Establishment Labs(ESTA) - 2022 Q4 - Annual Report

PART I Business Establishment Labs is a medical technology company specializing in breast aesthetics and reconstruction with its Motiva Implants®, focusing on international sales and U.S. market entry Overview and Recent Developments The company, centered on Motiva Implants®, has achieved regulatory milestones, expanded manufacturing, secured new financing, and launched innovative products - The company's Motiva Implants® are sold in 85 countries outside the U.S., with approximately 40% of 2022 revenue generated through its direct sales force[30] - In April 2022, the company secured a new credit agreement for up to $225 million from Oaktree, using part of the initial $150 million tranche to repay a previous $65 million credit facility[32] - The company is expanding its manufacturing capacity in Costa Rica with a new facility, expected to initially add approximately 730,000 units per year; the land and building shell were purchased in 2022[33][34] - The U.S. IDE clinical trial for Motiva Implants® completed all 827 patient enrollment surgeries by June 2022, with the final PMA submission module sent to the FDA in February 2023[31][40] Market and Competitive Landscape The global breast augmentation market, led by the U.S. and Brazil, is competitive, with the company positioning its Motiva Implants® as superior due to lower adverse event rates Top 5 Markets for Breast Augmentation Procedures (2021) | Rank | Country | Procedures | Percentage of World-Wide Total | | :--- | :--- | :--- | :--- | | 1 | United States | 387,700 | 23.0% | | 2 | Brazil | 177,960 | 10.6% | | 3 | Mexico | 77,700 | 4.6% | | 4 | Argentina | 67,480 | 4.0% | | 5 | Germany | 66,945 | 4.0% | Competitor 10-Year Primary Augmentation Adverse Event Rates (Kaplan-Meier) | Adverse Event | Sientra (N=1,116) | Allergan (N=455) | Mentor (N=552) | | :--- | :--- | :--- | :--- | | Rupture (MRI Cohort) | 8.5% | 9.3% | 24.2% | | Capsular Contracture | 12.9% | 18.9% | 12.1% | | Reoperation | 24.0% | 36.1% | 25.5% | Products and Technologies The company's product portfolio, centered on Motiva Implants®, features proprietary safety and aesthetic technologies, including the SmoothSilk® surface, Qid® RFID, and the Mia Femtech® minimally invasive system - The SmoothSilk®/SilkSurface® is a biocompatible smooth surface designed to reduce capsular contracture and categorized as smooth under ISO 14607:2018 standards[57][62] - The Qid® RFID microtransponder provides a unique electronic serial number for traceability, enhancing patient safety, and is currently the only breast implant on the international market with this technology[68][70] - The Motiva Flora® Tissue Expander is the first expander labeled as "MRI Conditional" due to its integrated RFID port with no magnets, allowing safe use alongside MRI scanning[75] - The Mia Femtech® system is designed for minimally invasive breast enhancement with faster recovery, and its Ergonomix2® Diamond implant received CE mark in December 2020[77] Clinical Data and Regulatory Strategy The company reports consistently low complication rates from extensive post-market data and is pursuing U.S. market entry through a prospective IDE clinical trial and rolling PMA submission to the FDA 12-Year Post-Market Surveillance Data (Oct 2010 - Dec 2022) | Metric | Rate | Number of Implants Sold | | :--- | :--- | :--- | | Rupture | < 0.1% | ~2.7 million | | Capsular Contracture | < 0.1% | ~2.7 million | | Reoperation for Adverse Events | < 0.1% | ~2.7 million | - The company is pursuing U.S. market entry via a PMA submission supported by an IDE clinical trial, with a rolling submission initiated in Q4 2021 and the final module submitted to the FDA in February 2023[86] Operations and Human Capital The company operates ISO-certified manufacturing in Costa Rica, relies on a sole-source silicone supplier, holds a significant patent portfolio, and employs 958 individuals as of December 2022 - The company manufactures products in two ISO-13485-certified facilities in Costa Rica and is expanding with a new Sulàyöm Innovation Campus to increase capacity[100][106] - Establishment Labs relies on Avantor as a single-source supplier for medical-grade silicone, with a master supply agreement extending through December 2026[108] - As of December 31, 2022, the company's intellectual property portfolio included 19 issued U.S. patents and 87 issued foreign patents, with expirations between 2025 and 2039[91] - As of December 31, 2022, the company had 958 