UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑
o
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38593
Establishment Labs Holdings Inc.
(Exact name of Registrant as specified in its charter)
British Virgin Islands
State or Other Jurisdiction of Incorporation or Organization
Building B15 and 25
Coyol Free Zone
Alajuela
Costa Rica
Address of Principal Executive Offices
Not applicable
I.R.S. Employer Identification No.
Not applicable
Zip Code
+506 2434 2400
Registrant’s Telephone Number, Including Area Code
Not applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Shares, No Par Value
Name of Each Exchange on Which Registered
The Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None.
__________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
(Check one)
Large accelerated filer
Non-accelerated filer
o
o
Accelerated filer
Smaller reporting company
Emerging growth company
☑
☑
☑
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No ☑
The aggregate market value of the common stock held by non-affiliates of the registrant on June 28, 2019 was approximately $299,678,686. Shares of the registrant’s common
stock held by each executive officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be
affiliates. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose. The registrant has no non-voting equity.
As of March 13, 2020, the number of the registrant’s common shares outstanding was 23,326,060.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement relating to its 2020 annual meeting of shareholders are incorporated by reference into Part III of this Annual Report on
Form 10-K where indicated. The 2020 Proxy Statement will be filed with the U.S. Securities Exchange Commission within 120 days after the end of the fiscal year to which this
report relates.
TABLE OF CONTENTS
Explanatory Note
Special Note about Forward-Looking Statements
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Signatures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statements and Schedule
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EXPLANATORY NOTE
In this report, unless the context indicates otherwise, the terms “Establishment Labs,” “Company,” “we”, “us” and “our” refer to Establishment
Labs Holdings Inc., a British Virgin Islands entity, and its consolidated subsidiaries.
We own, or have rights to, trademarks and trade names that we use in connection with the operation of our business, including
Establishment Labs and our logo as well as other brands such as Motiva Implants, SilkSurface/SmoothSilk, VelvetSurface, ProgressiveGel,
TrueMonobloc, BluSeal, Divina, Ergonomix and MotivaImagine, among others. Other trademarks and trade names appearing in this report
are the property of their respective owners. Solely for your convenience, some of the trademarks and trade names referred to in this report
are listed without the ® and TM symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks and trade
names.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can find many (but not all) of these statements by
looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar
expressions in this report. Any statements that refer to projections of our future financial or operating performance, anticipated trends in our
business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements
expressing general optimism about future operating results, are forward-looking statements.
We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any
forward-looking statements presented in this report, or that we may make orally or in writing from time to time, are expressions of our beliefs
and expectations based on currently available information at the time such statements are made. Such statements are based on
assumptions, and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our
control. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably
prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material.
Factors that could cause or contribute to these differences include, among others, those risks and uncertainties discussed under the sections
contained in this Form 10-K entitled Item 1A. “Risk Factors”; Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations”; and Item 7A. “Quantitative and Qualitative Disclosure about Market Risk”, and our other filings with the Securities and
Exchange Commission. The risks included in those documents are not exhaustive, and additional factors could adversely affect our business
and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time,
and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent
to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements.
We are not undertaking any obligation to update any forward-looking statements. Accordingly, investors should use caution in relying on past
forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.
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ITEM 1. BUSINESS
Overview
PART I
We are a medical technology company focused on improving patient safety and aesthetic outcomes, initially in the breast aesthetics and
reconstruction market. We initially incorporated in Costa Rica in 2004 and subsequently reorganized under a parent holding company in the
British Virgin Islands in 2013.
Our line of silicone gel-filled breast implants, branded as Motiva Implants, is the centerpiece of our MotivaImagine medical technology
platform. Our post-market surveillance data (which was not generated in connection with a United States Food and Drug Administration, or
FDA, pre-market approval, or PMA, study, but was self collected rather than collected at mandatory follow-ups), and published third-party
data indicates that Motiva Implants show low rates of adverse events (including rupture, capsular contracture, and safety related
reoperations) that we believe compare favorably with those of our competitors. We believe the proprietary technologies that differentiate our
Motiva Implants enable improved safety and aesthetic outcomes and drive our revenue growth. Our MotivaImagine platform enables surgical
techniques that we promote as Motiva designed surgeries. We have developed other complementary products and services on our
MotivaImagine platform, which are aimed at further enhancing patient outcomes.
Since launching Motiva Implants in October 2010, the majority of our revenue has been generated from sales of our Motiva Implants in cash
pay, non-reimbursable, breast augmentation procedures. To date, our Motiva Implants are registered to be sold in more than 80 countries
outside of the United States. We currently sell our products via exclusive distributors or our direct sales force (which accounted for
approximately 45% of our revenue in 2019) and have introduced four generations of Motiva Implants. We currently commercialize four
product families (Round, Ergonomix Round, Ergonomix Oval and Anatomical TrueFixation) that incorporate first of-its-kind safety features
including: (i) SmoothSilk / SilkSurface (an optimized biocompatible nanosurface that promotes reduction in capsular contracture), (ii) Q Inside
RFID technology (a non-invasive, readable serial number that enhances product safety and patient peace of mind), (iii) BlueSeal visual
barrier layer (a proprietary indicator that allows for verification of complete barrier layer presence) and (iv) TrueMonobloc gel-shell-patch
configuration (a highly durable, easy-to-insert performance shell that allows for smaller incisions and smaller scars).
In March 2018, we received approval of an investigational device exemption, or IDE, from the FDA to initiate our Motiva Implants clinical trial
in the United States and the first patient in the study was enrolled in April 2018. In March 2019, we filed our first annual report with the FDA,
and our IDE study-defined enrollment targets for the aesthetic cohorts, which include primary augmentation and revision, have been reached
with a total of 450 and 100 subjects, respectively. In August 2019, we announced that we were implementing a bifurcated regulatory strategy
in the United States, designed to allow us to initiate rolling submission of data in a PMA from the primary augmentation and revision
augmentation cohorts to the FDA beginning in the first quarter of 2021, to be supplemented by data from the reconstruction cohorts. We are
continuing to enroll subjects in the remaining reconstruction cohorts and plan to enroll a total of 800 patients in the study across 40 sites in
the United States, Germany, and Sweden.
We have assembled a broad portfolio of intellectual property related to our medical device and aesthetics products. We believe our
intellectual property, combined with proprietary manufacturing processes and our regulatory approvals, provides us with a strong market
position. As of December 31, 2019, we own or have rights to seven issued and 15 pending patents in the United States related to various
aspects of our Motiva implants (such as implant barrier layers, surface texture technology, minimally invasive implant delivery systems, and
our QInside Safety Technology radio frequency identification devices). In addition, we own or have rights to four issued and 56 pending
foreign applications and six pending Patent Cooperation Treaty, or PCT, applications. We intend to continue to expand our intellectual
property portfolio and, combined with our Motiva Implants’ favorable safety profile, obtain FDA approval and drive Motiva’s adoption in the
United States, which represents the largest breast surgery market globally.
Our revenue for the years ended December 31, 2019 and 2018 was $89.6 million and $61.2 million, respectively, an increase of $28.4
million, or 46.3%. Net losses increased to $38.2 million for the year ended December 31, 2019 from $21.1 million for the year ended
December 31, 2018. As of December 31, 2019, we had an accumulated deficit of $127.1 million.
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Our Market
Breast augmentation surgery remains the leading aesthetic surgical procedure by number of procedures globally. Approximately 1.86 million
breast augmentations were performed worldwide in 2018, according to International Society of Aesthetic Plastic Surgery, or ISAPS. In
addition, according to Markets and Markets’ Medical Aesthetics Market - Forecast to 2021 report of November 2016, the global breast
implant market was estimated at approximately $1.15 billion in 2016 and is expected to grow at a compound annual growth rate of
approximately 8.5% through 2021. The following table lists the top markets by country for total breast augmentations in 2018 according to
ISAPS.
Rank *
1
2
3
4
5
6
7
8
9
10
Country
United States
Brazil
Mexico
Germany
Italy
Argentina
Colombia
India
Australia
Thailand
Total Breast Augmentation Procedures
Procedures
Percentage of World-Wide Total
321,362
275,283
70,165
65,876
64,976
51,081
42,774
31,602
17,553
17,048
17.6%
15.1%
3.8%
3.6%
3.6%
2.8%
2.3%
1.7%
1.0%
0.9%
* Rankings are based solely on those countries from which a sufficient survey response was received and data was considered to be representative.
Traditional Breast Implants and Their Limitations
Despite the global demand for breast augmentation procedures, there has been relatively little innovation since the 1990s. In 1992, due to
emerging safety concerns, the FDA placed a moratorium on sales of silicone breast implants in the United States that was lifted in 2006.
This, combined with the ongoing FDA requirement for a PMA on all new breast implants, has discouraged breast implant innovation over the
past 30 years. Current products have relatively high adverse event rates, and we believe many do not mimic natural breast tissue. The table
below contains selected adverse event information from published data from their 10-year prospective clinical trials conducted by the only
three companies currently approved to market silicone breast implants in the United States.
Results from primary augmentations
Number of Patients
Ruptures(1)
Capsular Contracture
Reoperations
Sientra
10-Year
Allergan
10-Year
Mentor
10-Year
N=1,116 Patients
N=455 Patients
N=552 Patients
8.5%
12.9%
24.0%
9.3%
18.9%
36.1%
24.2%
12.1%
25.5%
Kaplan-Meier risk rates were the primary method of analysis for the above data. This table represents the final data from the primary cohort of the same
study referenced in the above five- and six-year PMA studies conducted by our competitors. This 10-year data for Sientra, Allergan and Mentor were
released in 2018, 2018, and 2015, respectively.
(1) The rupture rates represent the MRI cohort only for each respective study, which consisted of 571 patients for Sientra, 158 patients for Allergan and 202
patients for Mentor.
We believe that the improved appearance, feel and patient safety profile of our Motiva Implants provides a strong competitive advantage that
will help us to both capture market share and achieve higher patient conversion rates by addressing the key concerns described by patients
who choose not to pursue breast augmentation surgery.
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Our Competitive Strengths
▪
▪
▪
▪
▪
Patient-centric innovative implant technologies. We have developed our Motiva Implants by enhancing and creating novel
product components for our implants, and then combining these components into products that deliver improved aesthetic outcomes,
increased patient satisfaction and favorable safety profiles.
Extensive suite of complementary products and services. Our MotivaImagine product portfolio includes innovative products such
as Divina 3D surgical simulation systems, Puregraft autologous fat grafting systems, and other surgical tools. We believe our
designed surgical procedures, such as MotivaHybrid, Motiva MinimalScar and Motiva MIA, will address key unmet needs for both the
physician and the patient.
Proprietary internal manufacturing processes and capabilities. We manufacture our silicone products in state-of-the-art
manufacturing facilities in Costa Rica rather than relying on third-party manufacturers. In these facilities, we utilize our novel 3D
imprinted molding method to create proprietary surface features that, in combination with other proprietary materials and methods,
differentiate our products from those of our competitors. Our two manufacturing sites have gone through full site inspections and
audits under the Medical Device Single Audit Program, or MDSAP, which were carried out by the British Standards Institute, or BSI,
an agency which the FDA accepts as a substitute for routine agency inspections. We believe our modern facilities, focus on product
quality and deep technological know-how have helped us establish and maintain a brand of consistency, quality and safety.
Dynamic worldwide sales platform. We sell our products both through exclusive arrangements with leading local distributors who
have strong local surgeon relationships and our direct sales force in key markets such as Brazil and certain countries in Europe.
Using this market-specific approach, we have built an effective and efficient worldwide sales platform.
Proven management team with expansive industry experience. We have a highly experienced management team that is
comprised of leaders from the medical aesthetic market.
Our Growth Strategy
Our goal is to be the global leader in aesthetic surgical implant technology, including breast implants, while improving patient safety through
product innovation. The key elements of our strategy include:
▪
▪
Expand revenues in existing markets. We believe we can continue to grow market share in our existing markets due to the
favorable safety profile and improved aesthetic outcomes of our Motiva Implants.
Launch Motiva Implants in additional markets outside the United States. We expect that continued geographic expansion will
be a key driver of growth in the near term. In recent years, we started sales through distributors in Australia, Israel, Peru, Russia,
Saudi Arabia, Taiwan, Thailand and South Korea, as well as starting direct sales in Brazil, the second largest market for breast
augmentations. Expansion into China is expected as early as 2021.
▪ Obtain FDA approval and enter the U.S. market. We are conducting our IDE clinical trial in the United States, with the goal of
obtaining approval from the FDA for a premarket application and commercializing our Motiva Implants in the United States. All
surgeries have been completed in the aesthetics cohorts. We are continuing to enroll subjects in the remaining reconstruction
cohorts and plan to enroll a total of 800 patients in the study across 40 sites in the United States, Germany, and Sweden.
▪ Optimize patient conversion through sales and marketing programs. We employ a multi-faceted marketing strategy that
includes social media engagement, conference presence, online advertising and patient and physician education at our
MotivaImagine Centers. This approach enables us to engage with and educate patients on the Motiva brand and the benefits of our
products, as well as increase clinical efficiency for our physician collaborators. In the future, we expect our social media and
MotivaImagine Centers to have important strategic synergies with our designed surgeries, which are promoted globally.
Seek out and pursue strategic acquisitions. We intend to seek out other innovative products, services and procedures that satisfy
unmet needs in the aesthetics space and complement our existing product portfolio, and we believe this can be additive to future
revenue growth. We have purchased distributor networks in strategic markets and may acquire other third-party sales organizations
in the future. While we have no specific acquisitions or planned licensing agreements currently ongoing, we may engage in these, or
other strategic transactions, with the goal of augmenting our existing product portfolio and global footprint.
▪
4
▪
Continue a high level of engagement with key opinion leaders. We promote Motiva Implants, in part, via an extensive and robust
calendar of physician education events led by key opinion leaders in the field of aesthetic surgery. In 2019, we conducted 244 events
through our MotivaEDGE educational platform. We also collaborate actively with respected and influential key opinion leader
surgeons to identify and develop new clinical applications for our existing products, as well as new product and strategic
opportunities.
Our Products and Technologies
The key characteristics of our primary products are described in the table below:
Product
Motiva Implants
Divina
Puregraft
Description
Product Catalog
Soft silicone-gel filled breast implants
with improved appearance, feel and
safety
Available in more than 1,000 product
variations, including four projection
heights
3D simulation device and proprietary
tissue modeling software
For use with breast surgeries
Autologous graft of healthy, viable
adipose (fat) cells for filling and
contouring
Available in three graft volumes: 50cc,
250cc, and 850cc
Key Features
▪
SilkSurface/SmoothSilk shell
▪
Pre-operative 3D planning that
▪
Purifies adipose tissue through
surface
▪
ProgressiveGel PLUS,
ProgressiveGel Ultima, Silicone
filling gels
enables patients and physicians to
visualize post-surgical result and
measure pre-existing breast volume to
optimize implant selection
selective filtration technology
▪
Self-contained purification
process preserves sterility
▪
▪
▪
Ergonomix design
▪
May increase clinical
consultation efficiency
▪
MotivaHybrid: can be used in
conjunction with Motiva Implants
TrueMonobloc construction
▪
MotivaHybrid: fat grafting can be
▪
We are the exclusive distributor
QInside Safety Technology RFID
microtransponder
▪
BluSeal shell barrier layer
used in conjunction with Motiva
Implants by measuring pre-existing
volume of the breast and calculating
the appropriate ratio between silicone
implant and fat graft
outside of the United States and
Canada
Sales Territories
Over 80 countries outside the United States
Motiva Implants
We launched Motiva Implants commercially in October 2010, and to date we have sold over one million units in various countries outside the
United States. Motiva Implants incorporate a number of proprietary features that we believe contribute to Motiva Implants’ favorable safety
profile as well as a natural appearance and feel. Our latest generation of Motiva Implants utilize our proprietary Ergonomix design, a round
base implant that responds to gravity by shifting its maximum point of projection, offering the projection of a shaped implant without the
malpositioning and rotation issues frequently associated with shaped implants. Furthermore, our ProgressiveGel family of silicone gel
rheologies consists of four highly purified biocompatible gels with specific visco-elastic properties that we believe enables Motiva Implants to
respond to the patient’s motion in ways that more closely mimic the appearance, feel and movement of natural breast tissue. Our catalog
includes over 1,000 product
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variations, with round, oval and anatomical shapes, two different surfaces and volumes ranging from 105cc to 1,050cc, making it a wider
range of options than those offered by our major competitors.
SilkSurface/SmoothSilk
The International Standard Organization, through the new April 2018 standard (ISO 14607:2018), created a classification of implant surface
textures according to roughness. This standard includes an objective way of defining the difference between smooth, micro and macro
surfaces based on roughness average. The topology of SilkSurface/SmoothSilk is characterized under the smooth category, having a low
roughness value of 3.09 microns with thousands of contact features per square centimeter.
Our retrospective implant data shows that Motiva Implants have a lower rate of capsular contracture and seromas when compared to
available published data from competitors. We believe that these results are due in large part to the proprietary surface texturing of our
Motiva Implants. Our proprietary shell surfaces are smoother and have more regular surface features than those of our primary competitors
based on several studies using methods such as scanning electron microscopy, profilometry testing and statistical parameters comparisons.
A study performed in mice at the Langer Lab, by Professor Robert Langer, Institute Professor at the Massachusetts Institute of Technology,
or MIT, Department of Chemical Engineering indicated that our SmoothSilk/SilkSurface attracts fewer macrophages than a traditional smooth
surface. A larger percentage of macrophages in the cell mix indicates an inflammatory response, which is an early step in capsule formation.
We believe the more moderate inflammatory response observed on SmoothSilk/SilkSurface is responsible for improved biocompatibility and
lower complication rates.
In addition, an abstract presented in 2017 by researchers at Montana State University showed less accumulation of both bacteria and biofilm
on SmoothSilk/SilkSurface in vitro when compared to smoother and textured surfaces. Biofilm formed on implant surfaces increases the risk
of bacteria accumulation and capsule formation.
In December 2018, we commissioned a report from the French reference laboratory Laboratoire National de Metrologie et d’Essais, or LNE,
on the mechanical characteristics of our Motiva implants. Based upon its testing, LNE concluded that the SmoothSilk/SilkSurface shell
surface in the Motiva implants is considered a smooth surface as defined by ISO 14607:2018 categorization.
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The graph below shows how the size of our surface features compares with those of our competitors.
ProgressiveGel Family
The proprietary silicone chemistries that comprise our ProgressiveGel family allow for a high degree of cohesiveness and strength but add
characteristics such as softness and high ductility that enable movement dynamics more like that of natural breast tissue. We believe that the
cohesive properties reduce the likelihood of silicone gel leakage in the event of a rupture in the shell. The strength of the gel is believed to
contribute to a reduced frequency of gel fracture, a condition which leads to deformed implant shape and stress on the implant’s shell. While
other manufacturers have claimed a “high strength” gel, ours combines a notably high elasticity (the ability to stretch without permanent
deformation) with low viscosity, both of which reduce the susceptibility of the implants to rupture while improving their tactile feel and
movement dynamics. Additionally, the improved adhesion of the gel to the shell structure avoids the appearance of separation spots, an
aesthetic defect commonly seen in competitor products.
In addition to the safety advantages, our ProgressiveGel family provides for movement characteristics that resemble natural breast tissue.
Our later generation Ergonomix products further mimic natural tissue, with a maximum point of projection that shifts downward to create a
natural human breast shape when a patient is standing. This allows our Motiva Implants to provide the more natural aesthetics of “shaped” or
“teardrop” implants without the risk of associated drawbacks such as breast deformation form rotation and unnaturally hard tactile feel. The
images below illustrate the implants’ ability to change shape depending on the patient’s positioning.
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TrueMonobloc
Our TrueMonobloc technology, which is incorporated into all generations of Motiva Implants currently sold, combines proprietary chemistry
with our proprietary manufacturing techniques to create a shell, gel and other components that are tightly bound to one another. This results
in an implant that is more homogeneously elastic and resistant to separation of the gel from the shell, addressing one type of implant failure
that can lead to shell ruptures and silicone leaks. This also enables Motiva Implants to be stretched and squeezed to a more significant
degree, which we believe currently enables breast augmentation through incision sizes smaller than one inch, compared with the published
industry norm of approximately two inches. A surgical technique that we are developing, which we call Motiva Minimally Invasive
Augmentation, or Motiva MIA, would utilize a next-generation implant to take advantage of these physical properties to enable a less-invasive
procedure for the patient. The implants associated with Motiva MIA have been developed and were submitted for the CE marking process in
2018. Instruments and special devices for the Motiva MIA procedure are currently being prototyped and tested and will require regulatory
approval prior to commercialization. The following image shows that TrueMonobloc enables significant manipulation of a Motiva Implant
without separation of gel from shell.
QInside Safety Technology RFID Technology
We offer the QInside Safety Technology as an optional feature in our Motiva Implants. QInside Safety Technology provides a Radio-
Frequency Identification Device, or RFID, microtransponder, specially manufactured and encapsulated for implantation in the human body,
that is embedded in the gel of a Motiva Implant. The microtransponder contains only a unique 15-digit code that identifies the product and
does not contain any patient information. This microtransponder can be read with a simple pass from our non-invasive and inexpensive
reading device, the QInside Safety Technology Reader, and the serial number corresponds with related information in our MotivaImagine
database such as implant type, size and other characteristics. Patients can create a secure account, register the products and include
applicable patient information either through the MotivaImagine application or our website, to access their implant information. Surgeons can
access that implant-related information through our Motiva Implants website, but they can only view patient-specific information of patients
that have been linked to them after the patient or the surgeon creates a secure account, registers the products and provides patient
information. The MotivaImagine application and Motiva Implants website also allow the patient to access the implant warranty information.
This traceability is intended to give patients comfort that any future recalls can be positively identified as applying, or not applying, to that
patient’s particular implant. This addresses a key concern that often discourages women who are otherwise interested in implants from
making the choice to move forward with the surgery. Motiva Implants are currently the only breast implants on the
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international market with QInside Safety Technology; however, we believe there is an opportunity to sell these microtransponders to other
medical device companies in the space.
Each implant’s unique electronic serial number is encoded into the RFID circuitry as part of a three-point authentication system: the
microtransponder, the reader and the database. This authentication system prevents unauthorized access to any personal information of the
patient and is compliant with FDA regulations.
We also believe that additional functionality can be added to this microtransponder platform. Future potential applications currently under
development include temperature sensing as a means of infection detection or pressure sensing as a means of detection of shell rupture.
BluSeal
Our BluSeal technology embeds a visually distinct layer of blue silicone into the SilkSurface shell. This patented manufacturing innovation is
intended to highlight any imperfections in the barrier layer coverage with a distinct color. This provides the plastic surgeon with the ability to
verify whether the barrier layer has coverage defects or other imperfections before implantation that might lead to post-implantation shell
rupture or gel bleed. We believe this is another safety innovation that contributes to our substantially lower reported implant rupture rates as
compared to reports for our primary competitors.
Divina 3D Simulation System
We sell our Divina 3D surgical simulation systems to distributors and plastic surgeons for use in pre-surgical patient consultations and
planning. Divina utilizes a combination of 3D imaging hardware and proprietary Tissue Behavior Simulation software to give physicians and
patients the ability to visualize the potential aesthetic result of a procedure and to explore various implant sizes in real time.
Current methodologies for choosing the base size and projection of an implant are highly subjective. The same size implant will yield very
different aesthetic results depending on the patient’s existing breast mass, breast
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shape, and torso geometry. Divina improves this process in two key ways: for the physician, the simulation engine and software allows a
rapid and precise way to narrow down the patient’s choices to a handful of Motiva Implant sizes that will yield the patient’s desired look, and
for the patient, the ability to see a rendered simulation of her own body increases the level of confidence that a surgery will achieve her
aesthetic goals.
We believe that the addition of a Divina system to a clinic can facilitate an increase in the number of patients who proceed from a
consultation to a surgical procedure. We intend to make the sale of Divina systems a key component of our sales and marketing strategy
going forward.
Puregraft and Tulip - Autologous Fat Augmentation
Adipose (fat) tissue removed from one area of a patient’s body can be re-injected under the skin of the face, breasts, or in other areas where
augmentation and shaping are desired. In the breast augmentation context, there is an unmet need for predictable contouring around the
edges of the breast, both with and without volume augmentation via silicone implants. Puregraft LLC’s line of products provides surgeons
with a tool for additional contouring around breast implants, which we call MotivaHybrid when used in combination with Motiva Implants and a
3D pre-surgical scan using our Divina system or another 3D scanning system.
In an independent study by Gerth et al. reported in the peer-reviewed Aesthetic Surgery Journal in 2014 conducted between November 2010
and November 2012, 26 patients that had received autologous adipose tissue grafts for facial contouring processed via Puregraft had
significantly higher long-term retention of volume when compared to 33 patients that had received grafts processed using conventional
means, with statistical significance being determined by a p-value of 0.03. In another independent study conducted by Sforza et al. at Dolan
Park Hospital published in the Aesthetic Surgery Journal in 2016, in the breast augmentation setting, a clinical study of 26 patients, whose
implant procedures were subsequently enhanced with Puregraft-enabled grafts between April 2013 and October 2014, resulted in
approximately 73% of fat volume being retained by patients at one year, and 96% of patients reported satisfaction with the outcome. We
believe these results illustrate the benefits of Puregraft versus other conventional means of extracting and purifying adipose tissue.
In September 2016, we became the exclusive distributors, outside the United States and Canada, of the Puregraft line of products for
autologous adipose tissue harvesting and redistribution. Puregraft LLC currently sells its products in the United States and Canada directly or
through other distribution channels. These devices are CE Marked for sale outside the United States and Canada and hold a 510(k)
clearance for sale in the United States. In August 2019, we amended our exclusive distribution agreement with Puregraft LLC to extend the
term of the agreement to December 31, 2020 and update the pricing and purchase commitment volumes.
These procedures require a cannula for tissue extraction and reinsertion, and we also sell a special cannula for this purpose. This cannula is
differentiated by its proprietary rounded shape and low-friction coating, which are aimed at reducing trauma to the patient or implant during
the procedure.
MotivaImagine Centers
We utilize our MotivaImagine Center initiative, which are collaborations with plastic surgery clinics whereby we provide them with access to
our technologies and the ability to brand themselves as a MotivaImagine Center. In exchange for these services and use of the Motiva
branding, each MotivaImagine Center commits to use Motiva Implants and other products in the MotivaImagine product platform. Before
certifying a MotivaImagine Center, we ensure that the center offers:
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either our Divina or AX3 3D simulator, or a third-party cloud-based visualization software that we sell in partnership with Crisalix
systems;
access to the full suite of MotivaImagine products that complement Motiva Implants;
surgical staff trained by Establishment Labs in the optimal use of MotivaImagine products; and
branding and design elements, according to company guidelines, that are intended to create a more luxurious and reassuring
experience for patients.
Since 2016, we have partnered with a number of independent clinics outside the United States that elected to become MotivaImagine
Centers, and we are pursuing enrollment of additional centers as a component of our sales and marketing strategy. We intend to utilize the
network of MotivaImagine Centers as a channel for other future aesthetic surgical products on our MotivaImagine platform.
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Designed Surgeries
Our suite of products and technologies enables surgical techniques that we intend to develop and promote as “designed surgeries.” Our first
such designed surgery, MotivaHybrid, combines 3D pre-surgical assessment of existing breast tissue volume using either our Divina system
or another 3D scanning system, together with Motiva Implants and Puregraft autologous adipose tissue grafts. The MotivaHybrid method is
designed to enable surgeons to optimize silicone volume using Motiva Implants and balance the ratio of silicone to tissue with additional
contouring using Puregraft for more natural balanced results and improved patient satisfaction. Our second designed surgery, Motiva
MinimalScar, allows surgeons to significantly reduce the size of the surgical incision. We are also developing Motiva MIA — a family of
designed surgeries that we anticipate will allow breast augmentation through smaller incisions. We intend for Motiva MIA to allow breast
augmentation procedures to be performed under local anesthesia rather than general anesthesia, with faster recovery times and a resulting
reduction in surgical complications. The implants associated with Motiva MIA have been developed and were submitted for the CE marking
process in 2018. Instruments and special devices for the Motiva MIA procedure are currently being prototyped and tested and will require
regulatory approval prior to commercialization. We believe Motiva MIA will be able to attract new customers and expand the market for breast
aesthetic procedures.
Our Clinical Data
10-Year Safety Postmarket Surveillance Data
Dating from the commercial launch of Motiva Implants in October 2010 through December 2019, we have sold over one million breast
implants in various countries outside the United States and Canada. We maintain a Quality Management System database to log all
complaints received from patients or physicians. From October 2010 through December 2019, a total of 927 complaints have been reported,
investigated and processed, representing less than 0.1% of the total Motiva Implants sold through December 2019. There were no reported
cases of late seroma, double capsule formation or anaplastic large-cell lymphoma, or ALCL, in this data set, and there were 11 cases of early
seroma. The table below shows the rates of rupture, capsular contracture and reoperation for adverse events of our Motiva Implants from the
data gathered through December 2019. In contrast to the above competitor data, our data is self-reported rather than collected at mandatory
follow-ups and was generated solely for our post-market surveillance instead of in connection with a FDA PMA study. All of these patients
were located outside the United States.
Number of Implants Sold
Rupture
Capsular Contracture
Reoperation for Adverse Events
Reoperation (All Causes)
Motiva Implants
N= 1,027,912 Implants(1)
< 0.1%
< 0.1%
< 0.1%
N/A(2)
(1) Data is internally tracked on an individual implant basis rather than by patient.
(2) Complaint database does not capture reoperations for reasons not related to safety.
Independent Clinical Experience
An independent study by Sforza et al., published in the peer-reviewed Aesthetic Surgery Journal in 2017, conducted at a single center, the
Hospital Group Ltd.’s Dolan Park Clinic, or Dolan Park, in Bromsgrove, England, between April 2013 and April 2016, reported 5,813
consecutive cases of breast augmentation with Motiva Implants. This independent study was commissioned by Dolan Park’s medical
director, Dr. Sforza, who is also a member of our medical advisory board and receives compensation from us in such capacity. The study,
conducted by a group of 16 plastic surgeons at Dolan Park, reported overall rates of complication and reoperation of 0.76% over an interval
of three years. Beginning in March of 2014, we started supplying our products to Dolan Park under a series of long term supply agreements
with Dolan Park’s affiliated companies. The last supply agreement expired in July of 2019. There were no serious adverse events and no
cases of implant rupture for device failure, capsular contracture (Baker III/IV) in primary cases, double capsules, or late seromas. The
authors
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presented consistent real-world data and believe that their free, three-year aftercare system is a strong method for patient retention and
follow-up by eliminating any financial limitations for patients to return for follow-up consultations if any issues occur. Anecdotally, the same
group of surgeons utilizing the same aftercare system for the last seven years reported substantially different results utilizing other types of
silicone breast implants (i.e., non-Motiva Implants). The overall revision rate for this group from 2010 to 2013 utilizing a different, macro-
textured, FDA approved implant (N > 10,000) was 8.43%, which is more than 10 times higher than the rate for Motiva Implants reported in
this analysis.
(1) Names of FDA approved competitors have not been published.
