Establishment Labs Holdings Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results. The company manufactures and sells medical devices, principally Motiva silicone gel-filled breast implants; it had not received U.S. approval to sell Motiva Implants as of the filing.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $48.6 million | $41.2 million | $95.1 million | $79.6 million |
| Gross profit | $30.3 million | $27.5 million | $60.3 million | $52.4 million |
| Gross margin | 62.3% | 66.7% | 63.5% | 65.8% |
| Operating loss | $(13.7) million | $(10.4) million | $(21.9) million | $(16.0) million |
| Net loss | $(16.7) million | $(37.1) million | $(28.7) million | $(43.0) million |
| Net loss per share | $(0.65) | $(1.52) | $(1.14) | $(1.77) |
For the six months, cash used in operating activities was $48.9 million, versus $16.2 million in 2022; investing activities used $13.3 million, versus $19.6 million. Financing provided $85.7 million, mainly from the April share offering. Cash rose to $90.2 million from $66.4 million at year-end 2022. Working-capital outflows included $15.0 million from receivables and $19.1 million from inventory.
At June 30, current assets were $209.0 million and current liabilities $43.3 million. Total liabilities were $230.4 million. Oaktree debt was $186.9 million in gross principal, including interest added to principal; its net balance-sheet carrying value was $182.0 million. The debt bears 9% annual interest, matures in April 2027, and had no principal payments due before maturity. The company reported compliance with its financial debt covenants.
Changes and notable items
- Revenue grew 18.0% in Q2 and 19.5% for the first half, with management attributing growth primarily to share gains, especially in EMEA and Asia-Pacific. Q2 was described as record quarterly revenue.
- Gross margin fell 4.4 percentage points in Q2 and 2.3 points for the first half. The company cited higher inventory-obsolescence reserves, new-product initiatives, and higher labor and overhead costs, partly associated with Costa Rica colón revaluation.
- Operating expenses rose: first-half SG&A increased 14.7% and R&D increased 58.8%, reflecting freight, staffing, sales and marketing, facilities, and U.S. clinical-trial spending. Operating losses widened despite revenue growth.
- Net loss improved year over year, substantially reflecting the absence of the $19.0 million Madryn debt-extinguishment loss recorded in 2022 and more favorable foreign-exchange results. First-half 2023 other income included a $2.4 million foreign-currency transaction gain, largely unrealized.
- The April 2023 public offering of 1.265 million shares generated approximately $84.6 million net proceeds. Outstanding common shares were 25.8 million at June 30; the filing reports 25.8 million as of August 8.
Outlook, risks and other disclosures
Management expects continued losses at least in the near term and does not expect profitability in 2023. It expects higher spending on sales, marketing, manufacturing capacity, R&D, U.S. clinical and regulatory work, and public-company costs. Management believes cash and operating cash flows will cover liquidity needs for at least 12 months, but says assumptions could prove incorrect and additional financing may be needed. The filing provides no numerical revenue or earnings guidance.
The company submitted the fourth and final module of its U.S. PMA application in February 2023; FDA approval remains uncertain. It expects its new Costa Rica manufacturing facility to begin production by the end of 2023. New products received CE-mark approval in May 2023, and Motiva Implants and the Motiva Flora tissue expander have Japanese regulatory approval. Mia Femtech launched at selected Japanese clinics in April; it was not yet commercially available in the EU.
Key risks include dependence on Motiva Implants and elective-procedure demand, regulatory and clinical-trial uncertainty, competition, foreign-exchange and emerging-market exposure, and reliance on Avantor as the sole supplier of medical-grade silicone. Avantor represented 56.2% of purchases in the first half of 2023. The company also holds cash above FDIC insurance limits, concentrated at two U.S. financial institutions. The Russia-Ukraine conflict has negatively affected regional revenue; inflation and higher interest rates may constrain discretionary spending.
Disclosure controls and procedures were not effective as of June 30, 2023. A previously reported material weakness involving user-access controls and segregation of duties remained under remediation; management expected remediation in the second half of 2023. The company reported no material legal proceedings and said contingent liabilities were not material as of the reporting date.
Investor verification priorities
- Track cash burn, working-capital needs, and whether liquidity remains sufficient without further equity or debt financing.
- Confirm progress and timing of FDA review, any additional clinical or post-approval requirements, and regulatory approvals for the new facility.
- Monitor gross-margin recovery, inventory growth and reserves, and manufacturing costs as capacity expands.
- Assess continued revenue growth by region, elective-procedure demand, and the impact of foreign exchange and the Ukraine conflict.
- Verify remediation and testing of the material weakness, and review the Oaktree debt terms, covenant headroom, and future interest burden.