employees, with none represented by a labor union except for those in Brazil[145] Risk Factors The company faces significant risks including global health crises, economic downturns, reliance on Motiva Implants® for profitability, uncertain regulatory approvals, intense competition, single-source supplier dependency, and potential negative publicity - The COVID-19 pandemic has adversely affected business through procedure deferrals and operational disruptions, and future health crises or economic downturns could further impact demand for elective aesthetic procedures[154][240] - The company has a history of losses and expects to incur more, with profitability dependent on the commercial success of Motiva Implants® and navigating a lengthy, expensive, and uncertain FDA approval process for the U.S. market[167][170][194] - The company relies on a single-source supplier, Avantor, for its primary raw material (medical-grade silicone), creating significant risk related to supply interruptions, price increases, or compliance issues[254] - Negative publicity concerning breast implant safety, particularly regarding links to BIA-ALCL and other cancers in competitors' products, could reduce overall demand for silicone breast implants, despite no such cases reported for Motiva Implants®[224][232] Properties The company's main executive offices and manufacturing facilities are in Alajuela, Costa Rica, with significant expansion underway in the Coyol Free Zone, complemented by leased spaces globally - The main executive offices and manufacturing facilities are in Alajuela, Costa Rica, occupying approximately 36,000 square feet, with a new 28,000 square foot facility added in 2017[345] - A major expansion is underway in the Coyol Free Zone, including approximately 170,000 square feet of new facility space; the land and building shell were purchased in 2022[346] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common shares trade on Nasdaq under 'ESTA', with no cash dividends paid or planned, and no share repurchases in Q4 2022 - Common shares are traded on the Nasdaq Capital Market under the symbol "ESTA"[351] - The company has never paid cash dividends and does not anticipate doing so in the foreseeable future[354] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2022, revenue grew to $161.7 million, but net loss widened to $75.2 million due to debt extinguishment and higher operating expenses, despite securing a new $225 million credit facility Results of Operations In 2022, revenue increased 27.6% to $161.7 million, but gross margin declined, and SG&A expenses rose 36.6%, leading to a $19.0 million loss on debt extinguishment Consolidated Results of Operations (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Revenue | $161,700 | $126,682 | | Gross profit | $106,595 | $85,404 | | Loss from operations | ($39,658) | ($25,140) | | Net loss | ($75,209) | ($41,139) | - Revenue increased by $35.0 million (27.6%) in 2022, driven by market share gains, particularly in Latin America and Asia-Pacific, and recovery from the COVID-19 pandemic[389] - SG&A expenses increased by $33.8 million (36.6%) in 2022, primarily due to an $18.6 million increase in personnel costs from higher headcount and increased sales, marketing, and compliance-related consulting fees[393] - A loss on extinguishment of debt of $19.0 million was recognized in 2022 due to the termination of the Madryn Credit Agreement, which included a $6.5 million early repayment penalty[399] Liquidity and Capital Resources As of December 31, 2022, cash increased to $66.4 million, driven by $100.3 million from financing activities, offsetting $52.2 million used in operations and $34.8 million in investing activities, with sufficient liquidity for the next 12 months Summary of Cash Flows (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($52,166) | ($27,532) | | Net cash used in investing activities | ($34,791) | ($7,163) | | Net cash provided by financing activities | $100,255 | $4,052 | | Net increase (decrease) in cash | $12,940 | ($31,108) | - Net cash from financing activities was $100.3 million in 2022, primarily from $168.1 million in borrowings under the new Oaktree Credit Agreement, offset by a $71.7 million repayment of the previous Madryn facility[412] - Net cash used in investing activities was $34.8 million in 2022, with $29.9 million used for capital expenditures on the new manufacturing facility in Costa Rica[409] Critical Accounting Policies The company's critical accounting policies involve