Study to Support a PMA
We have started conducting a prospective IDE clinical trial in the United States. Our IDE request was approved by the FDA on March 20,
2018 to perform a single open-label, multi-center trial, with follow-up visits available at the time of filing. We will continue to monitor patients
for ten years post-implantation. The primary endpoints of the trial will be safety, effectiveness and patient satisfaction. In general, our trial
design and patient enrollment are consistent with prior PMA studies conducted by Allergan, Mentor, and Sientra. In August 2019, we
announced that we were implementing a bifurcated regulatory strategy in the United States, which is designed to allow us to initiate the
rolling submission of data to the FDA from the primary augmentation and revision augmentation cohorts beginning in the first quarter of 2021,
and then subsequently supplement our PMA with data from the reconstruction cohorts. All the surgeries had been completed in the
aesthetics cohorts, which include primary augmentation and revision, with a total of 450 and 100 subjects, respectively. We are continuing to
enroll subjects in the remaining reconstruction cohorts and plan to enroll a total of 800 patients in the study across 40 sites in the United
States, Germany, and Sweden.
Sales and Marketing
We primarily derive revenue from sales of our Motiva implants from two types of customers: (1) medical distributors and (2) direct sales to
physicians, hospitals, and clinics. Our products are commercially available in more than 80 countries through exclusive distributors, except in
Brazil and several European countries where we sell through our direct sales force. As of December 31, 2019, our sales organization
included 94 employees and contractors. All of these sales personnel are supported through a suite of tools, including marketing and training
materials, mobile smartphone applications, and access to a robust schedule of physician education events. We also pay significant attention
to helping our distributors maintain positive relationships with surgeons and clinics in their respective regions, and to positioning our product
in the marketplace as a premium product with consequent premium pricing.
We demonstrate our confidence in Motiva Implants with the Motiva Always Confident Warranty, which offers patients a free replacement for
any Motiva Implant that ruptures, for the life of the product. We also replace any
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implant which is replaced due to capsular contracture of Baker Grade III or IV severity at any time in the first 10 years post-implantation. We
also offer an extra-cost extended warranty, which provides financial assistance of up to $2,500 to cover surgical costs resulting from rupture
or capsular contracture.
We employ a multi-faceted marketing strategy that includes social media engagement, conferences, advertisements and education.
Intellectual Property
Our success depends at least in part upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a
combination of intellectual property rights, including patents, trade secrets and trademarks, as well as customary contractual protections.
We have assembled a broad portfolio of intellectual property related to our medical device and aesthetics products. We believe this
intellectual property, combined with proprietary manufacturing processes and the regulatory approvals we have successfully obtained outside
of the United States, provides us with a strong market position. As of December 31, 2019, we own or have rights to seven issued and 15
pending patents in the United States related to various aspects of our Motiva implants (such as implant barrier layers, surface texture
technology, minimally invasive implant delivery systems, and our QInside Safety Technology radio frequency identification devices). In
addition, we own or have rights to four issued and 56 pending foreign applications and six pending Patent Cooperation Treaty, or PCT,
applications. Our owned and licensed patents are expected to expire at various times between February 2025 and April 2037. Our owned
and licensed pending applications, if granted, likely would expire between September 2033 and October 2039.
In addition to pursuing patents on our products, we have taken steps to protect our intellectual property and proprietary technology by
entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate
partners, and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade
secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not
be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we
have taken to prevent such disclosure are, or will be, adequate. In addition, we intend to expand our international operations, and effective
patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries.
In general, the medical device industry is characterized by the existence of a large number of patents and frequent allegations and related
litigation regarding patent and other intellectual property rights. Third parties, including our competitor companies, may assert patent,
copyright, trademark and other intellectual property rights against us, our partners or our customers. Our standard license and other
agreements may obligate us to indemnify our partners and customers against such claims. We could incur substantial costs and divert the
attention of our management and technical personnel in defending against any such claims. Successful claims of infringement by a third-
party could prevent us from selling or distributing certain products or performing certain services, require us to expend time and resources to
develop non-infringing products, or force us to pay substantial damages, including treble damages if we are found to have willfully infringed
patents-royalties or other fees. We cannot assure you that we do not currently infringe, or that we will not in the future infringe, upon any
third-party patents or other proprietary rights.
Research and Development
Our goal is to continue to improve the existing products on our MotivaImagine platform, as well as develop new products and new surgical
techniques. We have a highly experienced team and deep customer and key opinion leader relationships. We also have sophisticated
internal prototyping and testing equipment. These allow us to invent, develop, test, and commercialize products with in-house resources. As
a result, we have introduced four distinct generations of Motiva Implant product since October 2010, with innovative features added to each
successive generation. Further, our efforts included work on both a tissue expander for reconstruction and our next generation implant for
minimally invasive procedures, which we submitted for CE Mark registration in 2018.
We have and will continue to work with several institutions in our effort to advance implant technology, and generate additional scientific data
to support the improved safety outcomes associated with our products, including:
▪ Massachusetts Institute of Technology
▪ Medical University of Innsbruck
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Plastic and Reconstructive Research Center at the University of Manchester
Center for Biofilm Engineering of Montana State University
The Chair of Plastic Surgery at the School of Medicine and Psychology of Sapienza University of Rome
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▪ Microscopic Structure Research Center of the University of Costa Rica
We have incurred, and expect to continue to incur, significant research and development expenses. Our research and development
expenses increased $2.3 million, or 18.2%, to $15.0 million for the year ended December 31, 2019, compared to $12.7 million for the year
ended December 31, 2018. Our research and development expenses consist of costs associated with our clinical and post-approval studies,
regulatory activity and product development, including the development of Motiva Implants and other current and future aesthetic and
reconstruction surgical devices on the MotivaImagine platform.
Implantable RFID Microtransponder Platform
The RFID technology platform that we use in the QInside feature of our Motiva Implants is independently cleared as a system via the FDA’s
510(k) pathway. We are developing more sophisticated functionality using this technology platform. We believe our RFID technology will be
an attractive platform for a variety of other applications, including unique device identification for other types of implantable medical devices,
functional implantable biosensors, and diagnostic monitoring. Future specific indications include detection of device life cycles (e.g.
flexion/contraction cycles for artificial hip and knee joints) and monitoring of analytes such as circulating tumor cells and blood chemistry
components. Some of these applications we may choose to develop and commercialize internally, while others may be more appropriately
commercialized via partnerships with other medical device companies.
We control all the activities of the development and manufacturing of our QInside Safety Technology RFID transponders. This allows us for
adapting to specific needs or new developments in our field.
Manufacturing and Suppliers
Facilities
We manufacture our products in ISO-13485-certified manufacturing facilities located in the Coyol Free Zone office park in Costa Rica, a park
populated by a number of international medical device companies and granted tax-advantaged status by the government of Costa Rica. Our
newest and largest manufacturing facility opened at the end of 2016 and we began shipping manufactured product from this facility in March
2017. This facility has more than 13,000 square feet of office space and production areas which are capable of producing over 400,000
implants a year, with state-of-the-art support systems for sustaining production, including an ice-bank system for cooling the controlled air in
the clean room and support areas, water-lubricated air compressors for eliminating the presence of oil particulates, heat recovery systems for
energy saving, and an energy micro-grid comprised of solar panels and energy-storage batteries. These energy efficient systems generate
up to 80% of the total energy consumption of the building, which received LEED Gold Certification by the U.S. Green Building Council in
August 2017. Our initial facility was established in 2009 and has about 3,000 square feet of production areas, capable of producing over
100,000 implants a year.
We continue to look for ways to improve manufacturing processes and facility organization to increase capacity in these two current facilities.
We recently completed an internal assessment and identified the potential additional manufacturing capacity of approximately 200,000
implants per year. This increased capacity can be added in stages over the next 18 months with efficiencies in our process flow and the
purchase of additional equipment for approximately $0.6 million.
In July 2017, both facilities received the MDSAP regulatory certification. MDSAP was established by a coalition of international medical
device regulatory authorities including Australia’s TGA, Brazil’s ANVISA, Health Canada, Japan’s MHLW and PMDA and the U.S. FDA. The
goal of MDSAP is to allow a single regulatory audit of a medical device manufacturer’s Quality Management System to satisfy the needs of
the participating regulatory jurisdictions. This program enables manufacturers to contract with an authorized third-party auditing organization,
in our case the British Standards Institute, to conduct a single audit to satisfy the relevant regulatory requirements of the participating
regulatory authorities including the FDA, which recognizes MDSAP audit reports as a substitute for FDA Establishment Inspection Reports.
In May 2019, both of our facilities in Coyol Free Zone received the Carbon Neutral certification from the Costa Rican Ministry of Environment,
Energy, and Telecommunications, based on the implementation of efficiency-aimed actions such as the reduction of energy consumption
through the acquisition of more efficient equipment;
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the combined use of solar panels, ice banks, and battery storage units; and the avoidance of fossil fuels for our operations.
We are also subject to periodic inspections and audits by various international regulatory and notified bodies, and we believe our past
performance in these audits reflects the strength of our quality system and manufacturing controls. We consider this to be a key element of
our risk management and business continuity strategies and a competitive advantage as we have full control of the product lifecycle. Our in-
house manufacturing team includes over 350 employees, all of whom undergo well defined training programs throughout their period of
employment. We believe our manufacturing experience, know-how, and process-related trade secrets are also a competitive advantage.
We are pursuing proposals related to the expansion of our manufacturing facilities and corporate offices in the Coyol Free Zone in Costa
Rica. The initial $35.3 million project estimate includes approximately 170,000 square feet of facility space and would initially increase our
manufacturing capacity by approximately 400,000 units per year, and potentially increase capacity by 800,000 units with an additional
incremental $4.6 million investment in manufacturing equipment. We have received non-binding proposals from two lenders to finance up to
70% or 80% of the project. All plans are subject to final approval by the Board of Directors and the negotiation and execution of definitive
agreements.
Process
We produce our shell surfaces using a novel 3D negative imprinting molding technique that allows much more precise control over feature
size, a uniform distribution of features on the surface, no particles creation, and less unit-to-unit variation. Our primary competitors utilize the
“salt-loss” technique or “polyurethane foam imprint” technique. The “salt-loss” technique blows crystals of salt or sugar onto the uncured
silicone shell in order to produce surface texture and the “polyurethane foam imprint” technique uses a foreign material to press against the
last uncured silicone layer to produce surface features. We believe our 3D negative imprinting technique is more efficient and consistent than
the techniques used by our competitors because the application of our surface texture is integrated with the molding process, rather than
requiring a separate, subsequent process.
Suppliers
We source manufacturing inputs from a number of outside suppliers. In particular, we obtain NuSil brand medical grade silicone from Avantor
(previously NuSil Technology LLC), which is a sole-source supplier of such product to the entire silicone breast implant industry. In 2016, we
entered into a new supply agreement with NuSil-Avantor, which provides for specified prices per unit of each relevant component through
2021, with potential extensions beyond that date.
Other critical materials are the silicone patches and other silicone components used for the assembly of our breast implants. All these
components are also made with NuSil medical-grade silicone and manufactured by specialized silicone contract manufacturing suppliers. All
component suppliers undergo strict quality inspections to ensure these can meet our quality standard. Other important components are the
primary packaging polycarbonate trays, the Tyvek sealing lids and packaging. All these components are also critical to maintain integrity of
the product throughout its shelf-life and all these suppliers must be qualified and materials must be validated prior to being approved for
manufacturing activities. Most suppliers are evaluated annually, and we carry second source supplier activities to ensure business continuity
and quality and costs improvement.
Competition
The market for silicone breast implants is relatively concentrated, with Allergan plc and Mentor Worldwide LLC, a division of Johnson &
Johnson. In the United States, Sientra, Inc. is the only other company with an approved silicone implant product. Internationally, the market is
more fragmented, with GC Aesthetics plc, Silimed, Inc., Groupe Sebbin SAS, Hans Biomed Crop., Polytech Health & Aesthetics, and Arion
Laboratories.
Our major competitors in the silicone marketplace are either publicly traded companies or divisions or subsidiaries of publicly traded
companies with significantly more market share and resources than we have. These companies have greater financial resources for sales,
marketing and product development, broader established relationships with health care providers and third-party payors, and larger and more
established distribution networks. In some instances, our competitors also offer products that include features that we do not currently offer in
all geographies. Our competitors also have regulatory approval to market and sell their products in countries where we currently do not,
notably the United States. In addition, our competitors may offer pricing programs with discounts across their non-breast aesthetic product
portfolios.
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We also face potential future competition from a number of companies, medical researchers and existing medical device companies that may
be pursuing new implant technologies. These include non-implant breast augmentation through injections of autologous adipose tissue, new
material technologies such as synthetic fillers, and new methods of enhancing and reconstructing the breast.
We believe the primary competitive factors in our current and future markets include:
▪
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▪
▪
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safety and outcomes data generated in clinical studies;
regulatory approvals;
technological characteristics of products;
complementary platforms of non-implant products, such as facial fillers and fat grafting technologies;
product price;
customer service; and
support by key opinion leaders.
Federal Food, Drug, and Cosmetic Act
Breast implants are regulated as Class III medical devices in the United States, and are subject to the Federal Food, Drug, and Cosmetic Act
as implemented and enforced by the FDA. The FDA administers requirements covering the design, development, testing, safety,
effectiveness, manufacturing, labeling, promotion, advertising, distribution, and postmarket surveillance of medical devices. Medical devices
are classified as Class I (lowest risk), II (moderate risk), or III (highest risk). Unless an exemption applies or the product is a Class I device,
each medical device that we market must first receive either premarket notification clearance (by filing a 510(k) submission) or premarket
approval (by filing a PMA) from the FDA. Breast implants are currently classified as Class III devices requiring an approved PMA for
commercial distribution. In addition, certain modifications made to marketed devices also may require 510(k) clearance or approval of a PMA
supplement.
The process of obtaining FDA clearance or approval of a medical device can be lengthy and costly. The FDA’s 510(k) clearance process
usually takes from three to twelve months, but it can take longer. The process of obtaining PMA approval is much more costly, lengthy, and
uncertain, and is generally preceded by the conduct of pre-clinical testing and a well-controlled clinical study. The FDA’s guidance document
“Saline, Silicone Gel, and Alternative Breast Implants” currently recommends that a core study, which can be a single, open label, multi-
center study, be conducted with ten years or more of prospective patient follow-up. To date, PMAs for silicone breast implants have been
submitted for approval to the FDA with a minimum of three years of premarket core study data. Additionally, the FDA will not approve the
PMA until it conducts a pre-approval inspection of our manufacturing facility and determines that it is in compliance with good manufacturing
practices, as set forth in the FDA’s Quality System Regulation or QSR. The PMA review and approval process generally takes from one to
three years but may take longer. The FDA’s guidance document “Saline, Silicone Gel, and Alternative Breast Implants” also states that
manufacturers seeking approval of breast implants will be subject to post-approval requirements, which may include, but are not limited to,
long-term follow-up of the core clinical study patients, conduct of separate post-approval studies, participation in a patient registry or other
studies, and training programs for physicians and surgeons, and periodic reporting requirements.
In addition to regulations governing 510(k) and PMA submissions, we are subject to regulations governing the conduct of clinical
investigations, including regulations related to informed consent, Institutional Review Board review and approval, Good Clinical Practices, or
GCPs, and labeling of investigational devices. Our clinical study sites are subject to possible inspection by the FDA. We received an IDE
approval from the FDA in March 2018, to initiate a clinical trial and our first patient was enrolled in April 2018.
When we initiate commercial distribution of our devices in the United States, we will be subject to FDA device listing and establishment
registration, good manufacturing practice requirements as set forth in the QSR, labeling and promotion requirements, reporting of adverse
events and device malfunctions, post-approval restrictions or conditions, post-market surveillance requirements, and reporting requirements
for product recalls, or corrections or removals in the field. Our manufacturing facilities, as well as those of certain of our suppliers, will be
subject to periodic and for-cause inspections by the FDA to verify compliance with the QSR and other regulatory requirements.
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HIPAA and Other Privacy Laws
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, established for the first time comprehensive protection for the
privacy and security of protected health information. HIPAA standards apply to three types of organizations, or “Covered Entities”: certain
health plans, health care clearing houses, and health care providers which conduct certain health care transactions electronically. Covered
Entities and their “Business Associates”: entities that perform services on behalf of a Covered Entity that involves the creation, use,
maintenance or disclosure of protected health information, must have in place administrative, physical, and technical standards to guard
against the misuse of protected health information. Some of the institutions and physicians from which we obtain biological specimens that
we use in our research and validation work are Covered Entities and must obtain proper authorization from their patients for the subsequent
use of those samples and associated clinical information. We may perform future activities that may implicate HIPAA, such as providing
clinical laboratory testing services or entering into specific kinds of relationships with a Covered Entity or a Business Associate of a Covered
Entity.
Additionally, the Health Information Technology for Economic and Clinical Health Act, enacted as part of the American Recovery and
Reinvestment Act of 2009 amended HIPAA by increasing the civil and criminal penalties that may be imposed against Covered Entities, their
Business Associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or
injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil
actions.
Our activities must also comply with other applicable privacy laws. For example, there are also international privacy laws that impose
restrictions on the access, use, and disclosure of health information. All of these laws may impact our business. If we fail to comply with
these privacy laws, or if significant changes in the laws restrict our ability to obtain tissue samples and associated patient information, this
could significantly impact our business and our future business plans.
Federal and State Billing and Fraud and Abuse Laws
Antifraud Laws/Overpayments
As participants in national and state health care programs, we may be subject to numerous national and state antifraud and abuse laws in
various countries. Many of these antifraud laws are broad in scope, and neither the courts nor government agencies have extensively
interpreted these laws. Prohibitions under some of these laws include:
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▪
▪
▪
the submission of false claims or false information to government programs;
deceptive or fraudulent conduct;
excessive or unnecessary services or services at excessive prices; and
prohibitions in defrauding private sector health insurers.
One of these statutes, the federal False Claims Act, is a key enforcement tool used by the government to combat health care fraud. The
federal False Claims Act imposes liability on any person who, among other things, knowingly presents, or causes to be presented, a false or
fraudulent claim for payment by a federal health care program. In addition, violations of the federal physician self-referral laws, such as the
Stark laws discussed below, may also violate false claims laws.
Numerous federal and state agencies enforce the antifraud and abuse laws. In addition, private insurers may also bring private actions. In
some circumstances, private whistleblowers are authorized to bring fraud suits on behalf of the government against providers and are entitled
to receive a portion of any final recovery.
Federal and State “Self-Referral” and “Anti-kickback” Restrictions
Self-Referral Law
We will be subject to a federal “self-referral” law, commonly referred to as the “Stark” law, which provides that physicians who, personally or
through a family member, have ownership interests in or compensation arrangements with a laboratory are prohibited from making a referral
to that laboratory for laboratory tests reimbursable by Medicare, and also prohibits laboratories from submitting a claim for Medicare
payments for laboratory tests referred by physicians who, personally or through a family member, have ownership interests in or
compensation arrangements with the testing laboratory. The Stark law contains a number of specific exceptions which, if met, permit
physicians who have ownership or compensation arrangements with a testing laboratory to make referrals to that laboratory and permit the
laboratory to submit claims for Medicare payments for laboratory
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tests performed pursuant to such referrals. The Stark law contains similar prohibitions and exceptions with respect to referrals by physicians
for other designated health services to entities in which the referring physician has a financial interest.
We will be subject to comparable state laws, some of which apply to all payors regardless of source of payment, and do not contain identical
exceptions to the Stark law.
Anti-Kickback Statute
The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly
or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which
payment may be made under a federal health care program, such as the Medicare and Medicaid programs. The term “remuneration” is not
defined in the federal Anti-Kickback Statute and has been broadly interpreted to include anything of value, including for example, gifts,
discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payment, ownership interests and
providing anything at less than its fair market value. The reach of the federal Anti-Kickback Statute was also broadened by the Patient
Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act, or PPACA, which, among
other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal health care fraud statutes . Pursuant to
the statutory amendment, a person or entity does not need to have actual knowledge of this statute or specific intent to violate it in order to
have committed a violation. In addition, PPACA provides that a claim including items or services resulting from a violation of the federal Anti-
Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act or the civil monetary penalties statute,
which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health
program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
The OIG has criticized a number of the business practices in the device industry as potentially implicating the federal Anti-Kickback Statute,
including compensation arrangements intended to induce referrals.
Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for health
care items or services reimbursed by any source, not only the Medicare and Medicaid programs, and do not contain identical safe harbors.
Federal and State Transparency Laws
Beginning in August 2013, the Physician Payment Sunshine Act, enacted as part of PPACA, and its implementing regulations requires
certain medical device manufacturers to track certain financial arrangements with physicians and teaching hospitals, including any “transfer
of value” made or distributed to such entities, as well as any investment interests held by physicians and their immediate family members.
Manufacturers are required to report this information to the U.S. Department of Health and Human Services, or HHS, on an annual basis.
Various states have also implemented regulations prohibiting certain financial interactions with health care professionals or mandating public
disclosure of such financial interactions. We may incur significant costs to comply with such laws and regulations now or in the future.
If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us,
we may be subject to penalties, including civil, criminal and administrative penalties, damages, fines, exclusion from participation in U.S.
federal or state health care programs, additional reporting and government oversight, and the curtailment or restructuring of our operations.
To the extent that any product we make is sold in a foreign country in the future, we may be subject to similar foreign laws and regulations,
which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, and
implementation of corporate compliance programs and reporting of payments or transfers of value to health care professionals. To reduce the
risks associated with these various laws and governmental regulations, we have implemented a compliance plan. Although compliance
programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action
against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert
our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and
state privacy, security and fraud laws may prove costly.
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International Medical Device Regulations
International marketing of medical devices is subject to foreign government regulations, which vary substantially from country to country. The
European Commission is the legislative body responsible for directives, including Directive 93/42/EEC which, once implemented in each
member state, must be complied with by manufacturers selling medical products in the EU and the European Economic Area, or EEA. The
EU includes most of the major countries in Europe, while other countries, such as Norway and Switzerland, are part of the EEA and
European Free Trade Area, or EFTA, respectively, and have voluntarily adopted laws and regulations that mirror those of the EU with respect
to medical devices. The EU directives address regulation of the design, manufacture, labeling, clinical studies and post-market vigilance for
medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear the CE conformity marking,
indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be marketed throughout
the EU and EEA.
Outside of the EU, regulatory pathways for the marketing of medical devices vary greatly from country to country. In many countries, local
regulatory agencies conduct an independent review of medical devices prior to granting marketing approval. For example, in China, approval
by the SFDA must be obtained prior to marketing a medical device. In Brazil, the inspections and approvals of products and facilities carried
out by the ANVISA and InMetro agencies are required prior to marketing a Class 3a medical device like our Motiva Implants. We received
regulatory clearance in Brazil in March 2017 and launched our Motiva Implants commercially in July 2017. The process in such countries
may be lengthy and require the expenditure of significant resources, including the conduct of clinical trials. In other countries, the regulatory
pathway may be shorter or less costly. The timeline for the introduction of new medical devices is heavily impacted by these various
regulations on a country-by-country basis, which may become longer and more costly over time.
U.S. Health Care Reform
In March 2010, the PPACA was enacted, which includes measures that have or will significantly change the way health care is financed by
both governmental and private insurers. The PPACA contains a number of provisions, including those governing enrollments in federal health
care programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government health care programs
and will result in the development of new programs.
Some provisions of the PPACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of
the PPACA, as well as recent efforts to repeal or replace certain aspects of the PPACA. While Congress has not passed comprehensive
repeal legislation, we expect there will be additional challenges and amendments to the PPACA in the future. Together with ongoing statutory
and budgetary policy developments at a federal level, this health care reform legislation could include changes in Medicare and Medicaid
payment policies and other health care delivery administrative reforms that could potentially negatively impact the business of our clients.
Third‑party payers and government entities increasingly continue to challenge the prices of medical devices. Further, the trend toward
managed health care in the U.S., the growth of organizations such as HMOs and MCOs, and legislative and regulatory proposals to reform
health care and government insurance programs create uncertainties regarding the future levels of coverage and reimbursement for medical
devices.
The Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, prohibits any U.S. individual or business from paying, offering or
authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of
influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA
also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring us to maintain books
and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and
maintain an adequate system of internal accounting controls for international operations.
Environment
Our manufacturing processes currently require the controlled use of potentially harmful chemicals, including highly flammable solvents and
we are subject to inspections and other regulatory requirements, including Costa Rican regulations regarding environmental protection and
hazardous and controlled substance controls, among others. Environmental laws and regulations are complex, change frequently and have
tended to become more stringent over time. We have incurred, and may continue to incur, significant expenditures to ensure we are in
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compliance with these laws and regulations. We would be subject to significant penalties for failure to comply with these laws and
regulations. For more information, please refer to Section 1A “Risk Factors”.
Employees
As of December 31, 2019, we had 602 employees. None of our employees are represented by a labor union or covered by collective
bargaining agreements except for employees in Brazil.
ITEM 1A. RISK FACTORS
Investing in our common shares involves a high degree of risk. The following risk factors describe circumstances or events that could have a
negative effect on our business, financial condition or operating results. You should consider the following risks carefully, together with all the
other information in this Annual Report on Form 10-K, including our consolidated financial statements and notes thereto, before you invest in
our common shares. If any of the following risks occur, our business, financial condition, or operating results, could be adversely affected. As
a result, the trading price of our common shares could decline, and you could lose part or all of your investment. Additional risks and
uncertainties not currently known to us or that we currently believe are not material could also impair our business, financial condition or
operating results.
Risks Related to the Development and Commercialization of Our Products
We expect to incur losses for the foreseeable future, and our ability to achieve and maintain profitability depends on the
commercial success of our Motiva Implants, which accounted for approximately 94% and 92% of our revenues for the years ended
December 31, 2019 and 2018, respectively, and we expect our revenues to continue to be driven primarily by sales of these
products.
We have incurred losses to date and expect to continue to incur losses for the foreseeable future. Sales of our Motiva Implants accounted for
approximately 94% and 92% of our revenues for the years ended December 31, 2019 and December 31, 2018, respectively, and we expect
our revenues to continue to be driven primarily by sales of these products. In order to achieve and sustain profitability, our revenues from
these products will need to grow beyond the levels we have achieved in the past. If physicians and/or patients do not perceive our products
to be competitive in features and safety when compared to other products in the market, or if demand for our Motiva Implants or for breast
implants in general decreases, we may fail to achieve sales levels that provide for future profitability.
Our ability to successfully market Motiva Implants and our other current and future offerings depends on numerous factors, including but not
limited to:
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the outcomes of current and future clinical studies of Motiva Implants, including our ongoing IDE clinical trial, to demonstrate our
products’ value in improving safety outcomes and/or patient satisfaction;
acceptance of Motiva Implants as safe and effective by patients, caregivers and the medical community;
an acceptable safety profile of Motiva Implants in the global market;
whether key thought leaders in the medical community accept that such clinical studies are sufficiently meaningful to influence their
or their patients’ choices of product;
• maintenance of our existing regulatory approvals and expansion of the geographies in which we have regulatory approvals;
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designing commercially viable processes at a scale sufficient to meet anticipated demand at an adequate cost of manufacturing, and
that are compliant with ISO 13485 Quality Management System requirements and/or good manufacturing practice, or GMP,
requirements, as set forth in the FDA’s Quality System Regulation, Brazilian and other international regulations;
our success in educating physicians and patients about the benefits, administration and use of Motiva Implants;
the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;
the willingness of patients to pay out-of-pocket for breast augmentation and reconstruction procedures in the absence of coverage
and reimbursement for such procedures;
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the success of our internal sales and marketing organization and the sales forces of our distributors; and
continued demand for breast augmentation and reconstruction procedures using silicone implants, which may be adversely affected
by events involving either our products or those of our competitors, including FDA warnings to patients regarding Breast Implant-
Associated Anaplastic Large Cell Lymphoma, or BIA-ALCL.
Some of these factors are beyond our control. If we are unable to continue to commercialize Motiva Implants and our other products, or
unable to obtain a partner to commercialize them, we may not be able to produce any incremental revenues related to Motiva Implants and
our other products. This would result in an adverse effect on our business, financial condition, results of operations and growth prospects.
There is no guarantee that the FDA or non-U.S. regulatory agencies will grant approval for our current or future products, and
failure to obtain regulatory approvals in the United States and other international jurisdictions, or revocation of approvals in those
jurisdictions, will prevent us from marketing our products.
We intend to seek additional distribution and marketing partners for Motiva Implants and may market specific products only in international
markets. We have obtained a CE Mark for Motiva Implants and are therefore authorized to sell in the EU; however, in order to market in
regions such as the Asia Pacific region and many other jurisdictions, we must obtain separate regulatory approvals. The approval procedures
vary among countries and can involve additional clinical testing, and the time required to obtain approvals may differ from that required to
obtain the CE Mark or FDA approval. Moreover, clinical studies or manufacturing processes conducted in one country may not be accepted
by regulatory authorities in other countries. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and
approval by one or more international regulatory authorities does not ensure approval by regulatory authorities in other countries or by the
FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in
others. An international regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain
international regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and, even if we file, we may
not receive necessary approvals to commercialize our products in any market.
Before obtaining regulatory approval for the sale of a planned product, we may be required to conduct extensive preclinical and clinical
studies to demonstrate the safety and efficacy of our planned products in human patients. Clinical studies can be expensive, difficult to
design and implement, can take many years to complete, and are uncertain as to outcome. A failure of one or more of our clinical studies
could occur at any stage of testing. In connection with the initiation of a clinical study in the United States, we filed an IDE application in 2017,
which was approved in March 2018 and our first patient was enrolled in April 2018. Our ongoing U.S. IDE trial may take longer to enroll than
anticipated, may be stopped for unforeseen safety issues or may not be successful in meeting its endpoints, in which case our U.S.
regulatory pathway would require subsequent additional clinical trials.
Numerous unforeseen events during, or as a result of, preclinical and clinical studies could occur, which would delay or prevent our ability to
receive regulatory approval or commercialize Motiva Implants or any of our planned products, including the following:
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clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional
clinical studies or abandon product development programs;
the number of patients required for clinical studies may be larger than we anticipate, enrollment in these clinical studies may be
insufficient or slower than we anticipate, or patients may drop out of these clinical studies at a higher rate than we anticipate;
the cost of clinical studies may be greater than we anticipate;
third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner,
or at all;
we might suspend or terminate clinical studies of our planned products for various reasons, including a finding that our planned
products have unanticipated serious side effects or other unexpected characteristics, or that the study subjects are being exposed to
unacceptable health risks;
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regulators may not approve our proposed clinical development plans;
regulators or independent institutional review boards, or IRBs, may not authorize us or our investigators to commence a clinical study
or conduct a clinical study at a prospective study site;
regulators or IRBs may require that we, or our investigators, suspend or terminate clinical studies for various reasons, including
noncompliance with regulatory requirements;
regulators may determine that the clinical data submitted to support our request for approval is unreliable or incomplete as a result of
any number of factors, including potential financial bias associated with equity holdings in the Company by study investigators, or
significant payments by the Company to study investigators for consulting work, which may result in regulators requesting further
data analysis or other confirmatory studies to be performed, or determining the data does not support regulatory approval;
regulators in countries where Motiva Implants are currently marketed may require that we suspend commercial distribution if there is
noncompliance with regulatory requirements or safety concerns;
regulators in countries where Motiva Implants are currently marketed may suspend commercial distribution of silicone breast
implants due to safety or other concerns generally applicable to the product category;
the supply or quality of our planned products or other materials necessary to conduct clinical studies of our planned products may be
insufficient or inadequate; and/or
the enactment of new regulatory requirements in Europe under the new Medical Device Regulation may make approval times longer
and standards more difficult to pass.
