Establishment Labs(ESTA) - 2019 Q3 - Quarterly Report

Part I. Financial Information This section covers the company's unaudited financial statements, management's discussion and analysis, market risk, and internal controls Item 1. Condensed Consolidated Financial Statements - Unaudited This section presents Establishment Labs Holdings Inc.'s unaudited condensed consolidated financial statements and notes for the periods ended September 30, 2019 Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity as of September 30, 2019, and December 31, 2018 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash | $42,559 | $52,639 | | Accounts receivable, net | $22,022 | $17,648 | | Inventory, net | $26,387 | $24,845 | | Total current assets | $97,936 | $99,435 | | Total assets | $118,256 | $116,573 | | Liabilities & Equity | | | | Accounts payable | $9,383 | $6,239 | | Note payable, Madryn, net | $47,770 | $22,322 | | Total liabilities | $74,452 | $47,088 | | Accumulated deficit | $(121,569) | $(88,975) | | Total shareholders' equity | $43,804 | $69,485 | - Total liabilities increased significantly from $47,088 thousand at year-end 2018 to $74,452 thousand as of September 30, 2019, primarily driven by an increase in the note payable to Madryn from $22,322 thousand to $47,770 thousand[18] Condensed Consolidated Statements of Operations This section details the company's financial performance, including revenue, gross profit, operating expenses, and net income or loss for the reported periods Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $22,854 | $16,286 | $65,316 | $44,811 | | Gross Profit | $14,238 | $10,113 | $38,502 | $26,245 | | Total Operating Expenses | $23,003 | $16,159 | $65,038 | $41,488 | | Loss from Operations | $(8,765) | $(6,046) | $(26,536) | $(15,243) | | Net Income (Loss) | $(12,775) | $1,306 | $(32,594) | $(10,584) | | Basic Net Loss Per Share | $(0.62) | $0.07 | $(1.59) | $(0.66) | - Revenue for the nine months ended September 30, 2019, grew 45.8% year-over-year to $65,316 thousand, but net loss widened to $32,594 thousand from $10,584 thousand in the prior-year period, driven by a 56.8% increase in total operating expenses[21] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities for the nine-month periods Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(25,957) | $(25,405) | | Net cash used in investing activities | $(6,407) | $(1,300) | | Net cash provided by financing activities | $22,424 | $81,587 | | Net (decrease)/increase in cash | $(10,080) | $54,713 | - For the nine months ended September 30, 2019, financing activities provided $22,424 thousand in cash, primarily from $24,700 thousand in borrowings under the Madryn credit agreement, contrasting with $81,587 thousand provided in the prior year, largely due to $71,500 thousand in IPO proceeds[33] Notes to the Condensed Consolidated Financial Statements This section provides detailed disclosures on the company's business, significant accounting policies, key financial components, and debt arrangements - The company's core business involves manufacturing and marketing medical devices for aesthetic and reconstructive plastic surgery, with most revenue from Motiva Implants sold across Europe, the Middle East, Latin America, and Asia, alongside an ongoing U.S. clinical trial[40] - The company relies on NuSil Technology, LLC as the sole supplier for medical-grade silicone, with purchases from NuSil accounting for 60.3% of total purchases for the nine months ended September 30, 2019[56] - The Madryn Credit Agreement was amended on June 17, 2019, lowering the interest rate, providing $25.0 million in new term loans, and extending the maturity to September 30, 2025, with a total outstanding principal balance of $65.0 million as of September 30, 2019[136][139] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operations, highlighting 45.8% revenue growth to $65,316 thousand for the first nine months of 2019, despite widening net losses, with sufficient liquidity for the next twelve months Consolidated Results of Operations This section provides a detailed analysis of the company's revenue, gross profit, and operating expenses for the three and nine-month periods ended September 30, 2019 Comparison of Three Months Ended September 30 (in thousands) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $22,854 | $16,286 | 40.3% | | Gross Profit | $14,238 | $10,113 | 40.8% | | Gross Margin | 62.3% | 62.1% | 0.2 p.p. | | SG&A Expenses | $19,227 | $12,985 | 48.1% | | R&D Expenses | $3,776 | $3,174 | 19.0% | - Q3 2019 SG&A expenses increased by $6,242 thousand (48.1%) year-over-year, primarily due to a $3,200 thousand increase in personnel costs, a $1,200 thousand increase in legal and consulting costs, and a $700 thousand increase in both sales commissions