significant estimates for revenue recognition, R&D expenses, accounts receivable and inventory valuation, and share-based compensation using the Black-Scholes model - Revenue from distributors is recognized at the time of shipment, while for consigned inventory, it is recognized upon notification of product implantation[422][424] - The company estimates IDE clinical trial expenses based on services performed by research organizations, accruing fees based on estimated time, patient enrollment, and activity level[429] - Share-based compensation for stock options is valued using the Black-Scholes model, requiring subjective assumptions for expected term, volatility (based on industry peers), and risk-free interest rate[440][652][654] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2022, due to a material weakness in IT user access controls and segregation of duties, leading to an adverse auditor opinion, with full remediation expected in 2023 - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022[449] - A material weakness in internal control over financial reporting exists related to ineffective primary user access controls for IT systems, leading to a lack of segregation of duties[451][461] - The company has made progress on remediation but needs more time to test the operational effectiveness of manual controls, with full remediation expected during 2023[452][453] - The independent registered public accounting firm, Marcum LLP, issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2022, due to the identified material weakness[460] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information for Items 10 through 14, covering directors, executive officers, corporate governance, compensation, and principal accountant fees, is incorporated by reference from the forthcoming 2023 Proxy Statement - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the forthcoming 2023 Proxy Statement[474][475][476][477][478] PART IV Exhibit and Financial Statement Schedules This section provides an index of the consolidated financial statements and all exhibits filed with the 10-K report, with financial statement schedules omitted as not applicable or included elsewhere - This item provides an index of the consolidated financial statements and all exhibits filed with the 10-K report[480][482] Financial Statements and Supplementary Data Consolidated Financial Statements The consolidated financial statements present the company's financial position, operations, and cash flows, reporting $211.1 million in total assets, $219.2 million in liabilities, and a $8.2 million shareholders' deficit as of December 31, 2022 Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $149,904 | $113,271 | | Total Assets | $211,061 | $139,529 | | Total Current Liabilities | $38,959 | $31,889 | | Total Liabilities | $219,246 | $88,790 | | Total Shareholders' (Deficit) Equity | ($8,185) | $50,739 | Consolidated Statement of Operations Data (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenue | $161,700 | $126,682 | $84,676 | | Gross Profit | $106,595 | $85,404 | $52,502 | | Loss from Operations | ($39,658) | ($25,140) | ($27,916) | | Net Loss | ($75,209) | ($41,139) | ($38,121) | | Basic and Diluted Net Loss per Share | ($3.08) | ($1.72) | ($1.63) | Notes to Consolidated Financial Statements The notes detail accounting policies, including single operating segment and revenue recognition, and provide specifics on the Oaktree credit facility, Madryn debt extinguishment, share-based compensation, and deferred tax assets with full valuation allowances - The company operates as a single reportable segment, with Brazil being the only country to exceed 10% of consolidated revenue in 2022, at 16.6%[521][522] - In April 2022, the company entered a new credit agreement with Oaktree for up to $225 million, maturing in 5 years with a 9% interest rate, with $181.3 million outstanding as of Dec 31, 2022, replacing the Madryn facility and resulting in a $19.0 million loss on extinguishment[613][614][621][628] - Share-based compensation expense was $13.4 million in 2022, up from $10.4 million in 2021, with $20.9 million of unrecognized compensation expense related to stock options as of Dec 31, 2022[647][650] - The company maintains a full valuation allowance against its deferred tax assets in the U.S. and Brazil due to a history of operating losses, with U.S. federal and state net operating loss carryforwards of approximately $76.1 million and $8.9 million, respectively, as of Dec 31, 2022[665][668]