If we or any future collaboration partner are required to conduct additional clinical trials or other testing of Motiva Implants or any planned
products, those clinical studies or other testing may not be successfully completed. Additionally, if the results of these studies or tests are not
positive, or if they raise safety concerns, we may:
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be delayed in obtaining marketing approvals for Motiva Implants or our planned products;
not obtain marketing approval at all;
obtain approval for indications that are not as broad as intended;
have a product removed from the market after obtaining marketing approval;
be subject to additional post-marketing testing requirements; and/or
be subject to restrictions on how the product is distributed or used.
Even if we obtain regulatory approvals or clearances in a jurisdiction, our products may be removed from the market due to a variety of
factors, including adverse events, recalls, suspension of regulatory clearance to sell, or other factors. For example, during the summer of
2016 while we were transitioning from one notified body to another, our CE Mark for Motiva Implants was temporarily not in force. We expect
that the initial U.S. approval will be subject to a lengthy and expensive follow-up period, during which we must monitor patients enrolled in
clinical studies and collect data on their safety outcomes. Even if FDA approval is obtained, FDA has authority to impose postmarket
approval conditions, which can include (i) restrictions on device’s sale, distribution, or use, (ii) continuing evaluation of the device’s safety and
efficacy, (iii) additional warning/hazard labeling requirements, (iv) significant record management, (v) periodic reporting requirements, and (vi)
any other requirements the FDA determines necessary to provide reasonable assurance of the device’s safety and effectiveness. Completion
of this follow-up study, in a manner which results in data sufficient to maintain FDA approval, is subject to multiple risks, many of which are
outside of our control. These include, but are not limited to, our ability to fund the ongoing study from our operations or via additional
fundraising; study participants’ willingness and ability to return for follow-up study visits; and maintenance of a suitable study database over a
long period of time. Even if completed and appropriately evaluated, the study follow-up may reveal safety or other issues that impact the
approved labeling or may result in withdrawal of Motiva Implants from the marketplace in the United States or elsewhere.
Although we launched Motiva Implants commercially in October 2010 and have sold over one million units to date in various countries
outside the United States, we do not have as much post-market surveillance data as our competitors and may not have clearly identified all
possible or actual risks of our products. Furthermore, if our clinical trials do not produce patient data that compares favorably with breast
implants that are already on the market, physicians and patients may opt to not use our products, and our business would suffer.
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Our product development costs will also increase if we experience delays to our clinical trials or approvals. We do not know whether any
clinical studies will begin as planned, will need to be restructured, or will be completed on schedule, or at all.
Significant clinical study delays could allow our competitors to bring products to market before we do, which would impair our ability to
commercialize our planned products and harm our business and results of operations.
Negative publicity, product defects and any resulting litigation concerning our products or our competitors’ products could harm
our reputation and reduce demand for silicone breast implants, either of which could negatively impact our financial results.
The responses of potential patients, physicians, the news media, legislative and regulatory bodies and others to information about
complications or alleged complications of our products, or products liability litigation against us or our competitors, could result in negative
publicity and could materially reduce market acceptance of our products. These responses or any investigations and potential resulting
negative publicity may have a material adverse effect on our business and reputation and negatively impact our financial condition, results of
operations or the market price of our common shares. In addition, significant negative publicity could result in an increased number of
product liability claims against us.
In certain large markets, we engage in direct sales efforts. We may fail to maintain and develop our direct sales force, and our
revenues and financial outcomes could suffer as a result. Furthermore, our direct sales personnel may not effectively sell our
products.
We have established a direct sales force for our business in Brazil, and we have implemented a direct sales strategy in and several
European countries. We have hired and will need to retain and motivate a significant number of sales and marketing personnel in order to
support our anticipated growth in these countries. There is significant competition for quality personnel experienced in such activities,
including from companies with greater financial resources than ours. If we are not successful in our efforts to continue recruiting, retaining,
and motivating such personnel, we may not be able to increase our revenues, or we may increase our expenses in greater measure than our
revenues, negatively impacting our operating results.
We are also working on creating a direct sales structure and strategy in certain markets. We are working to put in place the correct legal and
business structures to comply with taxation and operational requirements. These structures may not ultimately be implemented or, if
implemented, be successful or effective and may not be able to increase our revenues or improve our gross margins. In addition, our
expenses or tax related costs may increase in greater measure than our revenues, negatively impacting our operating results.
Furthermore, our sales force may operate independently with limited day-to-day oversight from management. They may engage in sales
practices that increase certain risks to our business, including the risk of scrutiny from regulatory authorities and the risk that we violate
health care or anti-corruption regulations in one or more countries. These and other independent actions may result in unexpected costs,
publicity that might impair our reputation or revenues, litigation in various jurisdictions, and/or sanctions. Any of these could impair the trading
price of our shares and adversely impact our results.
A substantial proportion of our sales are through exclusive distributors, and we do not have direct control over the efforts these
distributors may use to sell our products. If our relationships with these third-party distributors deteriorate, or if these third-party
distributors fail to sell our products or engage in activities that harm our reputation, or fail to adhere to medical device regulations,
our financial results may be negatively affected.
Historically, our sales model has been to sell primarily through distributors rather than through our own sales force, with the notable exception
of Brazil and several European countries where we are selling directly, but, in the future, we may utilize a hybrid sales model that includes
both distributors and a direct sales effort. We believe that our reliance on distributors improves the economics of our business, as we do not
carry the high fixed costs of a direct sales force in many of the countries in which our Motiva Implants are sold. If we are unable to maintain
or enter into such distribution arrangements on acceptable terms, or at all, we may not be able to successfully commercialize our products in
certain countries. Furthermore, distributors can choose the level of effort that they apply to selling our products relative to others in their
portfolio. The selection, training, and compensation of a distributors’ sales personnel are within their control rather than our own and may
vary significantly in quality from distributor to distributor.
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In addition, although our contract terms require our distributors to comply with all applicable laws regarding the sale of our products, including
anti-competition, anti-money laundering, and sanctions laws, we may not be able to ensure proper compliance. If our distributors fail to
effectively market and sell our products in full compliance with applicable laws, our results of operations and business may suffer.
If we are unable to train plastic surgeons on the safe, effective and appropriate use of our products and designed surgeries, we
may be unable to achieve our expected growth.
An important part of our sales process includes educating plastic surgeons about the benefits and advantages of our Motiva Implants and
MotivaImagine products as well as training them on the safe and appropriate use of our products. As part of our effort to educate and train
plastic surgeons through our MotivaEDGE educational platform, we completed 244 and 51 medical training sessions worldwide during 2019
and 2018, respectively. If we are unable to train potential new plastic surgeon customers at these medical training sessions, we may be
unable to achieve our expected growth.
It is critical to the success of our commercialization efforts to train a sufficient number of plastic surgeons and provide them with adequate
instructions in the appropriate use of our products and designed surgeries. This training process may take longer than expected and may
therefore affect our ability to grow our business. Following completion of training, we rely on the trained plastic surgeons to advocate for our
products and designed surgeries in the marketplace. Convincing plastic surgeons to dedicate the time and focus necessary for adequate
training is challenging, and we cannot provide any assurances that we will be successful in these efforts. If plastic surgeons are not properly
trained, they may misuse or ineffectively use our products or designed surgeries. This may also result in, among other things, unsatisfactory
patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have an adverse effect on our business and
reputation.
In addition, we need to ensure that plastic surgeons are sufficiently educated regarding our implants. For example, many metal implants,
such as screws or artificial joints, produce an artifact when magnetic resonance imaging, or MRI, is used to image the area in which the
object resides. Our QInside Safety Technology microtransponder embedded in certain Motiva Implants contains metal and causes an artifact
that can affect breast cancer screening using MRI, and this artifact is not present in other imaging modalities such as breast ultrasound and
film or digital mammography. It is important that we educate physicians and patients on the risks associated with MRI artifacts and how to
mitigate them if they choose to utilize Motiva Implants that contain a QInside microtransponder. If we fail to educate physicians and patients
about any of these factors, they may make decisions regarding Motiva Implants without full knowledge of the risks and benefits or may view
our Motiva Implants negatively.
We have a limited operating history and may face difficulties encountered by companies early in their commercialization in
competitive and rapidly evolving markets.
Our Motiva Implants have been marketed in countries outside of the United States since October 2010, and as such, we have a limited
operating history upon which to evaluate our business and forecast our future net sales and operating results. In assessing our business
prospects, you should consider the various risks and difficulties frequently encountered by companies early in their commercialization in
competitive markets, particularly companies that develop and sell medical devices. These risks include our ability to:
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implement and execute our business strategy;
expand and improve the productivity of our direct sales force, distributors and marketing programs to grow sales of our products;
increase awareness of our brands and build loyalty among plastic surgeons and patients;
• manage expanding operations;
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respond effectively to competitive pressures and developments;
enhance our existing products and develop new products;
• maintain and obtain regulatory clearance or approval of our existing products and commercialize new products;
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respond to changing regulations associated with medical devices across all geographies;
perform clinical trials with respect to our existing products and any new products;
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attract, retain and motivate qualified personnel in various areas of our business; and
obtain and maintain coverage and adequate levels of reimbursement for our products.
Due to our limited operating history, we may not have the institutional knowledge or experience to be able to effectively address these and
other risks that we may face. In addition, we may not be able to develop insights into trends that could emerge and negatively affect our
business and may fail to respond effectively to those trends. As a result of these or other risks, we may not be able to execute key
components of our business strategy, and our business, financial condition and operating results may suffer.
Motiva Implants are not currently approved for commercial sale in the United States. Obtaining such approval is costly and time
consuming, and we may not obtain the regulatory approval required to sell our products in the United States.
Neither we, nor any future collaboration partner, can commercialize Motiva Implants in the United States without first obtaining regulatory
approval for the product from the FDA. In the EU and other countries, we previously obtained a CE Mark, before making Motiva Implants
available for commercial sale. FDA guidance on silicone breast implants mandates approval via the PMA process. Extensive preclinical and
clinical testing will be required to support the PMA. At least one well-controlled clinical trial is required for approval, such as the one we
began in April 2018, which will require us to commit significant financial and personnel resources. Additionally, we will be required to commit
to significant and costly post-approval requirements, which will include follow-up of our clinical trial patients for up to ten years, creation of a
patient registry, and/or other studies, and implementation of training programs for physicians. We may be unable to fund, enroll, or complete
such trials in a timely fashion, or at all, and we may have an insufficient number of enrolled patients follow up as instructed. The results of
clinical studies may not be favorable enough to support marketing approval in the United States, or may raise other questions (pertaining, for
example, to product safety or effectiveness) that jeopardizes our current approvals for sale in other territories. The FDA approval process will
take at least several years to complete, and FDA approval may never be obtained. We must also demonstrate that our manufacturing
facilities, processes and controls are adequate to support FDA approval and that our clinical investigators complied with good clinical
practices in the conduct of the clinical trial for our Motiva Implants.
Furthermore, FDA regulatory approval is not a guarantee, and the filing and approval process itself is expensive and may take several years.
The FDA also has substantial discretion in the approval process. Despite the time and expense exerted, failure may occur at any stage, and
we could encounter problems that cause us to abandon or repeat clinical studies, including our ongoing IDE clinical trial that commenced in
April 2018. The FDA can delay, limit, or deny approval of a product candidate for many reasons, including, but not limited, to:
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a product candidate may not be deemed to be safe and effective;
FDA officials may not find the data from clinical and preclinical studies sufficient;
the FDA may not approve our or our suppliers’ processes or facilities;
the FDA may consider clinical studies inadequate and the data inadequate if, among other things, appropriate steps have not been
taken in the design, conduct, reporting and analysis of the studies to minimize bias; or
the FDA may change its approval policies or adopt new regulations.
If Motiva Implants, or our future products, fail to demonstrate safety and efficacy in further clinical studies that may be required for U.S.
approval, or do not gain regulatory approval, our business and results of operations will be harmed.
Moreover, obtaining regulatory approval for marketing of our products in one country does not ensure we will be able to obtain regulatory
approval in other countries, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the
regulatory process in other countries.
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Even if clinical trials demonstrate acceptable safety and efficacy for Motiva Implants in some patient populations, the FDA or
similar regulatory authorities outside the United States may not approve the marketing of Motiva Implants or may approve it with
restrictions on the label, which could have a material adverse effect on our business, financial condition, results of operations and
growth prospects.
It is possible the FDA or similar regulatory authorities may not consider the results of our clinical trials to be sufficient for approval of Motiva
Implants for our desired indications for use. Guidance issued by the FDA in 2006 suggests that a single well-controlled study is required for
approval of a new silicone breast implant. The FDA may nonetheless require that we conduct additional clinical studies, possibly using a
different clinical study design.
Moreover, even if the FDA or other regulatory authorities approve the marketing of Motiva Implants, the approval may include additional
restrictions on the label that could make Motiva Implants less attractive to physicians and patients compared to other products that may be
approved for broader indications, which could limit potential sales of Motiva Implants.
If we fail to obtain FDA or other regulatory approval of Motiva Implants, or if the approval is narrower than what we seek, it could impair our
ability to realize value from Motiva Implants, and therefore may have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
If we fail to compete effectively against our competitors, many of whom have greater resources than we have, our revenues and
results of operations may be negatively affected.
Alternatives exist for Motiva Implants and for our other products, and we will likely face competition with respect to any planned products that
we may seek to develop or commercialize in the future from major pharmaceutical companies, specialty pharmaceutical companies, medical
device companies and biotechnology companies worldwide. There are several large pharmaceutical and biotechnology companies that
currently market silicone breast implants. We also face competition from manufacturers of saline-filled breast implants, and we see emerging
competition from non-implant breast augmentation techniques such as hyaluronic acid injection and novel fat grafting methodologies. Any of
these may present competitive barriers to Motiva Implants.
Our leading competitors are large, multi-national companies with significant resources and capabilities. Three of these companies, Sientra,
Inc., Mentor Worldwide LLC (a division of Johnson & Johnson), and Allergan plc, have conducted large prospective clinical studies that
started in the United States in 2002, 2000 and 1998, respectively, and they use this data extensively to promote their products. This can put
us at a disadvantage when promoting our products to physicians and patients, even outside the United States. In addition, the significant
financial and staff resources and brand recognition that our competitors possess mean they may be able to compete with us regardless of
the differentiating features of our products. If we are not successful in capturing market share, even outside the United States, or if physicians
or patients do not perceive our products to be safer or more favorable, our revenues and/or our operating margins may be significantly
impaired.
In addition, manufacturers of competitive products may reduce prices for their competing products in an effort to gain or retain market share
and undermine the value proposition that Motiva Implants might otherwise be able to offer to customers. Potential competitors also include
academic institutions, government agencies and other public and private research organizations that conduct research, seek patent
protection and establish collaborative arrangements for research, development, manufacturing and commercialization. These competitors
may develop new technologies that are superior to our products or replace silicone.
Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large
and established companies. These third parties may compete with us in recruiting and retaining qualified technical and management
personnel, establishing clinical study sites and patient registrations for clinical studies, as well as in acquiring technologies complementary to,
or necessary for, our programs.
Pricing pressure from customers and our competitors may impact our ability to sell our products at prices necessary to support
our current business strategies and future expansion.
The industry environment for silicone implants and complementary products in certain international markets is price sensitive. In these
markets, or in the United States if we are successful in obtaining the required regulatory approval to sell in the U.S. market, our competitors
may adopt aggressive pricing strategies to intensify the competitive pricing pressure for breast implants. If we are not successful in educating
customers or third-party payors on the differentiation of our Motiva Implants as compared to our competitors’ products, customers may
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choose our competitors’ products. Additionally, as more competitors introduce products that compete with ours, we may face additional
pricing pressure that would adversely impact our future results.
Our business depends on maintaining our brand and ongoing customer demand for our products and services, and a significant
reduction in sentiment or demand could affect our results of operations.
Our success depends on the reputation of our brands, which depends on factors such as the safety and quality of our products, our
communication activities, including marketing and education efforts, and our management of our customer experience. Maintaining,
promoting and positioning our brands is important to expanding our customer base. This will depend largely on the success of our education
and marketing efforts and our ability to provide a consistent, high-quality customer experience.
We may need to make substantial investments in the areas of education and marketing in order to maintain and enhance our brands.
Ineffective marketing, negative publicity, significant discounts by our competitors, product defects and related liability litigation, failure to
obtain regulatory clearance for our products, counterfeit products, unfair labor practices and failure to protect the intellectual property rights in
our brands are some of the potential threats to the strength of our business. To protect our brands’ status, we may need to make substantial
expenditures to mitigate the impact of such threats.
We believe that maintaining and enhancing our brands in the countries in which we currently sell our products, and in new countries where
we have limited brand recognition, is important to expanding our customer base. If we are unable to maintain or enhance the strength of our
brands in the countries in which we currently sell our products and in new countries, then our growth strategy could be adversely affected.
Any disruption at our existing facilities could adversely affect our business and operating results.
Our headquarters are located in Costa Rica, and all of our main manufacturing activities are conducted in two ISO-13485 and GMP
compliant manufacturing facilities in Costa Rica through Establishment Labs, S.A. Despite our efforts to maintain and safeguard our
manufacturing facilities, including acquiring insurance and adopting maintenance and health and safety protocols, vandalism, terrorism or a
natural or other disaster, such as earthquake, volcanic activity, fire or flood, could damage or destroy our inventory of finished goods, cause
substantial delays in our operations and manufacturing, result in the loss of key information and cause us to incur additional expenses. Our
insurance may not cover our losses in any particular case. In addition, regardless of the level of insurance coverage, damage to our facilities
may have an adverse effect on our business, financial condition and results of operations.
If changes in the economy and/or consumer spending, consumer preference and other trends reduce consumer demand for our
products, our sales and profitability would suffer.
We are subject to the risks arising from adverse changes in general economic and market conditions. Certain elective procedures, including
breast augmentation, are typically not covered by insurance. Adverse changes in the economy may cause consumers to reassess their
spending choices, which could have an adverse effect on consumer spending, reduce the demand for these surgeries, and therefore have an
adverse effect on our revenues. Furthermore, consumer preferences and trends may shift due to a variety of factors, including changes in
demographic and social trends, public health initiatives and product innovations, which may reduce consumer demand for our products.
We have made multiple acquisitions in the past, and in the future we may acquire other businesses or form joint ventures or make
investments in other companies or technologies. If we are not successful in integrating these businesses, as well as identifying
and controlling risks associated with the past operations of these businesses, we may incur significant costs, receive penalties or
other sanctions from various regulatory agencies, and/or incur significant diversions of management time and attention.
We believe our business growth will be enhanced if we continually seek opportunities to enhance and broaden our product offerings. As part
of our business strategy, we may pursue acquisitions or licenses of assets, or acquisitions of businesses. We also may pursue strategic
alliances and joint ventures that leverage our core technology and industry experience to expand our product offerings or sales and
distribution resources. We have acquired companies and/or assets and licensed assets in a variety of countries, including Brazil and several
European countries.
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We may do more of these types of transactions in the future and may also form strategic alliances and joint ventures. We may not be able to
find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we
make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume
unknown or contingent liabilities. Any future acquisitions also could result in significant write-offs or the incurrence of debt and contingent
liabilities, any of which could have an adverse effect on our financial condition, results of operations and cash flows. Integration of an
acquired company may also disrupt ongoing operations and require management resources that would otherwise focus on developing our
existing business. We may experience losses related to investments in other companies, which could have a negative effect on our results of
operations. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize
the anticipated benefits of any acquisition, license, strategic alliance or joint venture. To finance such a transaction, we may choose to issue
common shares as consideration, which would dilute the ownership of our shareholders. If the price of our common shares is low or volatile,
we may not be able to acquire other companies or fund a joint venture project using our shares as consideration. Alternatively, it may be
necessary for us to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms
that are favorable to us, or at all.
We do not know whether we will be able to successfully integrate any acquired business, product or technology. The success of any given
acquisition may depend on our ability to retain any key employees related thereto, and we may not be successful at retaining or integrating
such key personnel. Integrating any business, product or technology we acquire could be expensive and time-consuming, disrupt our
ongoing business, impact our liquidity, and/or distract our management. If we are unable to integrate any acquired businesses, products or
technologies effectively, our business may suffer. Whether as a result of unsuccessful integration, unanticipated costs, including those
associated with assumed liabilities and indemnification obligations, negative accounting impact, or other factors, we may not realize the
economic benefits we anticipate from acquisitions. In addition, any amortization or charges resulting from the costs of acquisitions could
increase our expenses.
We may be subject to substantial warranty or product liability claims or other litigation in the ordinary course of business that may
adversely affect our business, financial condition and operating results.
We face an inherent risk of product liability exposure related to the sale of Motiva Implants and any planned products in clinical studies. The
marketing, sale and use of Motiva Implants and our planned products could lead to the filing of product liability claims against us if someone
alleges that our products failed to perform as designed or caused significant adverse events in patients. We may also be subject to liability for
a misunderstanding of, or inappropriate reliance upon, the information we provide. If we cannot successfully defend ourselves against claims
that Motiva Implants or our planned products caused injuries, we may incur substantial liabilities. Regardless of merit or eventual outcome,
liability claims may result in:
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decreased demand for any planned products we may develop;
injury to our reputation and significant negative media attention;
withdrawal of patients from clinical studies or cancellation of studies;
significant costs to defend the related litigation and distraction to our management team;
substantial monetary awards to plaintiffs;
loss of revenue; and
the inability to commercialize any products that we may develop.
We currently hold $25 million in product liability insurance coverage, which may not be adequate to cover all liabilities we may incur.
Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount
adequate to satisfy any liability that may arise.
Our success depends, in part, on our ability to continue to enhance our existing products and services and develop or
commercialize new products and services that respond to customer needs and preferences, which we expect will require us to
incur significant expenses.
In recent years, we have incurred significant costs in connection with the development of Motiva Implants, the MotivaImagine platform,
including the Divina 3D simulation system, and other products and services. We expect our research and development expenses to increase
significantly in 2020 and beyond, as we continue with our
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IDE clinical trial in the United States. We will also incur significant expenses to expand our sales and marketing organization to support sales
of Motiva Implants, including but not limited to a direct sales force in Brazil and several European countries, as well as Puregraft and
MotivaImagine products outside the United States and Canada.
We may not be able to compete effectively with our competitors, and ultimately satisfy the needs and preferences of our customers, unless
we can continue to enhance existing products and develop or acquire new innovative products and services. Product development requires
the investment of significant financial, technological and other resources. Product improvements and new product introductions also require
significant planning, design, development and testing at the product and manufacturing process levels. We may not be able to timely or
effectively develop product improvements or new products and services. Likewise, we may not be able to acquire new products on terms that
are acceptable to us, or at all. Furthermore, in most countries, we need to obtain regulatory approval in order to market and sell our products,
which may limit our ability to act quickly in scaling commercialization in those countries, including the United States. Our competitors’ new
products may beat our products to market, be more effective or safer or have new features, obtain better market acceptance or render our
products and services obsolete. Any new or modified products and services that we develop may not receive regulatory clearance or
approval, or achieve market acceptance or otherwise generate any meaningful sales or profits for us.
The loss of key members of our executive management team could adversely affect our business.
Our success in implementing our business strategy depends largely on the skills, experience and performance of key members of our
executive management team and others in key management positions, including Juan José Chacón Quirós, our Chief Executive Officer,
Salvador Dada, our Chief Operating Officer, Roberto de Mezerville, our Chief Technology Officer, and Renee M. Gaeta, our Chief Financial
Officer. The collective efforts of each of these persons, and others working with them as a team, are critical as we continue to develop our
tests and technologies and pursue our research and development and sales programs. As a result of the difficulty in locating qualified new
management, the loss or incapacity of existing members of our executive management team could adversely affect our operations. If we
were to lose one or more of these key employees, we could experience difficulties in finding qualified successors, competing effectively,
developing our technologies and implementing our business strategy. We do not have “key person” life insurance on our senior executives,
and the loss of any of the key members of our team would have a negative impact to our business and financial results.
In addition, we rely on collaborators, consultants and advisors, including scientific and clinical advisors, to assist us in formulating our
research and development and commercialization strategy. Our collaborators, consultants and advisors are generally employed by
employers other than us and may have commitments under agreements with other entities that may limit their availability to us.
The loss of a key employee, the failure of a key employee to perform in his or her current position or our inability to attract and retain skilled
employees could result in our inability to continue to grow our business or to implement our business strategy.
Our failure to adequately protect personal information in compliance with evolving legal requirements could harm our business.
In the ordinary course of our business, we collect and store sensitive data, including legally protected patient health information, credit card
information and personally identifiable information. We collect this kind of information on our customers for purposes of servicing potential
warranty claims and for post-marketing safety vigilance. These data protection and privacy-related laws and regulations are evolving and
may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions.
There are a number of state, federal and international laws protecting the privacy and security of health information and personal data. As
part of the American Recovery and Reinvestment Act 2009, or ARRA, Congress amended the privacy and security provisions of the Health
Insurance Portability and Accountability Act, or HIPAA. HIPAA imposes limitations on the use and disclosure of an individual’s protected
health information by certain health care providers, health care clearinghouses, and health insurance plans, collectively referred to as
covered entities, that involve the creation, use, maintenance or disclosure of protected health information. The HIPAA amendments also
impose compliance obligations and corresponding penalties for non-compliance on individuals and entities that provide services to health
care providers and other covered entities, collectively referred to as business associates. ARRA also made significant increases in the
penalties for improper use or
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disclosure of an individual’s protected health information under HIPAA and extended enforcement authority to state attorneys general. The
amendments also create notification requirements for individuals whose protected health information has been inappropriately accessed or
disclosed, notification requirements to federal regulators and in some cases, notification to local and national media. Notification is not
required under HIPAA if the health information that is improperly used or disclosed is deemed secured in accordance with encryption or other
standards developed by the U.S. Department of Health and Human Services, or HHS. Most states have laws requiring notification of affected
individuals and state regulators in the event of a breach of personal information, which is a broader class of information than the protected
health information protected by HIPAA. Many state laws impose significant data security requirements, such as encryption or mandatory
contractual terms to ensure ongoing protection of personal information.
In addition, even when HIPAA does not apply, according to the FTC, failing to take appropriate steps to keep consumers’ personal
information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the FTCA, 15 U.S.C § 45(a).
The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer
information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities.
Medical data is considered sensitive data that merits stronger safeguards. The FTC’s guidance for appropriately securing consumers’
personal information is similar to what is required by the HIPAA Security Rule.
Many foreign countries and governmental bodies, including the EU, Canada, Australia and other relevant jurisdictions, have laws and
regulations concerning the collection and use of personal or sensitive data obtained from their residents or by businesses operating within
their jurisdiction. For example, the European Commission recently adopted the General Data Protection Regulation, or the GDPR, effective
on May 25, 2018, that supersedes current EU data protection legislation, imposes more stringent EU data protection requirements and
provides for greater penalties for noncompliance. The GDPR applies to any company established in the EU as well as to those outside the
EU if they collect and use personal data in connection with the offering goods or services to individuals in the EU or the monitoring of their
behavior. The GDPR enhances data protection obligations for processors and controllers of personal data, including, for example, expanded
disclosures about how personal information is to be used, limitations on retention of information, mandatory data breach notification
requirements and onerous new obligations on services providers. Non-compliance with the GDPR can trigger steep fines of up to €20 million
or 4% of total worldwide annual revenues, whichever is higher. Given the breadth and depth of changes in data protection obligations,
meeting the GDPR’s requirements requires time, resources and a review of the technology and systems currently in use against the GDPR’s
requirements.
We may be at risk of enforcement actions taken by certain EU data protection authorities while we continue to build our business practices to
ensure that all transfers of personal data to us from the European Economic Area are conducted in compliance with all applicable regulatory
obligations, the guidance of data protection authorities and evolving best practices. We may find it necessary to establish systems to
maintain personal data originating from the EU in the European Economic Area, which may involve substantial expense and may cause us to
need to divert resources from other aspects of our business, all of which may adversely affect our business.
Our failure to comply with applicable laws and regulations, or to protect such data, could result in enforcement actions against us, including
fines, imprisonment of company officials and public censure, claims for damages by end-customers and other affected individuals, damage to
our reputation and loss of goodwill, any of which could harm on our operations, financial performance, and business. Evolving and changing
definitions of personal data and personal information, within the European Union, the United States, and elsewhere, may limit or inhibit our
ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. Moreover, if the
relevant laws and regulations change, or are interpreted and applied in a manner that is inconsistent with our data practices or the operation
of our products, we may need to expend resources in order to change our business operations, data practices, or the manner in which our
products operate. Even the perception of privacy concerns, whether or not valid, may harm our reputation and inhibit adoption of our
products.
Continued international expansion of our business will expose us to business, regulatory, political, operational, financial and
economic risks associated with doing business internationally.
Our products are commercially available in more than 80 countries, and we operate subsidiaries in the United States, Costa Rica, Brazil, and
several European countries. Our business strategy contemplates continued international expansion, including partnering with medical device
distributors, and introducing Motiva Implants and
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other planned products outside the United States. The sale and shipment of our products internationally, as well as the purchase of
components from international sources, subjects us to potential trade, import and export, and customs regulations and laws.
Compliance with these regulations and laws is costly and exposes us to penalties for non-compliance. Any failure to comply with applicable
legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and
administrative penalties, including imprisonment of individuals, fines and penalties, denial of export or import privileges, seizure of shipments,
restrictions on certain business activities and exclusion or debarment from government contracting. Also, the failure to comply with applicable
legal and regulatory obligations could result in the disruption of our shipping, marketing and sales activities.
In addition, several of the countries in which we sell our products or conduct our operations are, to some degree, subject to political,
economic or social instability. Doing business in Costa Rica and other countries outside the United States involves a number of other risks,
including:
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compliance with the free zone regime regulations under which the manufacturing sites operate;
different regulatory requirements for device approvals in international markets;
• multiple, conflicting and changing laws and regulations such as tariffs and tax laws, export and import restrictions, employment laws,
regulatory requirements and other governmental approvals, permits and licenses;
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potential failure by us or our distributors to obtain and/or maintain regulatory approvals for the sale or use of our products in various
countries;
difficulties in managing global operations;
logistics and regulations associated with shipping products, including infrastructure conditions and transportation delays;
limits on our ability to penetrate international markets if our distributors do not execute successfully;
governmental price controls, differing reimbursement regimes and other market regulations;
financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable, and exposure to
currency exchange rate fluctuations;
reduced protection for intellectual property rights, or lack of them in certain jurisdictions, forcing more reliance on our trade secrets, if
available;
economic weakness, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts,
curtailment of trade and other business restrictions;
the British exit from the EU, including with respect to its effect on the value of the British pound relative to other currencies;
failure to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions, by
maintaining accurate information and control over sales activities and distributors’ activities;
failure to comply with restrictions on the ability of companies to do business in foreign countries, including restrictions on foreign
ownership of telecommunications providers imposed by the U.S. Office of Foreign Assets Control;
unexpected changes in tariffs, trade barriers and regulatory requirements;
compliance with tax, employment, immigration and labor laws;
taxes, including withholding of payroll taxes;
currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to
doing business in another country;
workforce uncertainty in countries where labor unrest is more common than in the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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business and shipping interruptions resulting from natural or other disasters including earthquakes, volcanic activity, hurricanes,
floods and fires.