and marketing expenses[223] Comparison of Nine Months Ended September 30 (in thousands) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $65,316 | $44,811 | 45.8% | | Gross Profit | $38,502 | $26,245 | 46.7% | | Gross Margin | 58.9% | 58.6% | 0.3 p.p. | | SG&A Expenses | $53,677 | $32,462 | 65.4% | | R&D Expenses | $11,361 | $9,026 | 25.9% | - For the first nine months of 2019, SG&A expenses rose by $21,215 thousand (65.4%) year-over-year, driven by a $9,200 thousand increase in personnel costs, a $4,700 thousand increase in consulting fees, and a $2,000 thousand increase in sales commissions[234] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations, including cash position and funding sources - As of September 30, 2019, the company had cash of $42,559 thousand and an accumulated deficit of $121,569 thousand[245] - The company believes its available cash, cash from operations, and additional borrowings under the Madryn Credit Agreement will be sufficient to meet liquidity requirements for at least the next twelve months[245] - During the nine months ended September 30, 2019, the company borrowed an additional $25,000 thousand under its amended Madryn Credit Agreement[245] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company identifies primary market risks as interest rate, foreign currency, and inflation, reporting $2,600 thousand in foreign currency losses for the nine months ended September 30, 2019, with other risks deemed immaterial - The company's cash of $42,559 thousand is held in checking accounts, and management believes there is no material exposure to changes in interest rates[259][260] - A majority of revenue is denominated in U.S. dollars and euros, with operating expenses subject to fluctuations in the euro and Brazilian real, resulting in $2,600 thousand in foreign currency transaction losses for the nine months ended September 30, 2019[261] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective as of September 30, 2019, due to a material weakness in internal control over financial reporting related to manual consolidation, with remediation ongoing - Management concluded that disclosure controls and procedures were not effective as of the end of the period covered by the report[263] - A material weakness was identified related to the lack of adequate review over the manual consolidation process, which resulted in audit adjustments[264] - A remediation plan is underway, which includes improving policies and procedures, designing better controls, and hiring additional accounting personnel and expert consultants[266] Part II. Other Information This section provides additional information including legal proceedings, risk factors, and details on recent sales of unregistered securities and use of IPO proceeds Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings, though it may become involved in ordinary course litigation - As of the report date, the company is not a party to any material legal proceedings[272] Item 1A. Risk Factors This section details significant risks including product dependence, regulatory uncertainties, competition, supplier reliance, safety concerns, international operations, financial losses, and internal control weaknesses - Commercialization & Development Risks: The company's success is highly dependent on its Motiva Implants, facing risks related to clinical trial outcomes, U.S. regulatory approvals, market acceptance, and competition from larger, established players[274][277][297] - Operational Risks: The company relies on NuSil Technology as a single-source supplier for medical-grade silicone, posing manufacturing disruption risks, alongside challenges from its direct sales model, distributor reliance, and potential disruptions at its Costa Rican facilities[285][286][327][351] - Industry & Regulatory Risks: The company faces risks from negative publicity regarding breast implant safety, specifically BIA-ALCL, despite no reported cases with Motiva Implants, and must comply with complex global healthcare regulations[355][362][386] - Financial & Control Risks: The company has a history of net losses and may require additional capital, compounded by a material weakness in internal control over financial reporting identified as of December 31, 2018, related to the manual consolidation process[346][348][397][399] Item 2. Recent Sales of Unregistered Securities and Use of Proceeds The company reports no recent unregistered security sales and confirms no material change in the planned use of $70,100 thousand net IPO proceeds from July 2018 - The company completed its IPO on July 23, 2018, receiving net proceeds of approximately $70,100 thousand[437] - There has been no material change in the planned use of proceeds from the IPO as described in the final prospectus[437]