risks include U.S. regulatory approval and clinical-trial execution, dependence on Motiva products and elective-procedure demand, competition, foreign-exchange exposure, and reliance on NuSil as the sole supplier of medical-grade silicone. NuSil represented 58.5% of FY2019 purchases; the supply agreement was stated to expire in December 2021.
- Management concluded disclosure controls were not effective at December 31, 2019. A previously reported material weakness in review of the manual consolidation process remained unremediated. The independent auditor gave an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
- The company reported no material legal proceedings and no material off-balance-sheet arrangements. Its post-market implant complication data was self-collected and not based on mandatory follow-up or an FDA PMA study, limiting direct comparability with competitors’ prospective trials.
Investor verification priorities
- Track revenue growth, gross margin, cash burn, and whether operating costs rise faster than sales.
- Confirm post-offering liquidity, Madryn covenant compliance, debt terms and effective borrowing cost, and any funding needs for the clinical program or facility expansion.
- Verify clinical-trial enrollment, follow-up data, FDA feedback, and timing and cost of the planned PMA submissions.
- Assess the status of remediation of the material weakness and effectiveness of financial-reporting controls.
- Monitor COVID-19-related effects, implant safety developments, supplier continuity, foreign-exchange movements, and the terms or renewal of the NuSil supply agreement.