Any of these risks, if encountered, could harm our future international expansion and operations and, consequently, have an adverse effect
on our financial condition, results of operations and cash flows.
If we are not able to satisfy data protection, security, privacy, and other government- and industry-specific requirements, our
business could be harmed.
There are a number of data protection, security, privacy and other government- and industry-specific requirements, including those that
require companies to notify individuals of data security incidents involving certain types of personal data. Security compromises experienced
by other companies, by our customers or by us may lead to public disclosures, which could harm our reputation, erode customer confidence
in the effectiveness of our security measures, negatively impact our other products and our ability to attract new customers. As we expand
into new regions, we will need to comply with new requirements. If we cannot comply or if we incur a violation in one or more of these
requirements, our growth could be adversely impacted, and we could incur significant liability.
Fluctuations in insurance costs and availability, and future insurance requirements could adversely affect our profitability or our
risk management profile.
We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance, general liability
insurance, property insurance and workers’ compensation insurance. If the costs of maintaining adequate insurance coverage increase
significantly in the future, our operating results could be adversely affected. Likewise, if any of our current insurance coverage should
become unavailable to us or become economically impractical, we would be required to operate our business without indemnity from
commercial insurance providers. If we operate our business without insurance, we could be responsible for paying claims or judgments
against us that would have otherwise been covered by insurance, which would adversely affect our results of operations or financial
condition.
Commercial success of Motiva Implants in the United States or elsewhere depends on our ability to accurately forecast customer
demand and manufacture sufficient quantities of product in the implant sizes that patients and physicians request, and to manage
inventory effectively and the failure to do so could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
Manufacturing of silicone breast implants requires costly capital equipment and a highly skilled workforce. There is a significant lead time to
build and certify a new manufacturing facility. Until 2017, we had one manufacturing facility in Costa Rica, and we experienced inventory
shortages from time-to-time that impaired our ability to meet market demand. In March 2017, our second manufacturing facility, also located
in Costa Rica, became operational, and we received certification under the multi-country MDSAP protocol and began shipping saleable
product. Although we believe our new, larger manufacturing facility, in combination with our first facility, will give us adequate manufacturing
capacity to meet demand for at least the next two years, we have, in the past, been unable to fill all incoming orders to meet growing
demand. In addition, if we obtain FDA approval, we will likely need to obtain additional manufacturing capacity prior to any commercialization
of our Motiva Implants in the United States. If demand increases faster than we expect, or if we are unable to produce the quantity of goods
that we expect with our current facilities, we may not be able to grow revenue at an optimal rate. There may be other negative effects from
supply shortages, including loss of our reputation in the marketplace and a negative impact on our relationships with our distributors.
On the other hand, if demand for our products declines, or if market supply surpasses demand, we may not be able to reduce manufacturing
expenses or overhead costs proportionately. We have invested significantly in our manufacturing capacity in order to vertically integrate our
business. If an increase in supply outpaces the increase in market demand, or if demand decreases, the resulting oversupply could adversely
impact our sales and result in the underutilization of our manufacturing capacity, higher inventory carrying costs and associated working
capital, changes in revenue mix, and/or price erosion, any of which would lower our margins and adversely impact our financial results.
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Counterfeit products may be represented as ours, which could compete with our genuine products and may also expose us to
risks associated with adverse events and product liability.
We routinely see counterfeit versions of our major competitor’s branded products in the marketplace, and we have recently become aware of
potential counterfeiting of our Motiva Implants. This is particularly common in emerging markets, where sensitivity to price is higher and
regulatory enforcement is under-resourced. These counterfeit products are typically manufactured with significantly lower quality than the
products they are claimed to be, and in some cases may be manufactured with silicones that are not medical grade. They may expose
patients to significant adverse event risks, and there is a risk that certain adverse events with counterfeit products may be attributed to our
genuine products. This could reduce demand for our products, result in negative publicity, or otherwise impact our business and the price of
our shares.
Risks Related to the Operation of Our Business
Various factors outside our direct control, including the reliance on single-source suppliers, may adversely affect manufacturing
and supply of our Motiva Implants and other products.
We currently manufacture Motiva Implants at our facilities in the Coyol Free Zone, Alajuela, Costa Rica, under the multi-country MDSAP
protocol. Our Divina scanners are manufactured by contract manufacturers from components sourced globally, with final assembly in
Alajuela, Costa Rica. Our QInside Safety Technology microtransponders are manufactured by contract manufacturers with final testing and
packaging at a manufacturing supplier facility in Regensburg, Germany, with additional inspection of the units at our facilities in Coyol, Costa
Rica, prior to approval for inclusion in Motiva Implants. If demand for our current products and our planned products increases more rapidly
than we anticipate, or if we secure regulatory approval to commercialize our products in additional geographies, we will need to either expand
our manufacturing capabilities or outsource to other manufacturers. The manufacture of these products in compliance with ISO standards
and the FDA’s regulations requires significant expertise and capital investment, including the development of advanced manufacturing
techniques and process controls. Manufacturers of medical device products often encounter difficulties in production, including difficulties
with production costs and yields, quality control, quality assurance testing, shortages of qualified personnel, as well as compliance with
strictly enforced FDA requirements, other federal and state regulatory requirements, and foreign regulations.
We currently purchase components for the Divina scanners and QInside Safety Technology microtransponders under purchase orders and
do not have long-term contracts with most of the suppliers of the materials included in these products. We rely on NuSil Technology, LLC, or
NuSil, as the sole supplier of medical-grade silicone used in our Motiva Implants as well as other products that we manufacture under
contract to other customers. See the risk factor below titled “We rely on a single-source, third-party supplier for medical-grade silicone, which
is the primary raw material used in these products. If this supplier were to increase prices for these raw materials over time or experience
interruptions in their ability to supply us with this raw material, our business, financial condition and results of operations could be adversely
affected.” In addition, our supplier of Puregraft products and the suppliers of certain packaging components and the surgical tools that we sell
with Motiva Implants, including the cannulas, retractors, and insertion sleeves, are all purchased by us from single-source suppliers.
If our single-source and other suppliers were to delay or stop producing our components, or if the prices they charge us were to increase
significantly, or if they elected not to sell to us at all or on commercially reasonable terms, we would need to identify and initiate relationships
with alternative suppliers, if possible. We could experience delays in manufacturing our products or the interruption of the availability of
Motiva Implants or our other products for sale, while finding another acceptable supplier, which would impact our business, financial condition
and results of operations. Even if such alternative suppliers are available on commercially reasonable terms, the changes could also result in
increased costs associated with qualifying the new materials and in increased operating costs. Further, any prolonged disruption in a
supplier’s operations could have a significant negative impact on our ability to manufacture and deliver products in a timely manner and as a
result, our business, financial condition and results of operations could be adversely affected.
The manufacturing, sterilization and distribution of our Motiva Implants and other products are technically challenging. Changes that our
suppliers may make, or additional requirements from regulatory agencies, are outside of our direct control and can have an impact on our
processes, on quality, and on the successful delivery of products to our customers. Mistakes and mishandling are not uncommon and can
affect supply and delivery. Some of these risks include:
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failure to complete sterilization on time or in compliance with the required regulatory standards;
transportation and import and export risk, particularly given the global nature of our supply and distribution chains;
delays in analytical results or failure of analytical techniques that we depend on for quality control and release of products;
natural or other disasters, labor disputes, financial distress, lack of raw material supply, issues with facilities and equipment or other
forms of disruption to business operations affecting our manufacturer or its suppliers;
latent defects that may become apparent after products have been released and that may result in a recall of such products;
contamination of our raw materials or manufactured products; and
inclusion of vendors of raw materials not in compliance with ISO-13485 requirements.
As referenced above in this risk factor, some of the components used in our Motiva Implants and our other products are currently single-
sourced, and substitutes for these components might not be obtained easily or may require substantial redesign or manufacturing
modifications related to our specifications or due to regulatory requirements. Any significant problem experienced by one of our single-source
suppliers may result in a delay or interruption in the supply of components or products to us because the number of third-party manufacturers
with the necessary manufacturing and regulatory expertise and facilities is limited and certification of a new supplier may be complex and
time consuming. Any delay or interruption would likely lead to a delay or interruption in our manufacturing or distribution operations and/or
adversely affect our ability to sell Motiva Implants. The inclusion of substitute components or products must meet our specifications and could
require us to qualify the new supplier with the appropriate regulatory authorities. The added time and cost to arrange for alternative suppliers
could have a material adverse effect on our business. New manufacturers of any current or planned product would be required to qualify
under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the design
and method of manufacturing the planned product. Obtaining the necessary FDA or international approvals or other qualifications under
applicable regulatory requirements and ensuring non-infringement of third-party intellectual property rights could result in a significant
interruption of supply and could require the new manufacturer to bear significant additional costs that may be passed on to us.
We expect to significantly increase the size of our organization; as a result, we may encounter difficulties in managing our growth,
which could disrupt our operations and/or increase our net losses.
As of December 31, 2019, we had 602 employees. Over the next several years, we expect to experience significant growth in the number of
our employees and the scope of our operations, particularly in the areas of manufacturing, regulatory affairs, clinical and sales and
marketing. We also intend to continue to improve our operational, financial and management controls, reporting systems and procedures,
which may require additional personnel. Such growth could place a strain on our administrative and operational infrastructure, and/or our
managerial abilities, and we may not be able to make improvements to our management information and control systems in an efficient or
timely manner. We may discover deficiencies in existing systems and controls.
Many of these employees will be in countries outside of our corporate headquarters, which adds additional complexity. To manage our
anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our
facilities and continue to recruit and train additional qualified personnel. We may not be able to effectively manage these activities. The
physical expansion of our operations may lead to significant costs and may divert our management and business development resources.
Future growth would impose significant added responsibilities on members of management, including:
• managing our clinical trials effectively, which we anticipate being conducted at numerous clinical sites;
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identifying, recruiting, maintaining, motivating and integrating additional employees with the expertise and experience we will require,
in multiple countries;
• managing our internal development efforts effectively while complying with our contractual obligations to licensors, licensees,
contractors and other third parties;
• managing additional relationships with various distributors, suppliers, and other third parties;
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improving our managerial, development, operational and finance reporting systems and procedures; and
expanding our facilities.
Our failure to accomplish any of these tasks could prevent us from growing successfully. Any inability to manage growth could delay the
execution of our business plans or disrupt our operations. We may also be exposed or subject to additional unforeseen or undisclosed
liabilities as well as increased levels of indebtedness.
We rely on third parties to conduct certain components of our clinical studies, and those third parties may not perform
satisfactorily, including failing to meet deadlines for the completion of such studies, which could interfere with or delay our ability
to get regulatory approval or commercialize our products.
We rely on third parties, such as contract research organizations, or CROs, clinical data management organizations, medical institutions and
clinical investigators, to perform various functions for our clinical trials. Our reliance on these third parties for clinical development activities
reduces our control over these activities but does not relieve us of our responsibilities. We remain responsible for ensuring that each of our
clinical studies is conducted in accordance with the general investigational plan and protocols for the study. Moreover, the International
Council for Harmonization, or ICH, and the FDA require us to comply with standards, commonly referred to as good clinical practices, for
conducting, recording and reporting the results of clinical studies to ensure that data and reported results are credible and accurate and that
the rights, integrity and confidentiality of patients in clinical studies are protected. Furthermore, these third parties may also have
relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual
duties, meet expected deadlines or conduct our clinical studies in accordance with regulatory requirements or our stated protocols, we will
not be able to obtain, or may be delayed in obtaining, regulatory approvals for our planned products and will not be able to, or may be
delayed in our efforts to, successfully commercialize our planned products.
Our operations involve hazardous materials and we and third parties with whom we contract must comply with environmental laws
and regulations, which can be expensive and restrict how we do business, and could expose us to liability if our use of such
hazardous materials causes injury.
Our manufacturing processes currently require the controlled use of potentially harmful chemicals, including highly flammable solvents. We
cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of
these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our
resources or any applicable insurance coverage we may have. Additionally, we are subject to, on an ongoing basis, federal, state and local
laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. These are
particularly stringent in California, where NuSil, one of our key suppliers, is located. The cost of compliance with these laws and regulations
may become significant and could have an adverse effect on our financial condition, results of operations and cash flows. In the event of an
accident or if we otherwise fail to comply with applicable regulations, we could lose our permits or approvals or be held liable for damages or
penalized with fines.
Any future distribution or commercialization agreements we may enter into with respect to our current or planned products may
place the development of these products outside our control, or may otherwise be on terms unfavorable to us.
We may enter into additional distribution or commercialization agreements with third parties with respect to our current or planned products,
for commercialization in or outside the United States. Our likely collaborators for any distribution, marketing, licensing or other collaboration
arrangements include large and mid-size medical device and diagnostic companies, regional and national medical device and diagnostic
companies, and distribution or group purchasing organizations. We will have limited control over the amount and timing of resources that our
collaborators dedicate to the development or commercialization of our planned products. Our ability to generate revenue from these
arrangements will depend in part on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.
Collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or
commercialization of the applicable planned products. Collaborators may own or co-own intellectual property covering our products that
results from our collaboration with them. In such cases, we would not have the exclusive right to commercialize such intellectual property.
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Any termination or disruption of collaborations could result in delays in the development of planned products, increases in our costs to
develop the planned products or the termination of development of a planned product.
Our results of operations could be affected by fluctuations in currency rates.
We present our results of operations in U.S. dollars, which is our reporting currency. However, as of December 31, 2019, the majority of our
revenues are denominated in currencies other than the U.S. dollar - primarily the British pound, the euro, and the Brazilian real. As of
December 31, 2019, the majority of our expenses are denominated in U.S. dollars or in Costa Rican colones, which are linked to the U.S.
dollar. In the future, we expect to have significant revenues and expenses denominated in these non-U.S. currencies. As such, unfavorable
fluctuations in currency exchange rates could have an adverse effect on our results of operations.
Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, expenses and income, as well as
assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, changes in the
value of the U.S. dollar in relation to the British pound, the euro, and the Brazilian real will affect our revenues, operating income and the
value of balance sheet items originally denominated in other currencies. These changes would cause our growth in consolidated earnings
stated in U.S. dollars to be higher or lower than our growth in local currency when compared against other periods. We do not currently
engage in currency hedging arrangements to protect us from fluctuations in the exchange rates of the euro and other currencies in relation to
the U.S. dollar (and/or from inflation of such currencies), and we may be exposed to material adverse effects from such movements. We
cannot predict any future trends in rates of inflation or exchange rates of other currencies against the U.S. dollar, and there can be no
assurance that any contractual provisions will offset their impact, or that any future currency hedging activities will be successful.
We have significant exposure to the economic and political situations in emerging market countries, and developments in these
countries could materially impact our financial results, or our business more generally.
Many of the countries in which our products are sold are emerging markets. Our global growth strategy contemplates the expansion of our
existing sales activities in Latin America, Europe, the Middle East, and Asia-Pacific region as well as North America. Our exposure to
emerging markets has increased in recent years, as have the number and importance of our distributor arrangements. Economic and political
developments in Brazil and other emerging markets, including economic crises, currency inflation, or political instability, have had in the past,
and may have in the future, a material adverse effect on our financial condition and results of operations. Moreover, as these markets
continue to grow, competitors may seek to enter these markets and existing market participants will likely try to aggressively protect or
increase their market shares. Increased competition may result in price reductions, reduced margins and our inability to gain or hold market
share, which could have an adverse effect on our financial condition and results of operations.
A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, or coronavirus, may materially and adversely affect
our business and our financial results.
The recent outbreak of COVID-19 originated in Wuhan, China, in December 2019 and has since spread to multiple countries, including the
United States, Costa Rica, where our headquarters and manufacturing facilities are located, and several European, Asian and South
American countries where we currently sell our Motiva Implants. On March 11, 2020, the World Health Organization declared COVID-19 a
pandemic. Such events may result in a period of business disruption, including reduced sales as patients might cancel or defer elective
procedures or otherwise avoid medical facilities, resulting in reduced patient volumes and operating revenues. For example, the spread of
COVID-19 may result in travel restrictions impacting medical tourism and our sales professionals’ ability to travel or hospitals may limit
access for non-patients, including our sales professionals, which could negatively impact our access to physicians. Governmental agencies
and hospital administrators may also instruct hospitals to postpone some elective procedures in preparation for COVID-19-related
hospitalizations. Additionally, the continued spread of COVID-19 globally could adversely impact our clinical trial operations in the United
States, including our ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have
heightened exposure to COVID-19 if an outbreak occurs in their geography. The spread of COVID-19, or another infectious disease, could
also result in delays or disruptions in our supply chain or adversely affect our manufacturing facilities and personnel. The COVID-19
outbreak continues to be fluid and uncertain, making it difficult to forecast the final impact it could have on our future
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operations. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions, but if we or any of the
third parties with whom we engage were to experience shutdowns or other business disruptions, our ability to conduct our business in the
manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on
our business and our results of operation and financial condition.
The results of the Referendum of the United Kingdom’s Membership of the European Union may adversely affect our business and
profitability.
In June 2016, a referendum was held in the U.K. which resulted in a majority voting in favor of the U.K. withdrawing from the E.U. (commonly
referred to as “Brexit”). Pursuant to legislation approved by the U.K. Parliament and the E.U. Parliament in January 2020, the U.K. withdrew
from the E.U. with effect from 11 p.m. (GMT) on January 31, 2020 on the terms of a withdrawal agreement agreed between the U.K. and the
E.U. in October 2019 (the “Withdrawal Agreement”). The Withdrawal Agreement provides that the U.K.’s withdrawal is followed by a
“transition period”, during which, in summary, the U.K. is not a member of the E.U. but most E.U. rules and regulations continue to apply to
the U.K. During the transition period, the U.K. and the E.U. will seek to negotiate the terms of a long-term trading relationship between the
U.K. and the E.U. based on a “Political Declaration” agreed between the U.K. and the E.U. in October 2019. The transition period provided
for in the Withdrawal Agreement will expire on December 31, 2020 (unless both the U.K. and the E.U. agree to extend the period of transition
by one or two years).The political negotiation surrounding the terms of the U.K.’s withdrawal from the E.U. has created significant uncertainty
about the future relationship between the U.K. and the E.U., including with respect to the laws and regulations that will apply. This is
because, once the “transition period” expires then, subject to the terms of any long-term trading relationship agreed between the U.K. and the
E.U., the U.K. will determine which E.U.-derived laws to replace or replicate. The U.K.’s withdrawal from the E.U. has also given rise to calls
for the governments of other E.U. member states to consider withdrawal, while the U.K.’s withdrawal negotiation process has increased the
risk of the possibility of a further referendum concerning Scotland’s independence from the rest of the U.K. If no long-term trading relationship
is agreed between the U.K. and the E.U. by the end of the transition period provided for in the Withdrawal Agreement, the U.K.’s membership
of the E.U. could ultimately terminate under a so-called “hard Brexit.” Under this scenario, there could be increased costs from the imposition
of tariffs on trade or non-tariff barriers between the U.K. and E.U., shipping delays because of the need for customs inspections and
temporary shortages of certain goods.
These developments, or the perception that any of them could occur, may adversely affect European and worldwide economic and market
conditions, significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets
and could contribute to instability in global financial and foreign exchange markets, including increased volatility in interest rates and foreign
exchange rates. The potential impacts could adversely impact other global economies, and in particular, the European economy, a region
which accounted for approximately 40% of our total revenues for the year ended December 31, 2019. In the first quarter of 2019, we
completed the migration of our CE Mark certificates, originally issued by BSI UK Notified Body, to BSI Group The Netherlands B.V., which is
a European Notified Body designated in The Netherlands. We continue to actively monitor the ongoing potential impacts of Brexit and will
seek to minimize its impact on our business through review of our existing regulatory requirements, contractual arrangements and
obligations, particularly in the European region. Any of these effects of Brexit, among others, could adversely affect our business, business
opportunities, results of operations, financial condition and cash flows.
The political situation in the United States can affect the ability of our company to conduct business in certain areas or countries if
new trade conditions are imposed or enforced by the U.S. government.
There could be negative consequences to our company’s revenue if the U.S. government unexpectedly changes its trade policies towards
determined geographies or countries. These policy changes can include such things as trade barriers, which serve to limit or prevent
international trade. The U.S. government may request additional funds or tariffs in exchange for the right to export items into the country.
Tariffs or quotas may be used to protect domestic producers from foreign competition. Changes may include the modification or withdrawal of
free trade agreements already in place. This also can have a large effect on the profits of our company because it either cuts revenues as a
result of a tax on imports/exports or restricts the amount of revenues that can be earned.
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Risks Related to Our Financial Condition and Capital Requirements
We have incurred net operating losses in the past and expect to incur net operating losses for the foreseeable future.
We have incurred net operating losses since our inception, and we continue to incur significant research and development and general and
administrative expenses related to our operations. We do not expect to be profitable in 2020, and in future years we expect to incur
significant research and development expenses related to, among other things, the IDE clinical study of Motiva Implants in the United States.
Investment in medical device product development, particularly clinical studies, is highly speculative. It entails substantial upfront capital
expenditures and significant risk that any potential planned product will fail to demonstrate adequate accuracy or clinical utility. We may not
be profitable for some time. As of December 31, 2019, we had an accumulated deficit of $127.1 million.
We expect that our future financial results will depend primarily on our success in launching, selling and supporting Motiva Implants and other
products that are part of our MotivaImagine platform. This will require us to be successful in a range of activities, including manufacturing,
marketing, and selling Motiva Implants. We may not succeed in these activities and may never generate revenue that is sufficient to be
profitable in the future. Even if we are profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our
failure to achieve sustained profitability would depress the value of our company and could impair our ability to raise capital, expand our
business, diversify our planned products, market our current and planned products, or continue our operations.
We may need additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at
all, which would force us to delay, reduce or suspend our planned development and commercialization efforts. Raising additional
capital may subject us to unfavorable terms, cause dilution to our existing shareholders, restrict our operations, or require us to
relinquish rights to our products and technologies.
Our operations have consumed substantial amounts of cash since our inception, and we expect to incur significant expenses in connection
with our planned research, development and product commercialization efforts. We believe that our available cash, cash from operations,
and the net proceeds from the follow-on public offering we completed in February 2020 will be sufficient to satisfy our liquidity requirements
for at least the next 12 months. If our available cash resources, net proceeds from our follow-on public offering and anticipated cash flow
from operations are insufficient to satisfy our liquidity requirements, we may seek to sell equity or convertible debt securities, enter into a
credit facility or another form of third-party funding, or seek other debt financing. However, we are subject to restrictive covenants under the
Madryn Credit Agreement which restrict our ability to incur additional debt. Any failure to raise the funds necessary to support our operations
may force us to delay, reduce or suspend our planned clinical trials, research and development programs, or other commercialization efforts.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership may be diluted, and the
terms of these securities may include liquidation or other preferences that adversely affect your rights as a shareholder. Debt financing, if
available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional
debt, making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic collaborations or partnership, or marketing, distribution or licensing
arrangements with third parties, we may be required to do so at an earlier stage than would otherwise be ideal and/or may have to limit
valuable rights to our intellectual property, technologies, products, or future revenue streams, or grant licenses or other rights on terms that
are not favorable to us. Furthermore, any additional fundraising efforts may divert our management from their day-to-day activities, which
may adversely affect our ability to develop and commercialize our products.
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Risks Related to Our Business and Our Industry
We rely on a single-source, third-party supplier for medical-grade long-term implantable silicone, which is the primary raw material
used in our Motiva Implants. If this supplier were to increase prices for this raw material over time or experience interruptions in its
ability to supply us with this raw material, our business, financial condition and results of operations could be adversely affected.
We rely on NuSil, as the sole supplier of medical-grade silicone used in our Motiva Implants as well as other products that we manufacture
under contract to other customers. To our knowledge, NuSil is the only supplier of such raw materials with the appropriate filings with the
FDA and other regulatory bodies to enable manufacture of products with our requirements. NuSil supplies our major competitors with raw
material as well, and at least two of these are larger-volume customers of NuSil than we are.
If NuSil becomes unable or unwilling to supply sufficient quantities of medical-grade silicone of the specifications required for our products,
we may not be able to replace this supply source quickly, or at all. Similarly, they may become unable or unwilling to manufacture our needed
raw materials in compliance with regulatory requirements, or their manufacturing facilities may not be able to maintain compliance with
regulatory requirements. Any replacement supplier would have to be qualified with the relevant regulatory authorities, which is an expensive
and time-consuming process during which we may experience an interruption in our manufacturing operations. We may also be unsuccessful
in negotiating favorable terms with such a supplier. Any of these contingencies would likely affect the financial results of our operations and
may have a negative impact on our share price. In particular, if we are not able to establish a replacement vendor for our medical-grade
silicone, we would be unable to manufacture our Motiva Implants as well as other products that we manufacture under contract to other
customers until such time as a replacement vendor is identified, which would likely significantly affect the financial results of our operations
and have significantly negative impact on our share price.
Our current supply agreement with NuSil expires in December 2021. There can be no assurance that NuSil will agree to continue to supply
us with medical-grade silicone following the expiration of our contract on terms that are acceptable to us, or at all. This would have a material
adverse effect on our business, financial condition, and results of operations for the reasons set forth above.
In addition, our relationship with NuSil involves other risks, including but not limited to the following:
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it may not be able, or willing, to manufacture silicone raw materials with our agreed-upon specifications;
it may not be able, or willing, to manufacture our needed raw materials in compliance with regulatory requirements, or our its
manufacturing facilities may not be able to maintain compliance with regulatory requirements;
it may not be able to supply sufficient quantities of each raw material quickly enough for us to respond to rapid increases in demand;
it may unintentionally convey information to our competitors that is helpful in understanding our proprietary compositions and other
trade secrets of our manufacturing processes;
we may be subject to price fluctuations if we fail to meet certain minimum order requirements, or if our existing contract expires or is
renegotiated;
it may lose access to critical services and components, resulting in interruption in manufacture or shipment of medical-grade silicone;
its facilities may be affected by earthquakes, wildfires, mud slides or other natural disasters, which could delay or impede production
of our raw materials;
we may be required to obtain regulatory approvals related to any change in our supply chain;
NuSil may wish to discontinue supply of products to us due to its existing relationships with our competitors;
NuSil may stop supply and claim ownership of intellectual property on materials associated with future products; and
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•
NuSil or its parent entity may encounter financial or other hardships unrelated to our demand for products, which could negatively
impact their ability to fulfill our orders and support our regulatory approvals.
Negative publicity concerning our products or our competitors’ products could harm our reputation and reduce demand for
silicone breast implants, either of which could impact our financial results and/or share price.
The silicone breast implant industry has been the focus of significant regulatory and media scrutiny. Silicone breast implants were removed
from the U.S. marketplace for a period in the 1990s and 2000s related to safety concerns. Certain patient advocacy groups exist to publicize
real and perceived health risks associated with silicone breast implants and plastic surgery generally. Recently, some breast implant patients
have begun to self-identify and report various symptoms that they believe are related to their breast implants; they refer to these symptoms
as Breast Implant Illness, or BII, but BII is not an official medical diagnosis. Additionally, the activities of legislative bodies, regulatory
agencies, physician organizations, and other groups may lead to publicity around the real and perceived risks to patients from silicone
implants. Any of these could reduce patient demand for our products, or could, even in the absence of a change in demand, negatively
impact our share price. In addition, activity of this type could result in an increase in the number or size of product liability claims, which would
adversely affect our business, financial results, and/or the price of our shares.
Recent news coverage has called into question the long-term safety of breast implants and reports of breast implant-associated
anaplastic large cell lymphoma (BIA-ALCL) linked to our competitors’ products which have led to regulatory actions regarding
macrotextured devices in several countries and the worldwide recall of one of our competitor’s macrotextured implants and tissue
expanders. These events may lead to a reduction in the demand for silicone breast implants and could adversely affect our
business.
Silicone breast implants have been associated with higher rates of BIA-ALCL, an uncommon type of cancer affecting cells of the immune
system. In January 2011, the FDA indicated that there was a possible association between certain saline and silicone gel-filled breast
implants and higher rates of BIA-ALCL, with the causal links not yet understood. In March 2015, France’s National Cancer Institute, or NCI,
noted that there is a clearly established link between ALCL and certain breast implants, which is referred to as breast implant-associated
ALCL, or BIA-ALCL. The NCI noted in that report that most of the reported cases occurred in women with textured implants.
In August 2017, the FDA updated its recommendations on BIA-ALCL and subsequently requested all breast implant manufacturers to revise
their physician and patient labeling with the most up-to-date information. The August 2017 update described BIA-ALCL as “rare” and stated
“we have strengthened our understanding of this condition and concur with the World Health Organization designation of BIA-ALCL as a rare
T-cell lymphoma that can develop following breast implants. The exact number of cases remains difficult to determine due to significant
limitations in world-wide reporting and lack of global implant sales data. At this time, most data suggest that BIA-ALCL occurs more
frequently following implantation of breast implants with textured surfaces rather than those with smooth surfaces.” The FDA noted it does
not recommend prophylactic breast implant removal in a patient without symptoms or other abnormalities.
In March 2018, the FDA further updated its reporting on BIA-ALCL stating “we are reporting that we are aware of 414 total cases of BIA-
ALCL. Additionally, studies reported in medical literature estimate that the lifetime risk of developing BIA-ALCL for patients with textured
breast implants ranges from 1 in 3,817 to 1 in 30,000.” The FDA noted that the update did not change the agency’s recommendation and
that choosing to obtain a breast implant is a very personal decision that patients and providers should make with the most complete
information available. In the fourth quarter of 2018, following the non-renewal of its textured breast implant CE Mark licenses in Europe,
Allergan plc suspended sales of textured breast implants in Europe and withdrew its remaining textured breast implants on the market within
Europe.
On February 6, 2019, the FDA further reported that as of September 2018, the agency had received a total of 660 total medical device
reports regarding BIA-ALCL cases since 2010. Of the 660 reports, the FDA’s analysis suggested that there are 457 unique cases of BIA-
ALCL, including nine patient deaths. Additionally, on February 12, 2019, Health Canada confirmed that as of January 1, 2019, it had
received reports of 22 confirmed and 22 suspected Canadian cases of BIA-ALCL and that it would be updating its safety review of BIA-ALCL
in Spring 2019. In April 2019, the Agence Nationale de Securite du Medicament et des Produits de Sante, or ANSM, the
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regulatory authority in France, announced that 59 cases of BIA-ALCL had been reported in France since 2011 and banned several types of
macrotextured and polyurethane implants linked to BIA-ALCL. Between February and September 2019, authorities from Australia, Colombia,
Canada, South Korea and Singapore announced similar bans.
In July 2019, the FDA requested that Allergan plc recall its Biocell® textured implants in the U.S. market and Allergan subsequently
announced the global recall of its Biocell® textured breast implants and tissue expanders. In the FDA announcement, it noted that it had
reviewed 573 unique cases globally of BIA-ALCL, including 33 patient deaths, of which 12 of the 13 known deaths were attributed to Biocell®
implants. The FDA further noted that it will continue to monitor the incidence of BIA-ALCL across other textured and smooth breast implants
and tissue expanders as well as other devices intended for use in the breast. The FDA subsequently identified the recall as a Class I recall in
September 2019 and stated that use of the recalled devices may cause serious injuries and death. As the BIA-ALCL risk continues to
become more highly publicized, this could have a significant negative impact on demand for breast implants globally, including our Motiva
Implants. Most recently in October 2019, the FDA announced plans to require inclusion of additional information for patients on the labeling
for breast implants.
We do not produce the types of rough textured implants that have been involved in these reports. To date, no cases of BIA-ALCL have been
reported in patients with Motiva Implants. Furthermore, there have been no reported cases of BIA-ALCL in patients with smooth implants with
no history of previously having a textured device. Future clinical studies or clinical experience may indicate that breast implants expose
potentially genetically predisposed patients to greater risks of BIA-ALCL, which may reduce demand for silicone implants generally, expose
us to product liability claims, as well as to class actions and other lawsuits. These impacts may occur in the absence of any specific linkage
with our products. Moreover, if cases of BIA-ALCL or other complications are discovered in the future and/or are reported in patients with
Motiva Implants, we could be subject to mandatory product recalls, suspension or withdrawal of our regulatory licensure for sale in one or
more countries, and significant legal liability. Any of these may have an adverse effect on our business or operating results, or a negative
impact on our share price.
Risks Related to Intellectual Property
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely
affected, harming our business and competitive position.
In addition to our patented technology and products, we rely upon confidential proprietary information, including trade secrets, unpatented
know-how, technology and other proprietary information, to develop and maintain our competitive position. Any disclosure to or
misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our
technological achievements, thus eroding our competitive position in the market. We seek to protect our confidential proprietary information,
in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our
employees and selected consultants that obligate them to assign their inventions to us. These agreements are designed to protect our
proprietary information, however, we cannot be certain that our trade secrets and other confidential information will not be disclosed or that
competitors will not otherwise gain access to our trade secrets, or that technology relevant to our business will not be independently
developed by a person that is not a party to such an agreement. Furthermore, if the employees, consultants or collaborators that are parties
to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation,
and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could be disclosed, misappropriated or
otherwise become known or be independently discovered by our competitors. In addition, intellectual property laws in foreign countries may
not protect trade secrets and confidential information to the same extent as the laws of the United States. If we are unable to prevent
disclosure of the intellectual property related to our technologies to third parties, we may not be able to establish or maintain a competitive
advantage in our market, which would harm our ability to protect our rights and have an adverse effect on our business.
If we are not able to obtain and maintain intellectual property protection for our products and technologies, or if the scope of our
patents is not sufficiently broad, we may not be able to effectively maintain our market leading technology position.
Our success depends in large part on our ability to obtain and maintain patent and other intellectual property protection in the United States
and in other countries with respect to our proprietary technology and products.
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The patent position of medical device and diagnostic companies generally is highly uncertain and involves complex legal and factual
questions for which legal principles remain unresolved. In recent years, patent rights have been the subject of significant litigation. As a
result, the issuance, scope, validity, enforceability and commercial value of the patent rights we rely on are highly uncertain. Pending and
future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others
from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the
United States and other countries may diminish the value of the patents we rely on or narrow the scope of our patent protection. The laws of
other countries may not protect our rights to the same extent as the laws of the U.S. Publications of discoveries in the scientific literature
often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18
months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our
patents or pending patent applications, or that we or were the first to file for patent protection of such inventions.
Even if the patent applications we rely on issue as patents, they may not issue in a form that will provide us with any meaningful protection,
prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to
circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is
not conclusive as to its scope, validity or enforceability, and the patents we rely on may be challenged in the courts or patent offices in the
United States and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit
our ability to stop or prevent us from stopping others from using or commercializing similar or identical technology and products, or limit the
duration of the patent protection of our technology and products. Given the amount of time required for the development, testing and
regulatory review of new planned products, patents protecting such products might expire before or shortly after such products are
commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products
similar or identical to ours or otherwise provide us with a competitive advantage.
We may not be able to protect or enforce our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on all of our planned products throughout the world may be prohibitively expensive to us.
Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and,
further, may export otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as in
the United States. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent
claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing. Many companies have
encountered significant problems in protecting and defending intellectual property rights in international jurisdictions. The legal systems of
certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection,
which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary
rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and
attention from other aspects of our business.
We may become involved in legal proceedings to protect or enforce our intellectual property rights, which could be expensive,
time consuming, or unsuccessful.
Competitors may infringe or otherwise violate the patents we rely on, or our other intellectual property rights. To counter infringement or
unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Any claims that we assert
against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe their intellectual
property rights. In addition, in an infringement proceeding, a court may decide that a patent we are asserting is invalid or unenforceable, or
may refuse to stop the other party from using the technology at issue on the grounds that the patents we are asserting do not cover the
technology in question. An adverse result in any litigation proceeding could put one or more patents at risk of being invalidated or interpreted
narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a
risk that some of our confidential information could be compromised by disclosure during this type of litigation.
Interference or derivation proceedings provoked by third parties or brought by the U.S. Patent and Trademark Office, or USPTO, or any other
patent authority may be necessary to determine the priority of inventions or other matters of inventorship with respect to patents and patent
applications. We may become involved in proceedings,
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including oppositions, interferences, derivation proceedings, inter partes reviews, patent nullification proceedings, or re-examinations,
challenging our patent rights or the patent rights of others, and the outcome of any such proceedings are highly uncertain. An adverse
determination in any such proceeding could reduce the scope of, or invalidate, important patent rights, allow third parties to commercialize
our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize
products without infringing third-party patent rights. Our business also could be harmed if a prevailing party does not offer us a license on
commercially reasonable terms, if any license is offered at all. Litigation or other proceedings may fail and, even if successful, may result in
substantial costs and distract our management and other employees. We may also become involved in disputes with others regarding the
ownership of intellectual property rights. If we are unable to resolve these disputes, we could lose valuable intellectual property rights.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant
expenses and could distract our technical or management personnel from their normal responsibilities. In addition, there could be public
announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors
perceive these results to be negative, it could have a substantial adverse effect on the market price of our common shares. Such litigation or
proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future
sales, marketing or distribution activities. Uncertainties resulting from the initiation and continuation of intellectual property litigation or other
proceedings could have an adverse effect on our ability to compete in the marketplace.
Our internal computer systems, or those used by third parties which we rely on, may fail or suffer security breaches.
Despite the implementation of security measures, our internal computer systems, or those used by third parties which we rely on, are
vulnerable to damage from computer viruses and unauthorized access, malware, natural disasters, fire, terrorism, war and
telecommunication, electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our
organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through
cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the
number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. While we have not
experienced any such material system failure or security breach to our knowledge to date, if such an event were to occur and cause
interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For
example, the loss of data from completed, ongoing or future studies could result in delays in our regulatory approval efforts and significantly
increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage
to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further
development and commercialization of our current and future products could be delayed.
The medical device industry is characterized by patent litigation and we could become subject to litigation that could be costly,
result in the diversion of management's time and efforts, require us to pay damages or prevent us from marketing our existing or
future products.
Patent litigation is prevalent in the medical device and diagnostic sectors. Our commercial success depends in part upon our ability and that
of our distributors, contract manufacturers, and suppliers to manufacture, market, to sell our planned products, and to use our proprietary
technologies without infringing, misappropriating or otherwise violating the proprietary rights or intellectual property of third parties. We may
become party to, or be threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our
products and technology. Third parties may assert infringement claims against us based on existing or future intellectual property rights. If we
are found to infringe a third-party’s intellectual property rights, we could be required to obtain a license from such third-party to continue
developing and marketing our products and technology. We may also elect to enter into such a license in order to settle pending or
threatened litigation. However, we may not be able to obtain any required license on commercially reasonable terms, or at all. Even if we
were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us and
could require us to pay significant royalties and other fees. We could be forced, including by court order, to cease commercializing the
infringing technology or product. In addition, we could be found liable for monetary damages. A finding of infringement could prevent us from
commercializing our planned products in commercially important territories, or force us to cease some of our business operations, which
could
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harm our business. Many of our employees were previously employed at, and many of our current advisors and consultants are employed
by, universities or other biotechnology, medical device or pharmaceutical companies, including our competitors or potential competitors.
Although we try to ensure that our employees, advisors and consultants do not use the proprietary information or know-how of others in their
work for us, we may be subject to claims that we, or these employees, have used or disclosed intellectual property, including trade secrets or
other proprietary information, of any such employee’s former employer. These and other claims that we have misappropriated the confidential
information or trade secrets of third parties can have a similar negative impact on our business to the infringement claims discussed above.
Even if we are successful in defending against intellectual property claims, litigation or other legal proceedings relating to such claims may
cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In
addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if
securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common
shares. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development
activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our
competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially
greater financial resources. Uncertainties resulting from the initiation and continuation of litigation or other intellectual property related
proceedings could have a material adverse effect on our ability to compete in the marketplace.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment
and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for
non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents or applications will be due to be paid
by us to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents
or applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural,
documentary, fee payment and other similar provisions during the patent application process. In many cases, an inadvertent lapse can be
cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which
noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in
the relevant jurisdiction. In such an event, our competitors might be able to use our technologies and this circumstance would have a material
adverse effect on our business.
If we fail to comply with our obligations in our intellectual property agreements, we could lose intellectual property rights that are
important to our business.
We are a party, and expect to become party in the future, to certain intellectual property agreements that impose various diligence, milestone
payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, any licensor may have the right to
terminate such agreements, in which event we may not be able to develop and market any product that is covered by such agreements.
Termination of such agreements, or reduction or elimination of our rights under such agreements, may result in our having to negotiate new
or reinstated arrangements on less favorable terms, or our not having sufficient intellectual property rights to operate our business. The
occurrence of such events could harm our business and financial condition.
The risks described elsewhere in this Annual Report on Form 10-K pertaining to our intellectual property rights also apply to any intellectual
property rights that we may license, and any failure by us or any future licensor to obtain, maintain, defend and enforce these rights could
have a material adverse effect on our business.
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Risks Related to Government Regulation
The regulatory approval process is expensive, time consuming and uncertain, and may prevent us from obtaining approvals for the
commercialization of Motiva Implants or our planned products.
The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of medical devices are subject to
extensive regulation by the FDA and other regulatory authorities in the United States and other countries, where regulations differ from
country to country. Our products are registered to be sold in more than 80 countries, but we are not permitted to market our planned products
in the United States until we receive the requisite approval or clearance from the FDA. We have not submitted an application or received
marketing approval for Motiva Implants or any planned products in the United States. Obtaining PMA approval for sale for a medical device
from the FDA can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA and other applicable U.S. and
foreign regulatory requirements may subject us to administrative or judicially imposed sanctions, including the following:
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warning letters;
civil or criminal penalties and fines;
injunctions;
suspension or withdrawal of regulatory approval;
suspension of any ongoing clinical studies;
voluntary or mandatory product recalls and publicity requirements;
refusal to accept or approve applications for marketing approval of new devices or supplements to approved applications filed by us;
restrictions on operations, including costly new manufacturing requirements; or
seizure or detention of our products or import bans.
Prior to receiving approval to commercialize any of our planned products in the United States or abroad, we may be required to demonstrate
with substantial evidence from preclinical and well-controlled clinical studies, and to the satisfaction of the FDA or other regulatory authorities
abroad, that such planned products are safe and effective for their intended uses. Results from preclinical studies and clinical studies can be
interpreted in different ways. Even if we believe the preclinical or clinical data for our planned products are promising, such data may not be
sufficient to support approval by the FDA and other regulatory authorities. Administering any of our planned products to humans may
produce undesirable side effects, which could interrupt, delay or cause suspension of clinical studies of our planned products and result in
the FDA or other regulatory authorities denying approval of our planned products for any or all targeted indications.
Regulatory approval from the FDA is not guaranteed, and the approval process is expensive and may take several years. The FDA also has
substantial discretion in the approval process. Despite the time and expense exerted, failure can occur at any stage, and we could encounter
problems that cause us to abandon or repeat clinical studies, or perform additional preclinical studies and clinical studies. The number of
preclinical studies and clinical studies that will be required for FDA approval varies depending on the planned product, the indication that the
planned product is designed to address and the regulations applicable to any particular planned product. The FDA can delay, limit or deny
approval of a planned product for many reasons, including, but not limited to, the following:
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a planned product or one or more of its features may not be deemed safe or effective;
FDA officials may not find the data from preclinical studies and clinical studies sufficient;
the FDA might not approve our manufacturing or our third-party supplier’s processes or facilities; or
the FDA may change its approval policies or adopt new regulations.
If Motiva Implants or any planned products fail to demonstrate safety and efficacy in preclinical and clinical studies or do not gain regulatory
approval, our business and results of operations will be harmed.
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Even if we receive regulatory approval for a planned product, we will be subject to ongoing regulatory obligations and continued
regulatory review, which may result in significant additional expense and subject us to penalties if we fail to comply with applicable
regulatory requirements.
When a regulatory approval is obtained, the approved product and its manufacturer are subject to continual review by the FDA or non-U.S.
regulatory authorities. Our regulatory approval for Motiva Implants, as well as any regulatory approval that we receive for Motiva Implants or
for any planned products may be subject to limitations on the indicated uses for which the product may be marketed. Future approvals may
contain requirements for potentially costly post-marketing follow-up studies to monitor the safety and efficacy of the approved product. In
addition, we are subject to extensive and ongoing regulatory requirements by the FDA and other regulatory authorities with regard to the
labeling, packaging, adverse event reporting, storage, advertising, promotion and recordkeeping for our products. In addition, we are required
to comply with regulations regarding the manufacture of Motiva Implants, which include requirements related to quality control and quality
assurance as well as the corresponding maintenance of records and documentation. Further, regulatory authorities must inspect these
manufacturing facilities and determine they are in compliance with FDA good manufacturing practice requirements as set forth in the Quality
System Regulation, or QSR, before the products can be approved. These facilities are subject to continual review and periodic inspections by
the FDA and other regulatory authorities for compliance with QSR regulations. If we or a third-party discover previously unknown problems
with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is
manufactured, a regulatory authority may impose restrictions on that product, the manufacturer or us, including requiring withdrawal of the
product from the market or suspension of manufacturing.
If we fail to comply with health care regulations, we could face substantial penalties and our business, operations and financial
condition could be adversely affected.
Certain federal and state health care laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our
business. If we are approved by the FDA to market our products in the United States, we could be subject to health care fraud and abuse
and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations that may
affect our ability to operate include, without limitation:
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the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting,
receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the
purchase, order or recommendation of, any good or service for which payment may be made under federal health care programs,
such as the Medicare and Medicaid programs;
the federal physician self-referral law, commonly known as the Stark Law, which prohibits, among other things, physicians who have
a financial relationship, including an investment, ownership or compensation relationship with an entity, from referring Medicare and
Medicaid patients to that entity for designated health services, unless an exception applies. Similarly, entities may not bill Medicare,
Medicaid or any other party for services furnished pursuant to a prohibited referral. Unlike the federal Anti-Kickback Statute, the Stark
Law is a strict liability statute, meaning that all of the requirements of a Stark Law exception must be met in order to be compliant
with the law;
the federal civil and criminal false claims and civil monetary penalties laws, including the federal False Claims Act, which prohibits,
among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using
false statements, to obtain payment from the federal government;
HIPAA, which prohibits, executing a scheme to defraud any health care benefit program or making false statements relating to health
care matters;
the federal transparency requirements under the PPACA which requires certain manufacturers of drugs, devices, biologics and
medical supplies to annual report to the HHS information related to physician payments and other transfers of value made to
physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family
members;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of
certain electronic health care transactions and protects the security and privacy of protected health information;
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state law equivalents of each of the above federal laws, such as anti-kickback, transparency and false claims laws which may apply
to items or services reimbursed by any third-party payor, including commercial insurers, as well as state post-marketing compliance
laws; and
state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in
significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
The PPACA, among other things, amended the intent requirement of the federal Anti-Kickback Statute and criminal health care fraud
statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA
provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback
Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act.
Similar regulations would also apply to our business in countries where we have started direct sales operations, like Brazil and several others
within the European Union, where they have different regulations at European and national levels. There is a high degree of complication in
complying with the different levels of regulation and the singular differences in the different countries and markets.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we
may be subject to penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment,
exclusion from participation in Medicare, Medicaid and other federal healthcare programs, individual imprisonment, additional reporting and
government oversight, if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance
with these laws and the curtailment or restructuring of our operations. Any such penalties or curtailment or restructuring of our operations
could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of
our business. Moreover, achieving and sustaining compliance with applicable federal, state or international privacy, security and fraud laws
may prove costly.
We have obtained the authorization to distribute our products in regions/countries such as Europe and Brazil through the certification of our
Quality System by the corresponding regulatory entities. Failing to demonstrate that our Quality System is in place, that consistently and
systematically ensures compliance with regulations from such regions/countries might imply losing the certifications and as such, the rights to
freely distribute the products which would adversely impact the Company’s revenue and reputation.
Health care reform measures could hinder or prevent our planned products’ commercial success.
In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the health
care system in ways that could affect our future revenue and future profitability and the future revenue and future profitability of our potential
customers. Federal and state lawmakers regularly propose and, at times, enact legislation that could result in significant changes to the
health care system, some of which are intended to contain or reduce the costs of medical products and services. For example, one of the
most significant health care reform measures in decades, the Patient Protection and Affordable Care Act, as amended by the Health Care
and Education Reconciliation Act, or PPACA, was enacted in 2010. The PPACA contains a number of provisions, including those governing
enrollment in federal health care programs, reimbursement changes and fraud and abuse measures, all of which will impact existing
government health care programs and will result in the development of new programs.
Some provisions of the PPACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of
the PPACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the PPACA. While Congress has not
passed comprehensive repeal legislation, we expect there will be additional challenges and amendments to the PPACA in the future as new
administrations and politicians are elected. Since January 2017, two executive orders have been signed and other directives designed to
delay, circumvent, or loosen certain requirements mandated by the PPACA. Concurrently, Congress has considered legislation that would
repeal and replace all or part of the PPACA. While Congress has previously been successful at passing comprehensive repeal legislation
through both Chambers of Congress, it had then been vetoed by former President Obama; however full repeal legislation is unlikely in the
current political climate. Furthermore, the Tax Cuts and Jobs Act passed in December of 2017 included a provision that would repeal one
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of the primary pillars of the law, the PPACA’s individual mandate penalty that essentially assessed a monetary penalty or fine on certain
individuals who fail to maintain qualifying health coverage for all or part of a year. Congress may consider other legislation to repeal or
replace elements of the PPACA on a provision-by-provision basis. We cannot assure you that the PPACA, as currently enacted or as
amended in the future, will not adversely affect our business and financial results and we cannot predict how future federal or state legislative
or administrative changes relating to health care reform will affect our business. Furthermore, legislators continue efforts to repeal and
replace other elements of the PPACA. While the result of these efforts is not yet known, any changes that result in price controls reduce
access to and reimbursement for care or add additional regulations may have an adverse effect on our financial condition and results of
operations.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, the Budget Control Act
of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals for spending reductions to
Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021,
which triggered the legislation’s automatic reduction to several government programs, including aggregate reductions to Medicare payments
to providers of up to 2% per fiscal year, starting in 2013, which, due to subsequent legislative amendments to the statute, including the
Bipartisan Budget Act of 2018, will remain in effect through 2027 unless additional Congressional action is taken. We cannot predict whether
any additional legislative changes will affect our business.
There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost
of health care. We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the
government, insurance companies, managed care organizations and other payors of health care services to contain or reduce costs of health
care may adversely affect:
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our ability to set a price that we believe is fair for our products;
our ability to generate revenue and achieve or maintain profitability; and
the availability of capital.
Risks Related to Ownership of Our Securities
Our share price may be volatile, and purchasers of our securities could incur substantial losses.
Our common shares have only recently become publicly traded, and we expect that the price of our common shares will likely be volatile.
The securities markets in general, and the market for biotechnology and medical device companies in particular, have experienced extreme
volatility that has often been unrelated to the operating performance of particular companies. Additionally, the lack of an active market may
impair the value of our common shares, or your ability to sell your shares at the time you wish to sell them or at a price that you consider
reasonable. Although our common shares are listed on the Nasdaq Capital Market, if we fail to satisfy the continued listing standards, we
could be de-listed, which would negatively impact the price of our common shares. The market price for our shares may be influenced by
many factors, including the following:
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our ability to successfully commercialize, and realize revenues from sales of, Motiva Implants;
the success of competitive products or technologies;
results of clinical studies of Motiva Implants or planned products or those of our competitors;
regulatory or legal developments in the United States and other countries, especially changes in laws or regulations applicable to our
products;
introductions and announcements of new products by us, our commercialization partners, or our competitors, and the timing of these
introductions or announcements;
actions taken by regulatory agencies with respect to our products, clinical studies, manufacturing processes or sales and marketing
terms;
variations in our financial results or those of companies that are perceived to be similar to us;
the success of our efforts to acquire or in-license additional products or planned products;
developments concerning our collaborations, including but not limited to those with our sources of manufacturing supply and our
commercialization partners;
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developments concerning our ability to bring our manufacturing processes to scale in a cost-effective manner;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
developments or disputes concerning patents or other proprietary rights, including patents, litigation matters and our ability to obtain
patent protection for our products;
our ability or inability to raise additional capital and the terms on which we raise it;
the recruitment or departure of key personnel;
changes in the structure of health care payment systems;
negative shifts in the economy effecting the number of aesthetic breast procedures;
• market conditions in the pharmaceutical and biotechnology sectors;
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actual or anticipated changes in earnings estimates or changes in securities analyst recommendations regarding our common
shares, other comparable companies or our industry generally;
trading volume of our common shares;
sales of our common shares by us or our shareholders;
general economic, industry and market conditions; and
the other risks described in this “Risk Factors” section.
These broad market and industry factors may harm the market price of our common shares, regardless of our operating performance. In the
past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation,
if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could adversely affect
our business, financial condition, results of operations and growth prospects.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our
common share price and trading volume could decline.
The trading market for our common shares will depend, in part, on the research and reports that securities or industry analysts publish about
us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or
industry analysts commence coverage of our company, the trading price for our common shares would likely be negatively impacted. In the
event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our common shares or publish
inaccurate or unfavorable research about our business, our share price would likely decline. In addition, if our operating results fail to meet
the forecast of analysts, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to
publish reports on us regularly, demand for our common shares could decrease, which might cause our share price and trading volume to
decline.
We have identified a material weakness in our internal control over financial reporting as of December 31, 2018 and may identify
additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material
misstatements of our consolidated financial statements. If we fail to remedy our material weaknesses, or if we fail to establish and
maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be
adversely affected.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements in accordance with U.S. generally accepted accounting principles. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or
interim financial statements will not be prevented or detected on a timely basis. Prior to the completion of our IPO, we were a private
company with limited accounting and compliance personnel and other resources to address our internal control over financial reporting.
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In connection with the preparation and audit of our 2017 financial statements, we had the following material weaknesses. We did not perform
adequate reviews of the accounting for each tranche of the debt outstanding under the Madryn Credit Agreement and the standard-to-actual
inventory costing. Further, at our Brazilian subsidiary, we did not employ an adequate number of accounting and finance professionals with
the requisite expertise in order to timely and accurately capture, record and review the high volume of transactions.
Management determined that these material weaknesses were remediated as of December 31, 2018.
In connection with the preparation and audit of our 2018 financial statements, we had one material weakness. We
did not perform an adequate review over the manual consolidation process, resulting in audit adjustments.
If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in
our internal control are discovered or occur in the future, it may materially adversely affect our ability to report our financial condition and
results of operations in a timely and accurate manner and impact investor confidence in our Company.
The actions we have taken are subject to continued review, supported by confirmation and testing by management as well as audit
committee oversight. While we have implemented a plan to remediate these material weaknesses, we cannot assure you that we will be able
to remediate them, which could impair our ability to accurately and timely report our consolidated financial position, results of operations, or
cash flows. Our failure to remediate the material weaknesses identified above or the identification and remediation of additional material
weaknesses in the future, could adversely affect our ability to report financial information, including our filing of quarterly or annual reports
with the SEC on a timely and accurate basis. Moreover, our failure to remediate the material weakness identified above or the identification of
additional material weaknesses, could prohibit us from producing timely and accurate consolidated financial statements, which may
adversely affect our share price and we may be unable to maintain compliance with Nasdaq listing requirements.
We could be subject to securities class action litigation.
In the past, securities class action litigation has often been instituted against companies whose securities have experienced periods of
volatility in market price. Securities litigation brought against us following volatility in the price of our ordinary shares, regardless of the merit
or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and results of operations and
divert management’s attention and resources from our business.
We will incur significant increased costs as a result of operating as a public company, and our management will be required to
devote substantial time to new compliance initiatives.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will be
subject to the reporting requirements of the Exchange Act, the other rules and regulations of the Securities and Exchange Commission, or
SEC, and the rules and regulations of Nasdaq. The expenses that will be required in order to adequately prepare for being a public company
will be material, and compliance with the various reporting and other requirements applicable to public companies will require considerable
time and attention of management. For example, the Sarbanes-Oxley Act and the rules of the SEC and national securities exchanges have
imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial
controls. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. These rules
and regulations will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and
costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced policy limits on coverage or incur substantial costs to maintain the same or
similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified personnel to serve on our
Board of Directors, our board committees, or as executive officers.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure
controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial
reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act, beginning with our second annual report on Form 10-K. In addition, we will be required to have our independent
registered public accounting firm attest to the effectiveness of our internal control over financial reporting beginning with our annual
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report on Form 10-K following the date on which we are no longer an emerging growth company or a smaller reporting company. Our
compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant
management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with
appropriate public company experience and technical accounting knowledge. If we are not able to comply with the requirements of
Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over
financial reporting that are deemed to be material weaknesses, the market price of our shares could decline and we could be subject to
sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management
resources.
Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate
financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial systems,
procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or
enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control
over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section 404 of
the Sarbanes-Oxley Act. This, in turn, could have an adverse impact on trading prices for our common shares, and could adversely affect our
ability to access the capital markets.
Our directors and principal shareholders continue to maintain the ability to control or significantly influence all matters submitted
to shareholders for approval.
As of December 31, 2019, our executive officers, directors and shareholders who own more than 5% of our outstanding common shares, in
the aggregate, assuming the exercise of all options held by such persons, beneficially owned shares representing approximately 44.9% of
our common shares. As a result, if these shareholders were to choose to act together, they would be able to control or significantly influence
all matters submitted to our shareholders for approval, as well as our management and affairs. For example, these shareholders, if they
choose to act together, will control or significantly influence the election of directors and approval of any merger, consolidation or sale of all or
substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other
shareholders may desire.
Discontinuation of preferential tax treatments we currently enjoy or other unfavorable changes in tax law could result in additional
compliance obligations and costs.
Discontinuation of preferential tax treatments we currently enjoy or other unfavorable changes in tax law could result in additional compliance
obligations and costs. We are currently the beneficiary of a tax holiday in Costa Rica pursuant to which we are subject to a tax at a 0% rate.
However, there can be no assurance that we will continue to qualify for or receive such favorable tax treatment. If we fail to maintain such
favorable tax treatment we may be subject to tax in Costa Rica at a significantly higher rate.
Tax authorities may disagree with our positions and conclusions regarding certain tax positions, resulting in unanticipated costs,
taxes or non-realization of expected benefits.
A tax authority may disagree with tax positions that we have taken, which could result in increased tax liabilities. For example, the U.S.
Internal Revenue Service or another tax authority could challenge the amounts paid between our affiliated companies pursuant to our
intercompany arrangements and transfer pricing policies. A tax authority may take the position that material income tax liabilities, interest and
penalties are payable by us, in which case, we expect that we might contest such assessment. Contesting such an assessment may be
lengthy and costly and if we were unsuccessful in disputing the assessment, the implications could increase our anticipated effective tax rate,
where applicable. In addition, we may be subject to additional tax liabilities, which could materially and adversely affect our business,
financial condition and results of operations. The application, interpretation and enforcement value-added tax, or VAT, and other taxes and
related regulations applicable to medical device companies is complex and evolving.
We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and changes in tax laws or
their application to the operation of our business could adversely impact our operating results and our business.
We conduct operations in multiple jurisdictions, and we are subject to certain taxes, including income, sales and use, employment, value
added and other taxes, in the United States and other jurisdictions in which we do
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business. A change in the tax laws in the jurisdictions in which we do business, including an increase in tax rates or an adverse change in the
treatment of an item of income or expense, possibly with retroactive effect, could result in a material increase in the amount of taxes we incur.
Our determination of our tax liability is subject to review by applicable U.S. and foreign tax authorities. Any adverse outcome of such a review
could harm our operating results and financial condition. The determination of our worldwide provision for income taxes and other tax
liabilities requires significant judgment and, in the ordinary course of business, there are many transactions and calculations where the
ultimate tax determination is complex and uncertain. Moreover, as a multinational business, we have subsidiaries that engage in many
intercompany transactions in a variety of tax jurisdictions where the ultimate tax determination is complex and uncertain. The taxing
authorities of the jurisdictions in which we operate may challenge our methodologies, which could impact our financial position and operating
results. Historically, we have allocated some of our employees’ and contractors’ time across multiple business entities in the international
jurisdictions in which we operate. If it were determined that we had misclassified our employees’ or contractors’ employment status or certain
of our expenditures under local laws, we may be subjected to penalties or be required to pay withholding taxes for, extend employee benefits
to, provide compensation for unpaid overtime to, or otherwise incur substantially greater expenses with respect to such employees and
contractors. Any of the foregoing circumstances could have a material adverse impact on our operating results and financial condition.
We are periodically reviewed and audited by tax authorities with respect to income and non-income taxes. Tax authorities may disagree with
certain positions we have taken, and we may have exposure to additional income and non-income tax liabilities which could have an adverse
effect on our operating results and financial condition. Such authorities could impose additional taxes, interest and penalties, claim that
various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our
subsidiaries. In addition, our future effective tax rates could be favorably or unfavorably affected by changes in tax rates, changes in the
valuation of our deferred tax assets or liabilities, the effectiveness of our tax planning strategies, or changes in tax laws or their interpretation.
Such changes could have an adverse impact on our financial condition.
As a result of these and other factors, the ultimate amount of tax obligations owed may differ from the amounts recorded in our financial
statements and any such difference may harm our operating results in future periods in which we change our estimates of our tax obligations
or in which the ultimate tax outcome is determined.
We are an “emerging growth company,” and a “smaller reporting company,” and we cannot be certain if the reduced reporting
requirements applicable to emerging growth companies or smaller reporting companies will make our common shares less
attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, which was enacted in April
2012 and a “smaller reporting company” under the Securities Exchange Act of 1934, or the Exchange Act. For as long as we continue to be
an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public
companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on
executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging
growth company for up to five years, although circumstances could cause us to lose that status earlier. We will remain an emerging growth
company until the earlier of (1) the last day of the fiscal year following the fifth anniversary of the completion of our IPO, (2) the last day of the
fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the date on which we are deemed to be a large
accelerated filer, which means the market value of our common shares that is held by non-affiliates exceeds $700 million as of the prior
June 30th, and (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year
period. We will remain a smaller reporting company until we have a public float, or value attributable to stock held by nonaffiliates, of at least
$250 million, as measured on or prior to June 30th. After we are no longer an emerging growth company and for as long as we remain a
smaller reporting company, we will remain eligible for certain exemptions, including not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation, but we will be
required to hold a nonbinding advisory vote on executive compensation and obtain stockholder approval of golden parachute payments. We
cannot predict if investors will find our common shares less attractive because we may
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rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for
our common shares and our share price may suffer or be more volatile.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the
enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to take advantage of the
extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act.
Our ability to use net operating losses to offset future taxable income and certain other tax attributes may be subject to certain
limitations.
Federal and California laws impose restrictions on the utilization of net operating loss carryforwards and research and development credit
carryforwards in the event of a change in ownership of the Company, which constitutes an “ownership change” as defined by Internal
Revenue Code Sections 382 and 383. Generally, an ownership change occurs if the percentage of the value of the shares that are owned by
one or more direct or indirect “five percent shareholders” increases by more than 50% over their lowest ownership percentage at any time
during the applicable testing period. If we have experienced an “ownership change” at any time since our formation, we may already be
subject to limitations on our ability to utilize our existing net operating losses and other tax attributes. We have not experienced an ownership
change in the past that would materially impact the availability of its net operating losses and tax credits. Nevertheless, future changes in our
share ownership, which may be outside of our control, may trigger an “ownership change” and, consequently, Section 382 and 383
limitations. We have not completed a Section 382 and 383 analysis to determine if an ownership change has occurred. Until such analysis is
completed, we cannot be sure that the full amount of the existing net operating loss carryforwards will be available to us, even if we do
generate taxable income before their expiration. In addition, under the newly enacted U.S. federal income tax law, federal net operating
losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is
limited.
Provisions in our amended and restated memorandum and articles of association and under British Virgin Islands law could make
an acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove our current management.
Provisions in our amended and restated memorandum and articles of association may discourage, delay or prevent a merger, acquisition or
other change in control of us that shareholders may consider favorable, including transactions in which shareholders might otherwise receive
a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for our common
shares, thereby depressing the market price of our common shares. In addition, these provisions may frustrate or prevent any attempts by
our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our Board
of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in
turn affect any attempt by our shareholders to replace current members of our management team. Among others, these provisions include
the following:
•
•
•
•
•
•
our Board of Directors is divided into three classes with staggered three-year terms which may delay or prevent a change of our
management or a change in control;
our Board of Directors has the right to elect directors to fill a vacancy created by the expansion of our Board of Directors or the
resignation, death or removal of a director, which will prevent shareholders from being able to fill vacancies on our Board of
Directors;
our shareholders are not be able to act by written consent, as a result, a holder, or holders, controlling a majority of our shares are
not be able to take certain actions other than at annual shareholders’ meetings or special shareholders’ meetings;
our amended and restated memorandum and articles of association do not allow cumulative voting in the election of directors, which
limits the ability of minority shareholders to elect director candidates;
amendments of our amended and restated memorandum and articles of association will require the approval of shareholders holding
66 2/3% of our outstanding voting shares (unless amended by the Board of Directors);
our shareholders are required to provide advance notice and additional disclosures in order to nominate individuals for election to our
Board of Directors or to propose matters that can be acted upon at a shareholders’ meeting, which may discourage or deter a
potential acquiror from conducting a solicitation
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of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company; and
•
our Board of Directors is able to issue, without shareholder approval, preferred shares with voting or other rights or preferences that
could impede the success of any attempt to acquire us.
Moreover, because we are incorporated in the British Virgin Islands, we are governed by the provisions of BVI Business Companies Act,
2004, as amended, or the BVI Act, which provide for different shareholder rights than a Delaware corporation. See, for example, the risk
factor titled “Rights of shareholders under British Virgin Islands law differ from those under U.S. law, and, accordingly, you may have fewer
protections as a shareholder.”
Our employment agreements with our executive officers may require us to pay severance benefits to any of those persons who are
terminated in connection with a change in control of us, which could harm our financial condition or results.
Certain of our executive officers are parties to employment agreements that contain change in control and severance provisions providing for
aggregate cash payments of up to approximately $2.2 million for severance and other benefits and acceleration of vesting of share options in
the event of a termination of employment in connection with a change in control of our company. The accelerated vesting of options could
result in dilution to our existing shareholders and harm the market price of our common shares. The payment of these severance benefits
could harm our financial condition and results. In addition, these potential severance payments may discourage or prevent third parties from
seeking a business combination with our company.
Because we do not anticipate paying any cash dividends on our common shares in the foreseeable future, capital appreciation, if
any, will be our shareholders’ sole source of gain.
We currently intend to retain all our future earnings, if any, to finance the growth and development of our business. In addition, the terms of
existing or any future debt agreements may preclude us from paying dividends. For example, our credit agreement and guaranty with Madryn
restricts our ability to pay dividends. As a result, capital appreciation, if any, of our common shares will be our shareholders’ sole source of
gain for the foreseeable future.
U.S. holders of our common shares may suffer adverse tax consequences if we are characterized as a passive foreign investment
company.
A non-U.S. corporation will be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes, in any
taxable year in which either (1) at least 75% of its gross income is passive income; or (2) at least 50% of the average quarterly value of its
total gross assets is attributable to assets that produce “passive income” or are held for the production of passive income. Based on the
project composition of our income and valuation of our assets, we do not believe we were a PFIC in 2019, and we do not expect to be a PFIC
for our current taxable year or to become one in the future. However, because our PFIC status is subject to a number of uncertainties, neither
we nor our tax advisors can provide any assurances regarding our PFIC status. If we are a PFIC for any taxable year during which a U.S.
holder holds our common shares, the U.S. holder may be subject to adverse tax consequences. U.S. investors should consult their advisors
regarding the application of these rules and the availability of any potential elections. See “Material British Virgin Island and U.S. Federal
Income Tax Considerations.”
If a United States person is treated as owning at least 10% of our common shares, such holder may be subject to adverse U.S.
federal income tax consequences.
If a United States person is treated as owning (directly, indirectly, or constructively) at least 10% of the value or voting power of our ordinary
shares, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group (if
any). We may become a controlled foreign corporation. In addition, because our group includes one or more U.S. subsidiaries, certain of our
non-U.S. subsidiaries could be treated as controlled foreign corporations (regardless of whether or not we are treated as a controlled foreign
corporation). A U.S. shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income
its pro rata share of “Subpart F income,” “global intangible low-taxed income,” and investments in U.S. property by controlled foreign
corporations, regardless of whether we make any distributions. An individual that is a U.S. shareholder with respect to a controlled foreign
corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a U.S. shareholder that is a
U.S. corporation. Failure to comply with these reporting obligations may subject a U.S. shareholder to significant
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monetary penalties and may prevent the statute of limitations with respect to such shareholder’s U.S. federal income tax return for the year
for which reporting was due from starting. We cannot provide any assurances that we will assist investors in determining whether we or any
of our non-U.S. subsidiaries is treated as a controlled foreign corporation or whether any investor is treated as a U.S. shareholder with
respect to any such controlled foreign corporation or furnish to any U.S. shareholders information that may be necessary to comply with the
aforementioned reporting and tax paying obligations. A U.S. investor should consult its advisors regarding the potential application of these
rules to an investment in our common shares.
Risks Related to Being a British Virgin Islands Company
Rights of shareholders under British Virgin Islands law differ from those under U.S. law, and, accordingly, you may have fewer
protections as a shareholder.
Our corporate affairs are governed by our amended and restated memorandum and articles of association, the BVI Act, and the common law
of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the
fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the common law of the British
Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent
in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British
Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as
clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British
Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have
more fully developed and judicially interpreted bodies of corporate law. As a result of the foregoing, holders of our ordinary shares may have
more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as
shareholders of a U.S. company.
British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of one
avenue to protect their interests.
British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The
circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such
action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a
company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that
corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce judgments of courts in the
United States based on certain liability provisions of U.S. securities law, or to impose liabilities based on certain liability provisions of the U.S.
securities laws that are penal in nature, in original actions brought in the British Virgin Islands. There is no statutory recognition in the British
Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and
enforce the non-penal judgment of a non-U.S. court of competent jurisdiction without retrial on the merits. This means that even if
shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.
British Virgin Islands law differs from the laws in effect in the United States, and U.S. investors may have difficulty enforcing civil
liabilities against us, our directors or members of senior management.
Under our amended and restated memorandum and articles of association, we may indemnify and hold our directors harmless against all
claims and suits brought against them, subject to limited exceptions. Furthermore, to the extent allowed by law, the rights and obligations
among or between us, any of our current or former directors, officers and employees and any current or former shareholder will be governed
exclusively by the laws of the British Virgin Islands and subject to the jurisdiction of the British Virgin Islands courts, unless those rights or
obligations do not relate to or arise out of their capacities as such. Although there is doubt as to whether U.S. courts would enforce these
provisions in an action brought in the United States, under U.S. securities laws, these provisions could make judgments obtained outside of
the British Virgin Islands more difficult to enforce against our assets in the British Virgin Islands or jurisdictions that would apply British Virgin
Islands law.
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The laws of the British Virgin Islands provide limited protection for minority shareholders, so minority shareholders will have
limited or no recourse if they are dissatisfied with the conduct of our affairs.
Under the laws of the British Virgin Islands, there is limited statutory law for the protection of minority shareholders other than the provisions
of the BVI Act dealing with shareholder remedies, as summarized under “Description of Share Capital-Shareholders’ Rights Under British
Virgin Islands Law Generally.” One protection under statutory law is that shareholders may bring an action to enforce the constituent
documents of a British Virgin Islands company and are entitled to have the affairs of the Company conducted in accordance with the BVI Act
and the amended and restated memorandum and articles of association of the Company. As such, if those who control the Company have
disregarded the requirements of the BVI Act or the provisions of our amended and restated memorandum and articles of association, then
the courts will likely grant relief. Generally, the areas in which the courts will intervene are the following: (i) an act complained of which is
illegal; (ii) acts that constitute oppression, unfair discrimination or unfair prejudice against the minority where the wrongdoers control the
Company; (iii) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (iv) acts where we have not
complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights
afforded to minority shareholders under the laws of many states in the United States.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices are located in Alajuela, Costa Rica, where we occupy 34,750 square feet of office, laboratory and
manufacturing space under two leases which expire in 2023 and 2026. In order to increase our manufacturing capacity, we have constructed
a new manufacturing facility of approximately 27,000 square feet, which began shipping manufactured product in March 2017. We exercised
the option to purchase this manufacturing facility in June 2019. We also have office and warehouse space in Wommelgem, Belgium; Sao
Paulo and Rio de Janiero, Brazil; Stockholm, Sweden; Barcelona and Madrid, Spain; Milan, Italy; Miami and Miramar, Florida; London,
England; Haar, Germany and Cavaillon, France pursuant to a variety of leases that expire in 2020 through 2029.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings, but from time-to-time may become involved in
legal proceedings arising in the ordinary course of our business activities.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common shares have been traded on the Nasdaq Capital Market under the symbol “ESTA” since our initial public offering on July 23,
2018. Prior to this time, there was no public market for our common shares.
Holders
There were 50 shareholders of record of our common shares as of at March 13, 2020. Certain shares are held in “street” name and,
accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Sales of Unregistered Securities
We have issued and sold to third parties the securities listed below without registering the securities under the Securities Act. None of these
transactions involved any public offering. All our securities were sold through private placement either (i) outside the United States or (ii) in
the United States to a limited number of investors in transactions not involving any public offering. As discussed below, we believe that each
issuance of these securities was exempt from, or not subject to, registration under the Securities Act, relying on Section 4(a)(2) (or
Regulation D promulgated thereunder), Regulation S or Rule 701 of the Securities Act.
•
•
•
Between January 2019 and May 2019, we issued an aggregate of 87,321 common shares in connection with exercise of warrants;
In January 2019, we issued 12,404 common shares to ASF Medical as consideration in an asset acquisition; and
In September 2019, we issued 33,333 common shares to Femiline AB as contingent consideration for a milestone achieved related
to our acquisition of certain assets from Femiline AB.
Dividends
We have not paid any cash dividends on our common shares since inception and do not anticipate paying cash dividends in the foreseeable
future.
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Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report on Form
10‑K.
Use of Proceeds from Public Offering of Common Shares
On July 23, 2018, the Company completed its initial public offering, or IPO, whereby it sold a total of 4,272,568 shares of common stock at
$18.00 per share including 557,291 shares sold to underwriters for the exercise of their option to purchase additional shares. The Company
received net proceeds from the IPO of approximately $70.1 million, after deducting underwriting discounts and commissions of $5.4 million
and deferred offering costs of $1.5 million. The IPO was effected through a registration statement on Form S-1 (Registration Nos. 333-
225791 and 333-226235), which was declared effective on July 18, 2018. No payments for such expenses were made directly or indirectly to
any of our officers or directors, to persons owning 10% or more of any class of our equity securities, or to any of our affiliates.
Jeffries LLC, Cowen and Company LLC, and BTIG, LLC acted as the underwriters for the IPO. There has been no material change in the
planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on July 20, 2018 pursuant to
Rule 424(b) of the Securities Act.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers
There were no repurchases of shares of common shares made during the three months ended December 31, 2019.
ITEM 6. SELECTED FINANCIAL DATA
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated
financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K). This discussion contains forward-
looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of various factors, including those set forth under the sections contained in this
Form 10-K entitled Item 1A. “Risk Factors”; Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”; and Item 7A. “Quantitative and Qualitative Disclosure about Market Risk”. See “Special Note Regarding Forward-Looking
Statements” below.
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking
statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues,
projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,”
“may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-
looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our
forward-looking statements and you should not place undue reliance on our forward-looking statements.
Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we
make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in
the forward-looking statements, including, without limitation, the risks set forth under the sections contained in this Form 10-K entitled Item
1A. “Risk Factors”; Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and Item 7A.
“Quantitative and Qualitative Disclosure about Market Risk” and in our other filings with the SEC. The forward-looking statements are
applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.
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Overview
We are a medical technology company focused on improving patient safety and aesthetic outcomes, initially in the breast aesthetics and
reconstruction market. Our line of silicone gel-filled breast implants, branded as Motiva Implants, is the centerpiece of our MotivaImagine
medical technology platform. Post-market surveillance data, which was not generated in connection with the U.S. Food and Drug
Administration, or FDA, PMA approval study and was self-collected rather than collected at mandatory follow-ups, and published third-party
data indicates that Motiva Implants show low rates of adverse events (including rupture, capsular contracture, and safety related
reoperations) that we believe compare favorably with those of our competitors. We believe the proprietary technologies that differentiate our
Motiva Implants enable improved safety and aesthetic outcomes and have helped drive our revenue growth. Our MotivaImagine platform
enables surgical techniques that we promote as Motiva designed surgeries. We have developed other complementary products and services
on our MotivaImagine platform, which are aimed at further enhancing patient outcomes.
We have devoted a majority of our resources since inception to developing our Motiva Implants, which we began selling in October 2010. We
have incurred net losses in each year since inception, and we have financed our operations primarily through equity financings and debt
financings.
Our revenue for the years ended December 31, 2019 and 2018 was $89.6 million and $61.2 million, respectively, an increase of $28.4
million, or 46.3%. Net losses increased to $38.2 million for the year ended December 31, 2019 from $21.1 million for the year ended
December 31, 2018. As of December 31, 2019, we had an accumulated deficit of $127.1 million.
Our cash balance as of December 31, 2019 was $37.7 million.
On July 23, 2018, the Company completed its initial public offering, or IPO. The Company received net proceeds from the IPO of
approximately $70.1 million, after deducting underwriting discounts and expenses. On February 3, 2020, the Company completed a public
follow-on offering and received net proceeds of approximately $63.9 million, after deducting underwriting discounts and expenses.
We have made and continue to make significant investments in additional manufacturing capacity, marketing, customer service, and a direct
sales force in certain territories like Brazil and several countries in Europe in order to drive and support further adoption of our Motiva
Implants. We expect that we will continue to incur losses at least in the near term as we expand our organization to support planned sales
growth, while also continuing to invest in research and development of our products, clinical trials to enable regulatory approval in the United
States, and in other commercialization efforts. We also expect to incur significant additional expenditures as a public company.
As a result of these and other factors, we expect to continue to incur net losses in the intermediate term and may need to raise additional
capital through equity and debt financings in order to fund our operations. Our operating results may fluctuate on a quarterly or annual basis
in the future, and our growth or operating results may not be consistent with predictions made by securities analysts, if any. If we are unable
to achieve our revenue growth objectives, we may not be able to achieve profitability.
Components of Results of Operations
Revenue
We commenced sales of our Motiva Implants in October 2010 and these products have historically accounted for the majority of our
revenues. Sales of our Motiva breast implants accounted for over 90% of our revenues for the year ended December 31, 2019, and we
expect our revenues to continue to be driven primarily by sales of these products. We primarily derive revenue from sales of our Motiva
Implants to two types of customers: (1) medical distributors and (2) direct sales to physicians, hospitals, and clinics.
We recognize revenue related to the sales of products at the time of shipment, except for a portion of our direct sales revenue that is
generated from the sale of consigned inventory maintained at physician, hospital, and clinic locations. For consignment sales, revenue is
recognized at the time we are notified by the consignee that the product has been implanted. Our contracts with distributors do not typically
contain right of return or price protection and have no post-delivery obligations.
We expect our revenue to increase as we enter new markets, expand awareness of our products in existing markets, and grow our distributor
network and direct sales force. We also expect our revenue to fluctuate from quarter to quarter due to a variety of factors, including seasonal
fluctuations in demand for Motiva Implants. We
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are also affected by foreign currency fluctuations, however, to date, the net impact of foreign currency translation has been insignificant.
Cost of Revenue and Gross Margin
Our implants are manufactured at our two facilities in Costa Rica, one of which opened in 2017. Cost of revenue is primarily the cost of
silicone but also includes other raw materials, packaging, components, quality assurance, labor costs, as well as manufacturing and
overhead expenses. Cost of revenue also includes depreciation expense for production equipment, and amortization of certain intangible
assets.
We calculate gross margin as revenue less cost of revenue for a given period divided by revenue. Our gross margin may fluctuate from
period to period depending, in part, on the efficiency and utilization of our manufacturing facilities, targeted pricing programs, and sales
volume based on geography, customer and product type.
Operating Expenses
Sales, General and Administrative
Sales, general and administrative, or SG&A, expenses primarily consist of compensation, including salary, share-based compensation and
employee benefits for our sales and marketing personnel, and for administrative personnel that support our general operations such as
information technology, executive management, financial accounting, customer service, and human resources personnel. SG&A expenses
also includes costs attributable to marketing, sales support, travel, legal services, financial audit fees, insurance costs, and consulting
services. We expect to incur additional SG&A expenses in connection with our becoming a public company, which may increase further when
we are no longer able to rely on the “emerging growth company” exemption we are afforded under the Jumpstart Our Business Startups Act
of 2012, or JOBS Act.
We expect our SG&A expenses to continue to increase in absolute dollars for the foreseeable future as our business grows and we continue
to invest in our sales, marketing, medical education, training and general administration resources to build our corporate infrastructure.
However, we expect our SG&A expenses to decrease as a percentage of our revenue over the long term, although our SG&A expenses may
fluctuate from period to period due to the timing of expenses related to our sales and marketing campaigns.
Research and Development
Our research and development, or R&D, activities primarily consist of engineering and research programs associated with our products
under development, as well as R&D activities associated with our clinical development activities. Our R&D expenses primarily consist of
compensation, including salary, share-based compensation and employee benefits for our R&D and clinical personnel. We also incur
significant expenses for supplies, development prototypes, design and testing, clinical study costs and product regulatory and consulting
expenses.
We expect our R&D expenses to continue to increase in absolute dollars and as a percentage of revenue for the foreseeable future as we
continue to advance our products under development, as well as initiate and prepare for additional clinical studies. We received an approval
of an investigational device exemption, or IDE, from the FDA in March 2018 to initiate a clinical trial and enrolled the first patient during the
first half of 2018. We estimate that total costs for this PMA clinical trial will be between $30.0 million and $40.0 million over ten years. We
also have other products under development for which we may be required to conduct clinical trials in future periods in order to receive
regulatory approval to market these products.
Interest Expense
Interest expense consists primarily of cash and non-cash interest related to outstanding debt and amortization of debt discounts. As of
December 31, 2019, we had $65.0 million in outstanding principal and accrued interest.
Change in Fair Value of Derivative Instruments
Change in fair value of derivative instruments consists of changes in the fair value of our share warrants and put and call option liabilities
associated with outstanding debt instruments.
Other Income (Expense), Net
Other income (expense), net primarily consists of foreign currency gains/losses, interest income and change in fair value of contingent
consideration.
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Income Tax Expense
Income tax expense consists primarily of income taxes in foreign jurisdictions in which we conduct business. Due to our history of losses, we
maintain a full valuation allowance for deferred tax assets including net operating loss carry-forwards, R&D tax credits, capitalized R&D and
other book versus tax differences.
Consolidated Results of Operations
The following table set forth our results of operations for the years presented, in dollars:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales, general and administrative
Research and development
Total operating expenses
Loss from operations
Interest expense
Change in fair value of derivative instruments
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
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2019
2018
(in thousands)
$
$
89,565 $
34,704
54,861
70,811
14,991
85,802
(30,941)
(8,696)
3,052
(925)
(37,510)
(640)
(38,150) $
61,208
25,090
36,118
47,295
12,687
59,982
(23,864)
(8,814)
15,894
(4,099)
(20,883)
(215)
(21,098)
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Comparison of the Year December 31, 2019 and 2018
Revenue
Cost of revenue
Gross profit
Gross margin
Revenue
2019
2018
$
$
(in thousands)
$
89,565
34,704
54,861
$
61.3%
61,208
25,090
36,118
59.0%
Revenue increased $28.4 million, or 46.3%, to $89.6 million for the year ended December 31, 2019, as compared to $61.2 million for the
year ended December 31, 2018. The increase was primarily due to increased sales of Motiva Implants, with the increase driven by greater
market penetration in existing geographies and commencement of sales in new geographies. As of December 31, 2019, our sales
organization included 94 employees and contractors as compared to 67 individuals at December 31, 2018.
Cost of Revenue and Gross Margin
Cost of revenue increased $9.6 million, or 38.3%, to $34.7 million for the year ended December 31, 2019, compared to $25.1 million for the
year ended December 31, 2018. The increase was due to higher sales volume of Motiva Implants.
The gross margin increased to 61.3% for the year ended December 31, 2019, compared to 59.0% for the year ended December 31, 2018
primarily due to the addition of direct market revenues with generally higher average selling prices and cost savings from increased
efficiencies in our manufacturing operations offset by the increase in amortization related to the fair value of inventory recorded from our
asset acquisitions from certain distributors in the fourth quarter of 2018. The amortization decreased our gross margins by 4.0% year-to-date.
Operating Expenses
Operating expenses:
Sales, general and administrative
Research and development
Total operating expenses
2019
2018
(in thousands)
$
$
70,811 $
14,991
85,802 $
47,295
12,687
59,982
Sales, General and Administrative Expense
SG&A expense increased $23.5 million, or 49.7%, to $70.8 million for the year ended December 31, 2019, compared to $47.3 million for the
year ended December 31, 2018. The increase in SG&A was primarily due to $11.7 million increase in personnel costs as a result of the hiring
of additional sales and administrative employees, $3.7 million increase in consulting and audit fees, $2.4 million increase in sales
commissions, $2.2 million increase in marketing expense, $1.2 million increase in insurance costs and $0.4 million increase in freight costs.
Research and Development Expense
R&D expense increased $2.3 million, or 18.2%, to $15.0 million for the year ended December 31, 2019, compared to $12.7 million for the
year ended December 31, 2018. The increase in R&D expenses was primarily due to $0.8 million increase in R&D personnel costs and $1.3
million increase in expenditures related to our IDE clinical study in the United States, primarily consisting of a $2.1 million increase in fees to
third parties to set-up and manage the clinical trial partially offset by a $0.8 million decrease in laboratory-related expenditures.
Interest Expense
Interest expense decreased $0.1 million, or 1.3%, to $8.7 million for the year ended December 31, 2019, as
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compared to $8.8 million for the year ended December 31, 2018. The decrease in interest expense is primarily due to a decrease in the
contractual interest rate. The Madryn Credit Agreement was amended in June 2019.
Change in Fair Value of Derivative Instruments
Change in fair value of derivative instruments for the year ended December 31, 2019 resulted in a gain of $3.1 million, as compared to a gain
of $15.9 million for the year ended December 31, 2018. The change in fair value of derivative instruments was due to changes in the fair
value of Madryn derivatives embedded in the Madryn Credit Agreement we entered into in August 2017.
Provision for Income Taxes
Provision for income taxes increased $0.4 million, or 197.7%, to $0.6 million for the year ended December 31, 2019, compared to $0.2
million for the year ended December 31, 2018. The change in the provision for income taxes is primarily due to increased pre-tax income in
foreign jurisdictions.
Liquidity and Capital Resources
As of December 31, 2019, we had an accumulated deficit of $127.1 million. Since our inception, we have generated losses and expect to
continue to generate losses in the intermediate term. We have financed our operations through a combination of equity financings and debt
financings, and from cash generated from operations, primarily from the collection of accounts receivable resulting from sales. Our historical
cash outflows have primarily been associated with cash used for operating activities such as expansion of our sales and marketing and
distributor infrastructure, investing in inventory, R&D activities, asset acquisitions, capital improvements and other working capital needs. As
of December 31, 2019 and 2018, we had cash of $37.7 million and $52.6 million, respectively. In February 2020, we closed the follow-on
offering on our common stock. The net proceeds to the Company from the offering was approximately $63.9 million, after deducting
underwriting discounts and estimated offering expenses.
During the year ended December 31, 2018, the Company received $16.9 million from the issuance of common shares and exercise of stock
options and warrants. Also, we received proceeds in the IPO of approximately $70.1 million, net of $5.4 million related to underwriting
discounts and commissions and deferred offering costs of $1.5 million. In August 2019, we borrowed $25.0 million of the available funds
under the Madryn Credit Agreement. During the year ended December 31, 2019, the Company received $0.8 million from the exercise of
stock options and warrants.
We believe that our available cash, cash from operations, and the net proceeds from our past public offerings will be sufficient to satisfy our
liquidity requirements for at least the next twelve months from the date of the issuance of the financial statements. Our liquidity assumptions
may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital
requirements will depend on many factors, including:
▪
▪
▪
▪
▪
▪
▪
the degree and rate of market adoption of our products;
the cost and timing of our regulatory activities, especially the PMA clinical trial to obtain regulatory approval for our Motiva Implants in
the United States;
the emergence of new competing technologies and products;
the costs of R&D activities we undertake to develop and expand our products;
the costs of commercialization activities, including sales, marketing and manufacturing;
the level of working capital required to support our growth; and
our need for additional personnel, information technology or other operating infrastructure to support our growth and operations as a
public company.
We may need to raise additional capital to execute our business plan. If we are unable to raise additional capital when desired, or on terms
acceptable to us, our business, results of operations, and financial condition would be adversely affected.
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Cash Flows
The following table sets forth the primary sources and uses of cash for each of the years presented below:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net increase in cash
Net Cash Used in Operating Activities
2019
2018
$
$
(29,983) $
(7,766)
22,789
(24)
(14,984) $
(33,885)
(5,731)
81,527
(136)
41,775
Net cash used in operating activities of $30.0 million for the year ended December 31, 2019 was comprised of a net loss of $38.2 million and
$3.1 million change in fair value of financial instruments, partially offset by $3.3 million of non-cash depreciation expense, $6.5 million of
share-based compensation expense, $3.5 million unrealized foreign currency loss and $2.4 million of non-cash interest expense due to
accretion of debt discounts, as well as changes in operating assets and liabilities of $4.6 million.
Net cash used in operating activities of $33.9 million for the year ended December 31, 2018 was comprised of a net loss of $21.1 million and
$15.9 million change in fair value of financial instruments, partially offset by $2.8 million of non-cash depreciation expense, $7.3 million of
share-based compensation expense, and $3.3 million of non-cash interest expense due to accretion of debt discounts, as well as changes in
operating assets and liabilities of $14.0 million.
Net Cash Used in Investing Activities
Net cash used in investing activities of $7.8 million for the year ended December 31, 2019 primarily consisted of $6.3 million in purchases of
property and equipment and $0.8 million in cash used in asset acquisitions.
Net cash used in investing activities of $5.7 million for the year ended December 31, 2018 primarily consisted of $4.0 million in cash used in
asset acquisitions and $1.7 million in purchases of property and equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities of $22.8 million for the year ended December 31, 2019 primarily reflected $24.7 million in borrowing,
net of debt issuance costs, under the Madryn Credit Agreement, $0.7 million in proceeds received for stock option exercises and $0.1 million
in proceeds received for warrant exercises, which was partially offset by $2.3 million of warrant repurchases, $0.2 million of tax payments
related to shares withheld upon vesting of restricted stock and $0.2 million in repayment on capital leases.
Net cash provided by financing activities of $81.5 million for the year ended December 31, 2018 primarily reflected $71.5 million in proceeds
received from the issuance of common shares in the IPO, net of underwriters’ discount, $16.1 million in proceeds received from the issuance
of ordinary shares prior to the IPO, $0.6 million in proceeds received for stock option exercises and $0.1 million in proceeds received for
warrant exercises, which was partially offset by $5.1 million repayment of related party notes payable, $1.5 million deferred equity issuance
costs and $0.3 million in repayment on capital leases.
Indebtedness
Madryn Debt
On August 24, 2017 the Company entered into a credit agreement, or the Madryn Credit Agreement, with Madryn Health Partners, LP, or
Madryn, as administrative agent, and a syndicate of lenders. On June 17, 2019, the Madryn Credit Agreement was amended to lower the
interest rate on the outstanding debt facilities, provide for $25.0 million of new term loan commitments, decrease the amount of the
prepayment penalties, remove all
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principal payments and extend the maturity date and repayment from September 30, 2023 to September 30, 2025. The Madryn Credit
Agreement, as amended, provides for a term loan in a maximum principal amount of $65.0 million, $30.0 million (Term A) of which became
available upon signing and was subsequently borrowed by the Company.
Prior to amending the Madryn Credit Agreement on June 17, 2019, the Company’s ability to borrow the remaining term loans under the
Madryn Credit Agreement was subject to the Company achieving certain revenue milestones. The Company met milestones sufficient to
borrow and borrowed an additional $5.0 million (Term B-1) on October 31, 2017 and $5.0 million (Term B-2) on December 15, 2017,
increasing the total outstanding principal balance to $40.0 million as of December 31, 2017.
Pursuant to the June 2019 amendment, the Company became eligible to borrow an additional $10.0 million (Term B-3) and $15.0 million
(Term B-4) on or before September 30, 2019 and December 31, 2019, respectively. The Company borrowed the available funds under both
tranches equal to $25.0 million on August 12, 2019, bringing up the total outstanding principal balance to $65.0 million as of December 31,
2019.
In connection with the Madryn Credit Agreement, the Company and certain of its subsidiaries, granted a security interest in substantially all of
their assets , including, without limitation, intellectual property, and pledges of certain shares of the Company’s subsidiaries, subject to certain
excluded collateral exceptions.
The Madryn Credit Agreement contains customary affirmative and negative covenants, including, but not limited to, restrictions on the ability
of the Company and its subsidiaries to incur additional indebtedness, create liens, make certain investments, make restricted payments,
enter into or undertake certain liquidations, mergers, consolidations or acquisitions and dispose of assets or subsidiaries. In addition, the
Madryn Credit Agreement requires the Company to maintain minimum revenues and liquidity.
Prior to the effectiveness of the June 17, 2019 amendment, borrowings under the Madryn Credit Agreement bore interest at a rate equal to 3-
month LIBOR plus 11.0% per annum. As of the amendment on June 17, 2019, borrowings under the Madryn Credit Agreement bear interest
at a rate equal to 3-month LIBOR plus 8.0% per annum provided that no default has occurred. In an event of a default, the interest would
increase by an additional 4.0% per annum. The effective interest rate under the amended Madryn Credit Agreement is 18.4%, and the
weighted average interest rate was approximately 12.2% at December 31, 2019. The Company incurred $6.2 million and $5.4 million in
interest expense in connection with Madryn Credit Agreement during the year ended December 31, 2019 and 2018, respectively, including
$0.3 million of direct costs to amend the Madryn Credit Agreement in June 2019, which were expensed as interest expense. No principal
payments are due on the term loans until the final maturity date on September 30, 2025.
The Company also determined that the Madryn Credit Agreement contained put options which are mandatory repayment provisions related
to liquidity events or an event of default and a call option related to voluntary repayment option. The Company allocated a fair value of $15.1
million for these embedded derivatives as a debt discount on the original commitment date in August 2017. An additional $5.0 million and
$1.6 million debt discount was recorded on respective borrowing dates when the Company met the required milestones and borrowed an
additional $10.0 million in the fourth quarter of fiscal 2017 and August 2019. The Company revalues the embedded derivatives as of each
reporting period and records the change in the fair value in the consolidated statement of operations as other income or expense (see Note
5). The Company also incurred legal expenses of $1.3 million in the third quarter of fiscal 2017 and $0.3 million in August 2019, which were
recorded as a debt discount and are being amortized over the term of the Madryn Credit Agreement.
Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any off-balance sheet arrangements.
JOBS Act Accounting Election
The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or
revised accounting standards applicable to public companies. We intend to take advantage of certain exemptions from various public
company reporting requirements including following private company effective dates for new or revised accounting standards.
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Critical Accounting Policies, Significant Judgments and Use of Estimates
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which
have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and the disclosure of contingent
assets and liabilities. Our estimates are based on our historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and
liabilities. Actual results may differ from these estimates. We believe that the critical accounting policies discussed below are essential to
understanding our historical and future performance, as these policies relate to the more significant areas involving management’s estimates
and judgments.
Revenue Recognition
The Company recognizes revenue related to sales of products to distributors or directly to customers in markets where it has regulatory
approval, net of trade discounts and allowances. The Company recognizes revenue in accordance with Accounting Standards Codification,
or ASC, 606, Revenue from Contracts with Customers. ASC 606 requires the Company to recognize revenue to depict the transfer of goods
or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The
Company adopted ASC 606 on January 1, 2019, using the modified retrospective approach and applied ASC 606 only to contracts not
completed as of January 1, 2019. The impact of adopting ASC 606 was not material to the consolidated financial statements.
The Company recognizes revenue related to the sales of products to distributors at the time of shipment of the product, which represents the
point in time when the distributor has taken ownership and assumed the risk of loss and the required revenue recognition criteria are
satisfied. The Company’s distributors are obligated to pay within specified terms regardless of when, or if, they sell the products. The
Company’s contracts with distributors typically do not contain right of return or price protection and have no post-delivery obligations.
Appropriate reserves are established for anticipated sales returns based on historical experience, recent gross sales and any notification of
pending returns. The Company recognizes revenue when title to the product and risk of loss transfer to customers, provided there are no
remaining performance obligations required of the Company or any written matters requiring customer acceptance. The Company allows for
the return of product from direct customers in certain regions within fifteen days after the original sale and records estimated sales returns as
a reduction of sales in the same period revenue is recognized. Sales return provisions are calculated based upon historical experience with
actual returns. Actual sales returns in any future period are inherently uncertain and thus may differ from the estimates. If actual sales returns
differ significantly from the estimates, an adjustment to revenue in the current or subsequent period is recorded. As of December 31, 2019
and 2018, an allowance of $36,000 and $52,000 was recorded for product returns, respectively.
A portion of the Company’s revenue is generated from the sale of consigned inventory maintained at physician, hospital, and clinic locations.
For these products, revenue is recognized at the time the Company is notified by the consignee that the product has been implanted, not
when the consigned products are delivered to the consignee’s warehouse.
The Company has a limited warranty for the shelf life of the product, which is five years from the time of manufacture. Estimated warranty
obligations are recorded at the time of sale. The Company also offers a warranty to patients in the event of rupture and a replacement
program for capsular contracture events, provided certain registration requirements are met. Revenue for extended warranties is recognized
ratably over the term of the agreement. To date, these warranty and program costs have been de minimis. The Company will continue to
evaluate the warranty reserve policies for adequacy considering claims history.
Deferred revenue primarily consists of payments received in advance of meeting revenue recognition criteria. The Company has received
payments from distributors to provide distribution exclusivity within a geographic area and recognizes deferred revenue on a ratable basis
over the term of such contractual distribution relationship. Additionally, the Company has received payments from customers in direct
markets prior to surgical implantation and recognizes deferred revenue at the time the Company is notified by the customer that the product
has been implanted. For all arrangements, any revenue that has been deferred and is expected to be recognized beyond one year is
classified as long-term deferred revenue and included in “Other liabilities, long term” on the consolidated balance sheets (see Note 3).
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Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation of property and equipment is computed using the straight-line method over the assets’ estimated useful lives of five to ten
years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the
remaining lease term after factoring expected renewal periods. Upon retirement or disposal of assets, the costs and related accumulated
depreciation are eliminated from the accounts and any gain or loss is recognized in operations. Maintenance and repairs are expensed as
incurred. Substantially all of our manufacturing operations and related property and equipment is located in Costa Rica.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is stated at invoice value less estimated allowances for returns and doubtful accounts. The Company continually
monitors customer payments and maintains an allowance for estimated losses resulting from customers’ inability to make required payments.
In evaluating the Company’s ability to collect outstanding receivable balances, the Company considers various factors including the age of
the balance, the creditworthiness of the customer, which is assessed based on ongoing credit evaluations and payment history, and the
customer’s current financial condition. In cases where there are circumstances that may impair a specific customer’s ability to meet its
financial obligations, an allowance is recorded against amounts due, which reduces the net recognized receivable to the amount reasonably
believed to be collectible. As of December 31, 2019, an allowance of $36,000 was recorded for product returns. As of December 31, 2018,
an allowance of $52,000 was recorded for product returns.
Inventory and Cost of Revenue
Inventory is stated at the lower of cost to purchase or manufacture the inventory or the net realizable value of such inventory. Cost is
determined using the standard cost method which approximates actual costs using the first-in, first-out basis. The Company regularly reviews
inventory quantities considering actual losses, projected future demand, and remaining shelf life to record a provision for excess and slow-
moving inventory. As of December 31, 2019 and December 31, 2018, an allowance of $0.3 million and $0.2 million was recorded for
inventory obsolescence.
We recognize the cost of inventory transferred to the customer in cost of revenue when revenue is recognized.
Goodwill and Intangible Assets
We record the excess of the acquisition purchase price over the net fair value of the tangible and identifiable intangible assets acquired and
liabilities assumed as goodwill. In accordance with Accounting Standards Codification, or ASC, 350, Intangibles - Goodwill and Other, we test
goodwill for impairment annually during the fourth quarter of each year and whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. In connection with the annual impairment test for goodwill, we elected the option to
perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying
amount. If we determine that it was more likely than not that the fair value of the reporting unit is less than its carrying amount, then the
impairment test is performed. Consistent with our assessment that it has only one reporting segment, we have determined that it has only
one reporting unit and tests goodwill for impairment at the entity level using the two-step process required by ASC 350. In the first step, we
compare the carrying amount of the reporting unit to the fair value of the enterprise. If the fair value of the enterprise exceeds the carrying
value, goodwill is not considered impaired and no further testing is required. If the carrying value of the enterprise exceeds the fair value,
goodwill is potentially impaired, and the second step of the impairment test must be performed. In the second step, we compare the implied
fair value of the goodwill, as defined by ASC 350, to its carrying amount to determine the impairment loss, if any.
We record purchased intangible assets at their respective estimated fair values at the date of acquisition. Purchased finite-lived intangible
assets are being amortized using the straight-line method over their remaining estimated useful lives, which range from two to fifteen years.
We evaluate the remaining useful lives of intangible assets on a periodic basis to determine whether events or circumstances warrant a
revision to the remaining estimated amortization period. We test indefinite-lived intangible assets for impairment on at least an annual basis
and whenever circumstances suggest the assets may be impaired. If indicators of impairment are present, we evaluate the carrying value of
the intangible assets in relation to estimates of future undiscounted cash flows. We also evaluate the remaining useful life of an indefinite-
lived intangible asset to determine whether events and circumstances continue to support an indefinite useful life.
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During the years ended December 31, 2019 and 2018, there has been no impairment of goodwill or intangible assets based on the
qualitative assessments performed by the Company.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset might not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the
anticipated undiscounted future net cash flows to the related asset group’s carrying value. If an asset is considered impaired, the asset is
written down to fair value, which is determined based either on discounted cash flows or appraised value, depending on the nature of the
asset. There were no impairment charges, or changes in estimated useful lives recorded during the years ended December 31, 2019 and
2018.
Debt and Embedded Derivatives
We apply the accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting for hybrid
contracts. We account for convertible debt instruments when we have determined that the embedded conversion options should not be
bifurcated from their host instruments in accordance with ASC 470-20 Debt with Conversion and Other Options. We record, when necessary,
discounts to notes payable for the intrinsic value of conversion and other options embedded in debt instruments as a beneficial conversion
option based upon the differences between the fair value of the underlying shares at the commitment date of the note transaction and the
effective conversion price embedded in the note.
We use option pricing valuation models to determine the fair value of embedded derivatives and records any change in fair value as a
component of other income or expense in the consolidated statements of operations.
Debt Issuance Costs and Debt Discounts
Costs incurred in connection with the issuance of new debt are capitalized. Capitalizable debt issuance costs paid to third parties and debt
discounts paid to creditors, net of amortization, are recorded as a reduction to the long-term debt balance on the consolidated balance
sheets. Amortization expense on capitalized debt issuance costs and debt discounts related to loans are calculated using the effective
interest method over the term of the loan commitment, and is recorded as interest expense in the consolidated statements of operations.
Income Taxes
We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in our consolidated financial statements or income tax returns. In
estimating future tax consequences, expected future events, enactments or changes in the tax law or rates are considered. Valuation
allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.
We operate in various tax jurisdictions and are subject to audit by various tax authorities.
We record uncertain tax positions based on a two-step process whereby (1) a determination is made as to whether it is more likely than not
that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-
than-not recognition threshold we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate
settlement with the related tax authority. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a
component of income tax expense. Significant judgment is required in the identification of uncertain tax positions and in the estimation of
penalties and interest on uncertain tax positions.
There were no material uncertain tax positions as of December 31, 2019 and 2018.
Foreign Currency
The financial statements of our foreign subsidiaries whose functional currencies are the local currencies are translated into U.S. dollars for
consolidation as follows: assets and liabilities at the exchange rate as of the balance sheet date, stockholders’ equity at the historical rates of
exchange, and income and expense amounts at the average exchange rate for the period. Translation adjustments resulting from the
translation of the subsidiaries’ accounts are included in “Accumulated other comprehensive income (loss)” as equity in the consolidated
balance sheet. Transactions denominated in currencies other than the applicable functional currency are converted to the functional currency
at the exchange rate on the transaction date. At period end, monetary assets and liabilities are remeasured to the functional currency using
exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Gains
and losses
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resulting from foreign currency transactions are included within “Other income (expense), net” in the consolidated statements of operations.
For the year ended December 31, 2019, foreign currency transaction loss amounted to $1.2 million as compared to a foreign currency
transaction loss of $2.4 million for the year ended December 31, 2018.
Comprehensive Income (Loss)
Our comprehensive loss consists of net loss and foreign currency translation adjustments arising from the consolidation of the Company’s
foreign subsidiaries.
Deferred Offering Costs
In 2018, we capitalized $1.5 million of deferred offering costs, consisting of legal, accounting and other fees and costs relating to our IPO,
which, upon completion of the IPO, were reclassified to equity to offset the IPO proceeds.
Share-Based Compensation
The Company measures and recognizes compensation expense for all stock-based awards in accordance with the provisions of ASC 718,
Stock Compensation. Stock-based awards granted include stock options, restricted stock units, or RSUs, and restricted stock awards, or
RSAs. Share-based compensation expense for stock options and RSAs granted to employees is measured at the grant date based on the
fair value of the awards and is recognized as an expense ratably on a straight-line basis over the requisite service period. The fair value of
options to purchase shares granted to employees is estimated on the grant date using the Black-Scholes option valuation model.
Prior to the adoption of ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based
Payment Accounting, on January 1, 2019, the Company accounted for stock options and RSAs issued to non-employees under ASC 505-50
Equity: Equity-Based Payments to Non-Employees, which required the fair value of such non-employee awards to be remeasured at each
quarter-end over the vesting period. After the adoption of ASU 2018-07, the accounting guidance is consistent with accounting for employee
share-based compensation.
The calculation of share-based compensation expense requires that the Company make assumptions and judgments about the variables
used in the Black-Scholes model, including the expected term, expected volatility of the underlying common shares, risk-free interest rate
and dividends.
The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, under which it recognizes forfeitures
as they occur rather than applying a prospective forfeiture rate in advance (see note 10).
The Company uses the Black-Scholes option valuation model to value options granted to employees and consultants, which requires the use
of highly subjective assumptions to determine the fair value of share-based awards. The assumptions used in the Company’s option-pricing
model represent management’s best estimates. These estimates are complex, involve a number of variables, uncertainties and assumptions
and the application of management’s judgment. If factors change and different assumptions are used, the Company’s share-based
compensation expense could be materially different in the future. The assumptions and estimates that the Company uses in the Black-
Scholes model are as follows:
▪
▪
▪
Fair Value of Common Shares. Following the IPO, the closing price of the Company’s publicly-traded common shares on the date of
grant is used as the fair value of the shares. Prior to the IPO, the fair value of ordinary shares was estimated on a periodic basis by
the Company’s Board of Directors, with the assistance of an independent third-party valuation firm. The Board of Directors intended
all options granted to be exercisable at a price per share not less than the estimated per share fair value of the shares underlying
those options on the date of grant.
Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied
yield available on U.S. Treasury zero-coupon issues with a term equivalent to that of the term of the options for each option group on
the measurement date.
Term. For employee stock options, the expected term represents the period that the Company’s share-based awards are expected to
be outstanding. Because of the limitations on the sale or transfer of the Company’s shares during the period the Company was a
privately held company, the Company does not believe its historical exercise pattern is indicative of the pattern it will experience as a
publicly traded company. The Company consequently uses the Staff Accounting Bulletin 110, or SAB 110, simplified
69
Table of Contents
method to calculate the expected term of employee stock options, which is the average of the contractual term and vesting period.
The Company plans to continue to use the SAB 110 simplified method until it has sufficient trading history as a publicly traded
company. For consultant stock options, the term used is equal to the remaining contractual term on the measurement date.
Volatility. The Company determines the price volatility based on the historical volatilities of industry peers as it does not have
sufficient trading history for its shares. Industry peers consist of several public companies in the medical device industry with
comparable characteristics, including revenue growth, operating model and working capital requirements. The Company intends to
continue to consistently apply this process using the same or a similar peer group of public companies until a sufficient amount of
historical information regarding the volatility of its own shares becomes available, or unless circumstances change such that the
identified peer companies are no longer similar, in which case other suitable peer companies whose common share prices are
publicly available would be utilized in the calculation. The volatility is calculated based on the term on the measurement date.
Dividend Yield. The expected dividend assumption is based on the Company’s current expectations about its anticipated dividend
policy. The Company has no expectation that it will declare dividends on its common shares, and therefore has used an expected
dividend yield of zero.
▪
▪
We will continue to use judgment in evaluating the assumptions related to our share-based compensation on a prospective basis. As we
continue to accumulate additional data, we may have refinements to our estimates, which could materially impact our future share-based
compensation expense.
Recent Accounting Pronouncements
Please refer to Note 2 - “Summary of Significant Accounting Policies” in the notes to the consolidated financial statements included in this
Form 10-K for information on recent accounting pronouncements and the expected impact on our unaudited consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 are appended to this report beginning on page F‑1. An index of those
financial statements is included in Part IV, Item 15 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
As of December 31, 2019, the end of the period covered by this Annual Report on Form 10-K, our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end
of the period covered by this annual report. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and (ii) accumulated and communicated to the company’s management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure
controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
not effective as of the end of the period covered by this annual report at the reasonable assurance level.
70
Material Weakness in Internal Control over Financial Reporting
We disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, that the following material weakness in our internal
control over financial reporting existed as of December 31, 2018: a lack of adequate review over the manual consolidation process, resulting
in an audit adjustment, or the Material Weakness.
Changes in Internal Control over Financial Reporting
Other than with respect to the remediation efforts discussed below, there was no change in our internal control over financial reporting that
occurred during the fourth quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Remediation of Previous Material Weaknesses
We have implemented and are continuing to implement a number of measures to address the Material Weakness identified as of
December 31, 2018. We improved policies and procedures and designed and documented more effective controls that addressed the
relevant risks in order to remediate the previously identified Material Weakness in addition to hiring additional personnel in our accounting
department and engaging consultants with technical expertise to assist in accounting for complex transactions. We also engaged a third-
party consulting firm to assist us with the implementation of SAP, which is a global information technology solution designed to address,
among other items, the elements which gave rise to the Material Weakness. However, despite the progress made to our internal control
environment, management determined that the Material Weakness identified as of December 31, 2018 has not been remediated as of
December 31, 2019, in part due to the implementation of SAP at one of our subsidiaries. We will continue to implement additional measures
to address the Material Weakness identified as of December 31, 2019.
Limitations on Effectiveness of Controls and Procedures
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of
achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is
based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. In addition, the design
of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply
judgment in evaluating the benefits of possible controls and procedures relative to their costs. Similarly, an evaluation of controls cannot
provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any,
have been detected.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Incorporated by reference from the information in our Proxy Statement for our 2020 Annual Meeting of Stockholders, which we will file with
the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information in our Proxy Statement for our 2020 Annual Meeting of Stockholders, which we will file with
the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
71
Incorporated by reference from the information in our Proxy Statement for our 2019 Annual Meeting of Stockholders, which we will file with
the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from the information in our Proxy Statement for our 2020 Annual Meeting of Stockholders, which we will file with
the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference from the information in our Proxy Statement for our 2020 Annual Meeting of Stockholders, which we will file with
the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following statements are filed as part of this Annual Report on Form 10-K:
1. Financial Statements.
PART IV
A listing of the Consolidated Financial Statements, related notes and Report of Independent Registered Public Accounting is set forth on
page F-1 in this Annual Report on Form 10-K.
2. Financial Statement Schedules.
All schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of
a schedule, or because the information required is included in the financial statements or related notes.
3. Index to Exhibits.
Exhibit
Number
Description of Exhibit
1.1
3.1
4.1
4.2
4.3
4.4
4.5
4.6
Form of Underwriting Agreement.
Form of Memorandum and Articles of Association of the Registrant, to be in effect upon
completion of the offering.
Form of Warrant to purchase shares of Class B ordinary shares.
Amended and Restated Investors’ Rights Agreement by and between the Registrant and
certain of its shareholders dated May 17, 2018.
Second Amendment to Credit Agreement by and between the Registrant, certain of its
subsidiaries and Madryn Health Partners, LP dated August 24, 2017, which amended and
restated the Credit Agreement effective as of June 15, 2018.
Security Agreement by and between ELSA, certain of its subsidiaries and Madryn Health
Partners, LP dated August 24, 2017.
Form of Promissory Note by and between the Registrant and former holders of Class Z
preferred shares of the Registrant.
First Amendment to Note and Warrant Purchase Agreement by and between the
Registrant and CPH TU, LP, dated December 8, 2015.
72
Incorporation by Reference
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 9, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Exhibit
Number
4.7
4.8
10.1
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9
10.10‡
10.11
10.12‡
10.13‡
10.14
10.15
10.16
10.17
10.18
10.19‡
10.20‡
Description of Exhibit
Second Amendment to Note and Warrant Purchase Agreement by and between the
Registrant and CPH TU, LP, dated September 14, 2016.
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934
Form of Indemnification Agreement between the Registrant and each of its directors and
executive officers.
2015 Equity Incentive Plan, as adopted December 10, 2015, and the forms of equity
agreements thereunder.
2018 Equity Incentive Plan and the forms of equity agreements thereunder.
2018 Employee Share Purchase Plan.
Consultancy Agreement by and between the Registrant and Salvador Dada Santos, dated
July 1, 2016.
Employment Agreement by and between Registrant and Juan Jose Chacon Quiros, dated
July 1, 2016.
Employment Agreement by and between ELSA and Salvador Dada Santos, dated July 1,
2016.
Employment Agreement by and between RD&S Produtos para Saude Ltda., and Eddie
De Oliveira, dated January 28, 2016.
Development, Supply & License Agreement by and between ELSA and AorTech
International plc, dated December 13, 2011.
OEM/PLM and Supply Agreement by and between ELSA and Black Tie Medical, Inc., dba
Tulip Medical Products, dated July 31, 2016.
Asset Purchase Agreement by and among the Registrant, JAMM Technologies, Inc., and
Magna Equities I, LLC, dated November 6, 2015.
Supply Agreement by and between Establishment Biotech, S.A. and NuSil Technology
LLC, dated August 18, 2016.
Exclusive Distribution Agreement by and between Registrant, Puregraft LLC and its
parent, Bimini Technologies, LLC, dated September 7, 2016.
Design, Architecture & Engineering, and Build-Out Construction Management Agreement
by and between ELSA and Zona Franca Coyol, S.A., dated February 11, 2016.
Lease Agreement by and between ELSA and Zona Franca Coyol, S.A., dated August 7,
2015.
Lease Agreement by and between ELSA and Zona Franca Coyol, S.A., dated November
1, 2009, as amended on October 22, 2010, September 24, 2012 and August 7, 2015.
Commercial Partnership Agreement by and between ELSA and Crisalix, S.A., dated May
15, 2016.
Joint Invention Assignment Agreement by and between ELSA and Randolph Geissler,
dated April 13, 2016.
Manufacturing and Supply Agreement by and between ELSA and Apollo Endosurgery,
Inc., dated December 5, 2014.
Supply Agreement by and between ELSA and The Hospital Group Healthcare Ltd dated
March 1, 2014.
Incorporation by Reference
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Filed herewith.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 9, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 9, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed June 21, 2018.
Incorporated by reference from Registrant’s
Form S-1/A filed July 13, 2018.
Incorporated by reference from Registrant’s
Form S-1 filed July 13, 2018.
Exhibit
Number
10.21+
10.22
10.23
10.24
10.25+
10.26+
10.27+
10.28+
10.29
10.30
10.31‡
21.1
31.1*
31.2*
32.1*
Description of Exhibit
Employment Agreement, effective August 10, 2018, by and between Establishment Labs
Holdings Inc. and Renee Gaeta
Asset Purchase Agreement by and among European Distribution Center Motiva BVBA
and Motiva Matrix Spain SL, dated as of October 1, 2018
Asset Purchase Agreement by and among European Distribution Center Motiva BVBA
and Menke Med GmbH, dated as of October 3, 2018
Commercial Agency Agreement by and among European Distribution Center Motiva
BVBA and Menke Med GmbH, dated as of October 3, 2018
Employment Agreement between Establishment Labs Holdings Inc. and Juan José
Chacón-Quirós dated effective as of December 26, 2018.
Employment Agreement between Establishment Labs S.A. and Juan José Chacón-Quirós
dated effective as of December 26, 2018.
Employment Agreement between Establishment Labs Holdings Inc. and Salvador Dada
dated effective as of December 26, 2018.
Employment Agreement between Establishment Labs S.A. and Salvador Dada dated
effective as of December 26, 2018.
Third Amendment to Credit Agreement, by and among Establishment Labs Holdings Inc.,
the subsidiary guarantors party thereto, the lenders party thereto and Madryn Health
Partners LP, as administrative agent.
Deed by and between Establishment Labs, S.A. and Zona Franca El Coyol, S.A., dated as
of June 25, 2019.
The First Amendment dated August 9, 2019 to the Exclusive Distribution Agreement by
and between Registrant, Puregraft LLC and its parent, Bimini Technologies, LLC, dated
September 7, 2016.
List of Subsidiaries of the Registrant.
Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-
14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-
14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
Incorporation by Reference
Incorporated by reference from Registrant’s
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2018.
Incorporated by reference from Registrant’s
Current Report on Form 8-K filed October 10,
2018.
Incorporated by reference from Registrant’s
Current Report on Form 8-K filed October 10,
2018.
Incorporated by reference from Registrant’s
Current Report on Form 8-K filed October 10,
2018.
Incorporated by reference from Registrant’s
Current Report on Form 8-K filed December
28, 2018.
Incorporated by reference from Registrant’s
Current Report on Form 8-K filed December
28, 2018.
Incorporated by reference from Registrant’s
Current Report on Form 8-K filed December
28, 2018.
Incorporated by reference from Registrant’s
Current Report on Form 8-K filed December
28, 2018.
Incorporated by reference from Registrant’s
Current Report on Form 8-K filed June 18,
2019.
Incorporated by reference from Registrant’s
Current Report on Form 8-K filed June 26,
2019.
Incorporated by reference from Registrant’s
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2019.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Indicates management contract or compensatory plan or arrangement.
+
‡ Portions omitted, or to be omitted, pursuant to a request for confidential treatment.
* The certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Annual Report on Form 10-K and will not be
deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant
specifically incorporates it by reference.
Table of Contents
ESTABLISHMENT LABS HOLDINGS INC.
Index to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
76
PAGE
F-1
F-2
F-3
F-4
F-5
F-6
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Establishment Labs Holdings Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Establishment Labs Holdings Inc. (the “Company”) as of December 31,
2019 and 2018, the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the
two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and
2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2016.
Costa Mesa, CA
March 16, 2020
F-1
ESTABLISHMENT LABS HOLDINGS INC.
Consolidated Balance Sheets
(In thousands, except share data)
Assets
Current assets:
Cash
Accounts receivable, net of allowance for doubtful accounts of $1,026 and $926
Inventory, net
Prepaid expenses and other current assets
Total current assets
Long-term assets:
Property and equipment, net of accumulated depreciation
Goodwill
Intangible assets, net of accumulated amortization
Other non-current assets
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
Accrued liabilities
Other liabilities, short term
Total current liabilities
Long-term liabilities:
Note payable, Madryn, net of debt discount and issuance costs
Madryn put option
Other liabilities, long term
Total liabilities
Commitments and contingencies (Note 7)
Shareholders’ equity:
Common shares - zero par value, unlimited amount of shares authorized at December 31, 2019 and 2018;
21,057,040 and 20,672,025 shares issued at December 31, 2019 and 2018, respectively; 20,648,970 and
20,263,955 shares outstanding at December 31, 2019 and 2018, respectively
Additional paid-in-capital
Treasury shares, at cost, 408,070 shares held at December 31, 2019 and 2018
Accumulated deficit
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
F-2
December 31,
2019
2018
37,655 $
22,767
28,660
6,757
95,839
16,418
465
3,441
368
116,531 $
10,366 $
10,677
2,199
23,242
48,142
3,072
2,461
76,917
147,688
21,214
(2,854)
(127,125)
691
39,614
116,531 $
52,639
17,648
24,845
4,303
99,435
12,913
465
3,445
315
116,573
6,239
6,125
4,083
16,447
22,322
4,768
3,551
47,088
145,709
15,156
(2,854)
(88,975)
449
69,485
116,573
$
$
$
$
Table of Contents
ESTABLISHMENT LABS HOLDINGS INC.
Consolidated Statements of Operations
(In thousands, except share and per share data)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales, general and administrative
Research and development
Total operating expenses
Loss from operations
Interest income
Interest expense
Change in fair value of derivative instruments
Change in fair value of contingent consideration
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Basic and diluted loss per share
Weighted average outstanding shares used for basic and diluted net loss per share
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Year Ended December 31,
2019
2018
89,565 $
34,704
54,861
70,811
14,991
85,802
(30,941)
4
(8,696)
3,052
276
(1,205)
(37,510)
(640)
(38,150) $
61,208
25,090
36,118
47,295
12,687
59,982
(23,864)
16
(8,814)
15,894
(1,727)
(2,388)
(20,883)
(215)
(21,098)
(1.86) $
(1.22)
20,541,528
17,350,705
$
$
$
ESTABLISHMENT LABS HOLDINGS INC.
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss
Other comprehensive income:
Foreign currency translation gain
Other comprehensive gain
Comprehensive loss
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Year Ended December 31,
2019
2018
(38,150) $
(21,098)
242
242
(37,908) $
373
373
(20,725)
$
$
Table of Contents
ESTABLISHMENT LABS HOLDINGS INC.
Consolidated Statements of Shareholders’ Equity
(In thousands, except share data)
Common Shares
Ordinary Shares
Treasury Shares
Shares
Amount
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
—
$
—
15,743,705
$ 41,267
(1,221,210)
$ (6,465)
$
27,986
$
(67,877)
$
76
$ (5,013)
— —
— — 1,011,174 — 16,180 —
— —
— —
(78) —
Balance at January
1, 2018
Issuance of ordinary
shares
Issuance of common
shares, IPO
Issuance of common
shares in a business
combination
Conversion of
ordinary shares to
common shares
Issuance of shares in
an asset acquisition
Warrant exercises
Stock option
exercises
Share-based
compensation
Retirement of treasury
shares
Foreign currency
translation gain
Net loss
Balance at
December 31, 2018
Issuance of common
shares in partial
settlement of
contingent
consideration
Issuance of common
shares in an asset
acquisition
Warrant exercises
Stock option
exercises
Share-based
compensation
Shares withheld to
cover income tax
obligation upon
vesting of restricted
stock
Foreign currency
translation gain
Net loss
Balance at
December 31, 2019
(813,140)
(813)
813,140
3,611
(2,798)
4,272,568
70,055
33,333
862
—
—
—
—
16,215,710
74,256
(16,215,710)
(56,908)
5,000
38,785
25,843
80,786
—
—
—
120
128
207
81
—
—
—
20,672,025
145,709
33,333
12,404
87,321
80,991
181,516
(10,550)
—
—
630
337
129
712
182
(11)
—
—
—
—
106,248
167,723
—
—
106
168
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(17,348)
—
(7)
330
7,071
—
—
—
—
(408,070)
(2,854)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,156
—
—
(73)
—
6,344
(213)
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-5
— —
—
—
—
—
—
—
—
—
—
(21,098)
(88,975)
—
—
—
—
—
—
—
(38,150)
— — 16,102
—
—
—
—
—
—
—
—
373
—
449
—
—
—
—
—
70,055
862
—
120
121
643
7,320
—
373
(21,098)
69,485
630
337
56
712
6,526
—
242
—
691
(224)
242
(38,150)
$ 39,614
21,057,040
$ 147,688
—
$
(408,070)
$ (2,854)
$
21,214
$
(127,125)
$
Table of Contents
ESTABLISHMENT LABS HOLDINGS INC.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Year Ended December 31,
2019
2018
$
(38,150) $
(21,098)
Depreciation and amortization
Provision for doubtful accounts (bad debt recovery)
Provision for inventory obsolescence
Share-based compensation
Loss from disposal of property and equipment
Unrealized foreign currency loss, net
Change in fair value of derivative instruments
Change in fair value of contingent consideration
Amortization of debt discount
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued liabilities
Other liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Cash used in asset acquisitions
Cost incurred for intangible assets
Net cash used in investing activities
Cash flows from financing activities:
Borrowings under Madryn credit agreement, net of issuance costs
Repayments on related-party notes payable
Repayments on capital leases
Proceeds from issuance of ordinary shares, net of issuance costs
Proceeds from issuance of common shares, net of underwriters’ discount
Deferred equity issuance costs, IPO
Cash used to repurchase warrants
Proceeds from stock option exercises
Proceeds from warrant exercises
Tax payments related to shares withheld upon vesting of restricted stock
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase in cash
Cash at beginning of period
Cash at end of period
Supplemental disclosures:
Cash paid for interest
The accompanying notes are an integral part of these consolidated financial statements.
F-6
3,288
111
143
6,526
67
3,533
(3,052)
(276)
2,428
(5,511)
(3,372)
(2,538)
(54)
1,830
4,644
400
(29,983)
(6,288)
(767)
(711)
(7,766)
24,748
—
(242)
—
—
—
(2,261)
712
56
(224)
22,789
(24)
(14,984)
52,639
37,655 $
2,810
(547)
204
7,320
79
2,217
(15,894)
1,727
3,317
(4,667)
(6,984)
(2,192)
(45)
(3,905)
3,801
(28)
(33,885)
(1,731)
(3,959)
(41)
(5,731)
—
(5,083)
(311)
16,102
71,523
(1,468)
—
643
121
—
81,527
(136)
41,775
10,864
52,639
$
$
5,947 $
5,379
Table of Contents
ESTABLISHMENT LABS HOLDINGS INC.
Consolidated Statements of Cash Flows
(In thousands)
Cash paid for income taxes
Supplemental disclosures of non-cash investing and financing activities:
Unpaid balance for property and equipment
Assets acquired under capital leases
Equity consideration in an asset acquisition
Consideration payable related to asset acquisitions
Inventory acquired in an asset acquisition
Issuance of common shares in partial settlement of contingent consideration
Transfer from restricted cash to prepaid expenses and other current assets
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Year Ended December 31,
2019
2018
649 $
136
465 $
69 $
337 $
1,271 $
1,257 $
630 $
— $
717
94
120
1,276
—
863
75
$
$
$
$
$
$
$
$
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
1. Formation and Business of the Company
Formation and Business of the Company
Establishment Labs Holdings Inc. and its wholly owned subsidiaries (collectively “the Company”, “we”, “us”, or “our”) is a global company that
manufactures and markets innovative medical devices for aesthetic and reconstructive plastic surgery. The Company was established in the
British Virgin Islands on October 9, 2013, at which time Establishment Labs, S.A., the Costa Rican manufacturing company, was
reincorporated as a wholly-owned subsidiary. As of December 31, 2019, the Company also has wholly-owned subsidiaries in the United
States (JAMM Technologies, Inc. and Motiva USA LLC), Belgium (European Distribution Center Motiva BVBA), Brazil (Establishment Labs
Produtos para Saude Ltda), France (Motiva Implants France SAS), Sweden (Motiva Nordica AB), Switzerland (JEN-Vault AG), the United
Kingdom (Motiva Implants UK Limited), Italy (Motiva Italy S.R.L), Spain (Motiva Implants Spain, S.L.), Austria (Motiva Austria GmbH) and
Germany (Motiva Germany GmbH). Substantially all of the Company’s revenues are derived from the sale of silicone gel-filled breast
implants, branded as Motiva Implants.
The main manufacturing activities are conducted at two manufacturing facilities in Costa Rica. In 2010, the Company began operating under
the Costa Rica free zone regime (Régimen de Zona Franca), which provides for reduced income tax and other tax obligations pursuant to an
agreement with the Costa Rican authorities.
The Company’s products are approved for sale in Europe, the Middle East, Latin America, and Asia. The Company sells its products
internationally through a combination of distributors and direct sales to customers.
The Company is pursuing regulatory approval to commercialize its products in the United States. The Company received approval for an
investigational device exemption, or IDE, from the FDA in March 2018 to initiate a clinical trial in the United States for its Motiva implants and
enrolled the first patient in the study in April 2018.
The Company has been expanding its global operations through a series of acquisitions and establishing wholly-owned subsidiaries. In
November 2015, the Company purchased certain assets from Magna Equities I, LLC and established its wholly-owned subsidiary, JAMM
Technologies, Inc., in the United States. In January 2016, the Company purchased a distribution company in Brazil to support the application
to sell its products in Brazil. In March 2016, the Company purchased a storage and distribution company in Belgium to support its continued
growth in Europe. In September 2016, the Company purchased a distribution company in France and established a wholly-owned subsidiary
in Switzerland. In November 2017, the Company acquired certain assets from Femiline AB and established its wholly-owned subsidiary in
Sweden, Motiva Nordica AB. During 2018, the Company has established wholly-owned subsidiaries in the United Kingdom and Italy and
purchased certain assets from Menke Med GmbH, Motiva Matrix Spain SL and Belle Health Ltd. In 2019, the Company purchased certain
assets from AFS Medical GMBH and established wholly-owned subsidiaries in Austria, Spain, and Germany.
Initial Public Offering
On July 23, 2018, the Company completed its initial public offering, or IPO, whereby it sold a total of 4,272,568 common shares at $18.00 per
share including 557,291 shares sold to underwriters for the exercise of their option to purchase additional shares. The Company received net
proceeds from the IPO of approximately $70.1 million, after deducting underwriting discounts and commissions of $5.4 million and deferred
offering costs of $1.5 million.
Concurrent with the closing of the IPO, the following transactions were completed in accordance with the related agreements:
•
•
•
the Company amended and restated its Memorandum of Association and Articles of Association, or the Articles, to automatically
convert all outstanding classes of the Company’s stock into common shares of a single class of no par value. An unlimited number of
common shares was authorized.
The Board of Directors determined no further awards would be issued from the 2015 Equity Plan and approved the 2018 Equity
Incentive Plan, or the 2018 Plan, with an initial reserve of 1,500,000 of the Company’s common shares for issuance;
The Board of Directors adopted the 2018 Employee Share Purchase Plan, or the ESPP, with an initial reserve of 100,000 of the
Company’s common shares for issuance.
F-8
Table of Contents
Follow-On Offering
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
On January 29, 2020, the Company entered into an underwriting agreement with several underwriters relating to the issuance and sale of
2,285,714 common shares, no par value at a price of $26.25 per share. The underwriters have exercised their 30-day option to purchase an
additional 342,857 common shares. The closing of the follow-on offering occurred February 3, 2020. The net proceeds to the Company from
the offering was approximately $63.9 million, after deducting underwriting discounts and commissions and estimated offering expenses.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America, or GAAP, and the applicable rules and regulations of the Securities and Exchange Commission, or SEC.
The consolidated financial statements include the Company’s accounts and those of its wholly owned subsidiaries as of December 31, 2019
as follows:
Subsidiary
Establishment Labs, S.A. (Costa Rica)
Motiva USA, LLC (USA)
JAMM Technologies, Inc. (USA)
Establishment Labs Produtos par Saude Ltda (Brazil)
European Distribution Center Motiva BVBA (Belgium)
Motiva Implants France SAS (France)
JEN-Vault AG (Switzerland)
Motiva Nordica AB (Sweden)
Motiva Implants UK Limited (the United Kingdom)
Motiva Italy S.R.L (Italy)
Motiva Implants Spain, S.L. (Spain)
Motiva Austria GmbH (Austria)
Motiva Germany GmbH (Germany)
Incorporation/Acquisition Date
January 18, 2004
February 20, 2014
October 27, 2015
January 4, 2016
March 4, 2016
September 12, 2016
November 22, 2016
November 2, 2017
July 31, 2018
July 31, 2018
January 3, 2019
January 14, 2019
August 1, 2019
All intercompany accounts and transactions have been eliminated in consolidation.
Segments
The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information
presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of allocating resources
and evaluating financial performance. The Company has one business activity and there are no segment managers who are held
accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company
has determined that it has a single reportable and operating segment structure. The Company and its Chief Executive Officer evaluate
performance based primarily on revenue in the geographic regions in which the Company operates.
Geographic Concentrations
The Company derives all of its revenues from sales to customers in Europe, the Middle East, Latin America, and Asia, and has not yet
received approval to sell its products in the United States.
For the years ended December 31, 2019 and 2018, Brazil accounted for 15.7% of consolidated revenue and no
F-9
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
other individual country exceeded 10% of consolidated revenue, on a ship-to destination basis.
The Company’s long-lived assets located in Costa Rica represented the majority of the total long-lived assets as of December 31, 2019 and
2018.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. Significant accounting estimates and management
judgments reflected in the consolidated financial statements include items such as accounts receivable valuation and allowances, inventory
valuation and allowances, valuation of acquired intangible assets, valuation of derivatives, estimation of assets’ useful lives and valuation of
deferred income tax assets, including tax valuation allowances. Estimates are based on historical experience, where applicable, and other
assumptions believed to be reasonable by management. Actual results may differ from those estimates under different assumptions or
conditions.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and accounts
receivable. The majority of the Company’s cash is held at two financial institution in the United States. The Company has not experienced
any losses on its deposits of cash. All of the Company’s revenue has been derived from sales of its products in international markets,
principally Europe, the Middle East, Latin America, and Asia. In the international markets in which the Company participates, the Company
uses a combination of distributors and makes direct sales to customers. The Company performs ongoing credit evaluations of its distributors
and customers, does not require collateral, and maintains allowances for potential credit losses on customer accounts when deemed
necessary.
During the years ended December 31, 2019 and 2018, no customers accounted for more than 10% of the Company’s revenue. Substantially
all of the Company’s revenues are derived from the sale of Motiva Implants. One customer accounted for 10.2% of the Company’s accounts
receivable balance as of December 31, 2019. No customers accounted for more than 10% of the Company’s accounts receivable balance as
of December 31, 2018.
The Company relies on NuSil Technology, LLC, or NuSil, as the sole supplier of medical-grade silicone used in Motiva Implants. During the
years ended December 31, 2019 and 2018, the Company had purchases of $14.2 million, or 58.5% of total purchases, and $14.8 million, or
63.4% of total purchases, respectively, from Nusil. As of December 31, 2019 and 2018, we had an outstanding balance owed to this vendor
of $2.7 million and $0.8 million, respectively.
The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future
operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of regulatory
approval of the Company’s current and potential future products, uncertainty of market acceptance of the Company’s products, competition
from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on
key individuals and sole source suppliers.
Products developed by the Company require clearances from the FDA or other international regulatory agencies prior to commercial sales.
There can be no assurance that the products will receive the necessary clearances. If the Company was denied clearance, clearance was
delayed, or the Company was unable to maintain its existing clearances, these developments could have a material adverse impact on the
Company.
Cash
The Company’s cash consists of cash maintained in checking and interest-bearing accounts. The Company accounts for financial
instruments with original maturities of three months or less at the date of purchase as cash equivalents. The Company held no cash
equivalents as of December 31, 2019 and 2018.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is stated at invoice value less estimated allowances for returns and doubtful accounts. The
F-10
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Company continually monitors customer payments and maintains an allowance for estimated losses resulting from customers’ inability to
make required payments. In evaluating the Company’s ability to collect outstanding receivable balances, the Company considers various
factors including the age of the balance, the creditworthiness of the customer, which is assessed based on ongoing credit evaluations and
payment history, and the customer’s current financial condition. In cases where there are circumstances that may impair a specific
customer’s ability to meet its financial obligations, an allowance is recorded against amounts due, which reduces the net recognized
receivable to the amount reasonably believed to be collectible.
Inventory and Cost of Revenue
Inventory is stated at the lower of cost to purchase or manufacture the inventory or the net realizable value of such inventory. Cost is
determined using the standard cost method which approximates actual costs using the first-in, first-out basis. The Company regularly reviews
inventory quantities considering actual losses, projected future demand, and remaining shelf life to record a provision for excess and slow-
moving inventory. An inventory allowance of $0.3 million and $0.2 million has been recorded as of December 31, 2019 and December 31,
2018, respectively.
The Company recognizes the cost of inventory transferred to the customer in cost of revenue when revenue is recognized.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in selling, general and administrative, or SG&A, expenses. For the
years ended December 31, 2019 and 2018, shipping and handling costs were $3.2 million and $2.0 million, respectively.
Revenue Recognition
Effective January 1, 2019, the Company recognizes revenue related to sales of products to distributors or directly to customers in markets
where it has regulatory approval, net of trade discounts and allowances. The Company recognizes revenue in accordance with Accounting
Standards Codification, or ASC, 606, Revenue from Contracts with Customers. ASC 606 requires the Company to recognize revenue to
depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those
goods or services. The Company adopted ASC 606 on January 1, 2019, using the modified retrospective approach and applied ASC 606
only to contracts not completed as of January 1, 2019. The impact of adopting ASC 606 was not material to the consolidated financial
statements.
Prior to the adoption of ASC 606, the Company recognized revenue in accordance with ASC, 605 Revenue Recognition when all of the
following criteria are met:
•
•
•
•
persuasive evidence of an arrangement exists;
the sales price is fixed or determinable;
collection of the relevant receivable is probable at the time of sale; and
delivery has occurred or services have been rendered.
The Company recognizes revenue related to the sales of products to distributors at the time of shipment of the product, which represents the
point in time when the distributor has taken ownership and assumed the risk of loss and the required revenue recognition criteria are
satisfied. The Company’s distributors are obligated to pay within specified terms regardless of when, or if, they sell the products. The
Company’s contracts with distributors typically do not contain right of return or price protection and have no post-delivery obligations.
Appropriate reserves are established for anticipated sales returns based on historical experience, recent gross sales and any notification of
pending returns. The Company recognizes revenue when title to the product and risk of loss transfer to customers, provided there are no
remaining performance obligations required of the Company or any written matters requiring customer acceptance. The Company allows for
the return of product from direct customers in certain regions within fifteen days after the original sale and records estimated sales returns as
a reduction of sales in the same period revenue is recognized. Sales return provisions are calculated based upon historical experience with
actual returns. Actual sales returns in any future period are inherently uncertain and thus may differ from the estimates. If actual sales returns
differ significantly from the estimates, an adjustment to
F-11
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
revenue in the current or subsequent period is recorded. As of December 31, 2019 and 2018, an allowance of $36,000 and $52,000 was
recorded for product returns, respectively.
A portion of the Company’s revenue is generated from the sale of consigned inventory maintained at physician, hospital, and clinic locations.
For these products, revenue is recognized at the time the Company is notified by the consignee that the product has been implanted, not
when the consigned products are delivered to the consignee’s warehouse.
Revenue was generated in these primary geographic markets:
Europe
Latin America
Asia-Pacific/Middle East
Other
Year ended
December 31, 2019
(in thousands)
36,212
27,994
24,819
540
89,565
$
$
The Company believes this level of disaggregation sufficiently depicts how the nature, amount, timing and uncertainty of our revenue and
cash flows are affected by economic factors.
The Company has a limited warranty for the shelf life of the product, which is five years from the time of manufacture. Estimated warranty
obligations are recorded at the time of sale. The Company also offers a warranty to patients in the event of rupture and a replacement
program for capsular contracture events, provided certain registration requirements are met. Revenue for extended warranties is recognized
ratably over the term of the agreement. To date, these warranty and program costs have been de minimis. The Company will continue to
evaluate the warranty reserve policies for adequacy considering claims history.
Deferred revenue primarily consists of payments received in advance of meeting revenue recognition criteria. The Company has received
payments from distributors to provide distribution exclusivity within a geographic area and recognizes deferred revenue on a ratable basis
over the term of such contractual distribution relationship. Additionally, the Company has received payments from customers in direct
markets prior to surgical implantation and recognizes deferred revenue at the time the Company is notified by the customer that the product
has been implanted. For all arrangements, any revenue that has been deferred and is expected to be recognized beyond one year is
classified as long-term deferred revenue and included in “Other liabilities, long term” on the consolidated balance sheets (see Note 3).
Research and Development
Costs related to research and development, or R&D, activities are expensed as incurred. R&D costs primarily include personnel costs,
materials, clinical expenses, regulatory expenses, product development, consulting services, and outside research activities, all of which are
directly related to research and development activities.
The Company estimates FDA clinical trial expenses based on the services performed, pursuant to contracts with research institutions and
clinical research organizations that conduct and manage clinical trials on its behalf. In accruing service fees, the Company estimates the time
period over which services will be performed and the level of patient enrollment and activity expended in each period. If the actual timing of
the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly.
F-12
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Selling, General and Administrative Expenses
SG&A expenses include sales and marketing costs, payroll and related benefit costs, insurance expenses, shipping and handling costs, legal
and professional fees and administrative overhead.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Following the exercise of its option to purchase its manufacturing facility in June 2019, the Company depreciates the owned building and
building improvements on a straight-line basis over the useful life of 50 and 22 years, respectively. Depreciation of property and equipment is
computed using the straight-line method over the assets’ estimated useful lives of five to ten years. Leasehold improvements are amortized
on a straight-line basis over the shorter of the estimated useful life of the asset or the remaining lease term after factoring expected renewal
periods. Upon retirement or disposal of assets, the costs and related accumulated depreciation are eliminated from the accounts and any
gain or loss is recognized in operations. Maintenance and repairs are expensed as incurred. Substantially all of the Company’s
manufacturing operations and related property and equipment is located in Costa Rica.
Goodwill and Intangible Assets
The Company records the excess of the acquisition purchase price over the net fair value of the tangible and identifiable intangible assets
acquired and liabilities assumed as goodwill. In accordance with ASC 350, Intangibles - Goodwill and Other, the Company tests goodwill for
impairment annually during the fourth quarter of each year and whenever events or changes in circumstances indicate that the carrying value
of the asset may not be recoverable. In connection with the annual impairment test for goodwill, the Company elected the option to perform a
qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount.
If the Company determines that it was more likely than not that the fair value of the reporting unit is less than its carrying amount, then the
impairment test is performed.
Consistent with the Company's assessment that it has only one reporting segment, the Company has determined that it has only one
reporting unit and tests goodwill for impairment at the entity level using the two-step process required by ASC 350. In the first step, the
Company compares the carrying amount of the reporting unit to the fair value of the enterprise. If the fair value of the enterprise exceeds the
carrying value, goodwill is not considered impaired and no further testing is required. If the carrying value of the enterprise exceeds the fair
value, goodwill is potentially impaired, and the second step of the impairment test must be performed. In the second step, the Company
compares the implied fair value of the goodwill, as defined by ASC 350, to its carrying amount to determine the impairment loss, if any.
The Company capitalizes certain costs related to intangible assets, such as patents and trademarks and records purchased intangible assets
at their respective estimated fair values at the date of acquisition. Purchased finite-lived intangible assets are being amortized using the
straight-line method over their remaining estimated useful lives, which range from two to fifteen years. The Company evaluates the remaining
useful lives of intangible assets on a periodic basis to determine whether events or circumstances warrant a revision to the remaining
estimated amortization period. The Company tests indefinite-lived intangible assets for impairment on at least an annual basis and whenever
circumstances suggest the assets may be impaired. If indicators of impairment are present, the Company evaluates the carrying value of the
intangible assets in relation to estimates of future undiscounted cash flows. The Company also evaluates the remaining useful life of an
indefinite-lived intangible asset to determine whether events and circumstances continue to support an indefinite useful life.
During the years ended December 31, 2019 and 2018, there has been no impairment of goodwill or intangible assets based on the
qualitative assessments performed by the Company.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset might not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the
anticipated undiscounted future net cash flows to the related asset group’s carrying value. If an asset is considered impaired, the asset is
written down to fair value, which is determined based either on discounted cash flows or appraised value, depending on the nature of
F-13
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
the asset. There were no impairment charges, or changes in estimated useful lives recorded during the years ended December 31, 2019 and
2018.
Debt and Embedded Derivatives
The Company applies the accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting for
hybrid contracts. The Company accounts for convertible debt instruments when the Company has determined that the embedded conversion
options should not be bifurcated from their host instruments in accordance with ASC 470-20 Debt with Conversion and Other Options (see
Note 6).
The Company uses option pricing valuation models to determine the fair value of embedded derivatives and records any change in fair value
as a component of other income or expense in the consolidated statements of operations (see Note 5).
Debt Issuance Costs and Debt Discounts
Costs incurred in connection with the issuance of new debt are capitalized. Capitalizable debt issuance costs paid to third parties and debt
discounts, net of amortization, are recorded as a reduction to the long-term debt balance on the consolidated balance sheets. Amortization
expense on capitalized debt issuance costs and debt discounts related to loans are calculated using the effective interest method over the
term of the loan commitment and is recorded as interest expense in the consolidated statements of operations.
Income Taxes
The Company records income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or income
tax returns. In estimating future tax consequences, expected future events, enactments or changes in the tax law or rates are considered.
Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities.
The Company records uncertain tax positions based on a two-step process whereby (1) a determination is made as to whether it is more
likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet
the more-likely-than-not recognition threshold the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be
realized upon ultimate settlement with the related tax authority. The Company’s policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. Significant judgment is required in the identification of uncertain tax
positions and in the estimation of penalties and interest on uncertain tax positions.
There were no material uncertain tax positions as of December 31, 2019 and 2018.
Foreign Currency
The financial statements of the Company’s foreign subsidiaries whose functional currencies are the local currencies are translated into U.S.
dollars for consolidation as follows: assets and liabilities at the exchange rate as of the balance sheet date, stockholders’ equity at the
historical rates of exchange, and income and expense amounts at the average exchange rate for the period. Translation adjustments
resulting from the translation of the subsidiaries’ accounts are included in “Accumulated other comprehensive income” as equity in the
consolidated balance sheets. Transactions denominated in currencies other than the applicable functional currency are converted to the
functional currency at the exchange rate on the transaction date. At period end, monetary assets and liabilities are remeasured to the
reporting currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical
exchange rates. Gains and losses resulting from foreign currency transactions are included within “Other income (expense), net” in the
consolidated statements of operations. For the years ended December 31, 2019 and 2018, foreign currency transaction loss amounted to
$1.2 million and $2.4 million, respectively.
Comprehensive Loss
The Company’s comprehensive loss consists of net loss and foreign currency translation adjustments arising from the consolidation of the
Company’s foreign subsidiaries.
F-14
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Deferred Offering Costs
In 2018, we capitalized $1.5 million of deferred offering costs, consisting of legal, accounting and other fees and costs relating to our IPO,
which, upon completion of the IPO, were reclassified to equity to offset the IPO proceeds.
Share-Based Compensation
The Company measures and recognizes compensation expense for all stock-based awards in accordance with the provisions of ASC 718,
Stock Compensation. Stock-based awards granted include stock options and restricted stock awards, or RSAs. Share-based compensation
expense for stock options and RSAs granted to employees is measured at the grant date based on the fair value of the awards and is
recognized as an expense ratably on a straight-line basis over the requisite service period. The fair value of options to purchase shares
granted to employees is estimated on the grant date using the Black-Scholes option valuation model.
Prior to the adoption of ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based
Payment Accounting, on January 1, 2019, the Company accounted for stock options and RSAs issued to non-employees under ASC 505-50
Equity: Equity-Based Payments to Non-Employees, which required the fair value of such non-employee awards to be remeasured at each
quarter-end over the vesting period. After the adoption of ASU 2018-07, the accounting guidance is consistent with accounting for employee
share-based compensation.
The calculation of share-based compensation expense requires the Company to make assumptions and judgments about the variables used
in the Black-Scholes model, including the expected term, expected volatility of the underlying common shares, risk-free interest rate and
dividends.
The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, under which it recognizes forfeitures
as they occur rather than applying a prospective forfeiture rate in advance (see Note 10).
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to shareholders by the weighted-average
number of shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net income (loss) per share is
computed by dividing the net income (loss) by the weighted-average number of shares and potentially dilutive securities outstanding for the
period. For purposes of the diluted net loss per share calculation, any shares issuable upon exercise of share warrants, share options and
non-vested restricted stock outstanding under the Company’s equity plan are potentially dilutive securities. Diluted net loss per share is the
same as basic net loss per share for periods where the Company reported a net loss because including the dilutive securities would be anti-
dilutive.
Recent Accounting Standards
Periodically, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting
bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards
that are not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption. Under the
Jumpstart Our Business Startups Act of 2012, or JOBS Act, the Company meets the definition of an emerging growth company, and has
elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
The Company will remain an emerging growth company until the earliest of (1) the last day of its first fiscal year (a) following the fifth
anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in
which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates
exceeds $700.0 million as of the prior June 30th and (2) the date on which we have issued more than $1.0 billion in non-convertible debt
securities during the prior three-year period.
The following recent accounting pronouncements issued by the FASB, could have a material effect on our financial statements:
F-15
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Recently Adopted Accounting Standards
On January 1, 2019, the Company adopted ASC 606, Revenue from Contracts with Customers, and all the related amendments and applied
it to all contracts that were not completed as of January 1, 2019 using the modified retrospective method. The impact of adoption on the
Company’s consolidated balance sheet as of December 31, 2018 and consolidated statement of operations for the year ended December 31,
2018 was not material.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-
Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the
guidance consistent with accounting for employee share-based compensation. This guidance is effective for non-public entities for fiscal
years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company adopted
this ASU on January 1, 2019. The adoption of this ASU did not have a material impact on the financial statements.
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of
its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intra-
period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for
outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is
effective for non-public business entities and emerging growth companies for fiscal years after December 15, 2021, and interim periods
within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact that this
guidance will have upon its financial position and results of operations, if any.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements. The modifications removed the
following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the
policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU added the
following disclosure requirements: (i) the changes in unrealized gains and losses for the period included in other comprehensive income
("OCI") for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of
significant observable inputs used to develop Level 3 fair value measurements. This update is effective for non-public business entities and
emerging growth companies for annual and interim periods beginning after December 15, 2020, with early adoption permitted. As the
requirements of this literature are disclosure only, ASU 2018-13 will not impact our financial condition or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a
dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed
purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a
straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all
leases with a term of greater than twelve months regardless of their classification. Leases with a term of twelve months or less will be
accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases.
The standard is effective for non-public business entities and emerging growth companies for fiscal years beginning after December 15, 2020
and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is currently assessing
the impact the adoption of ASC 842 will have on its consolidated financial statements and footnote disclosures.
F-16
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Table of Contents
3. Balance Sheet Accounts
Inventory, Net
Raw materials
Work in process
Finished goods
Prepaid Expenses and Other Current Assets
Prepaid insurance
Prepaid raw materials and accessories
Prepaid taxes
Other
F-17
December 31,
2019
2018
(in thousands)
5,506 $
1,200
21,954
28,660 $
3,349
1,244
20,252
24,845
December 31,
2019
2018
(in thousands)
2,371 $
1,885
1,234
1,267
6,757 $
1,126
1,832
634
711
4,303
$
$
$
$
Table of Contents
Property and Equipment, Net
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Machinery and equipment
Building improvements
Furniture and fixtures
Building
Leasehold improvements
Land
Vehicles
Total
Less: Accumulated depreciation and amortization
December 31,
2019
2018
(in thousands)
$
$
8,045 $
6,443
3,614
2,472
2,101
802
463
23,940
(7,522)
16,418 $
7,145
—
2,536
—
8,062
—
400
18,143
(5,230)
12,913
For the years ended December 31, 2019 and 2018, depreciation and amortization expense related to property and equipment was $2.7
million and $2.2 million, respectively.
The Company entered into capital leases relating to equipment and vehicles and recorded the fair value of the lease payments on the initial
contract date and is amortizing the assets over the term of the leases. As of December 31, 2019 and 2018, the gross asset value for capital
lease assets was $1.5 million and $1.4 million, respectively. Depreciation expense for assets under capital leases was $84,000 and $89,900
for the years ended December 31, 2019 and 2018, respectively.
In August 2015, the Company entered into a contract with the Zona Franca Coyol, S.A. to have them build a new manufacturing facility in
Costa Rica. The construction of the new 27,900 square foot facility began in November 2015 and was finished during the first quarter of fiscal
2017. The construction costs were paid for by the Company. The Company purchased the title to the building and land for approximately $3.2
million on June 26, 2019. Prior to the purchase, the Company leased the building from Zona Franca Coyol, S.A. for approximately $34,000
per month.
F-18
Table of Contents
Accrued Liabilities
Accrued liabilities consisted of the following:
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Performance bonus
Payroll and related expenses
Bonus feature of stock option grants
Taxes
Commissions
Professional and legal services
Short-term minimum lease payments under capital leases
Warranty reserve
Advisory board and board of director related expenses
Other
Other Liabilities, Short Term
Other liabilities, short-term consisted of the following:
Repurchase of warrants
Contingent equity consideration (see Note 11)
Deferred revenue
Cash payable for asset acquisitions (see Note 11)
December 31,
2019
2018
(in thousands)
2,080 $
1,996
4,212
—
522
500
258
313
124
672
10,677 $
1,295
1,300
1,763
479
487
122
336
148
165
30
6,125
December 31,
2019
2018
(in thousands)
— $
922
785
492
2,199 $
2,261
914
908
—
4,083
$
$
$
$
In August 2017, the Company repurchased warrants for $4.7 million of which $2.3 million was still outstanding as of December 31, 2018. The
outstanding amount was paid on July 25, 2019.
F-19
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Other Liabilities, Long Term
Other liabilities, long-term consisted of the following:
Contingent equity consideration (see Note 11)
Deferred revenue
Cash payable for asset acquisitions (see Note 11)
Other
December 31,
2019
2018
$
$
(in thousands)
— $
1,344
781
336
2,461 $
914
1,186
883
568
3,551
4. Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a
business combination. Intangible assets resulting from the acquisitions of entities accounted for using the acquisition method of accounting
are recorded at the estimated fair value of the assets acquired. Purchased intangibles include certain patents and license rights, 510(k)
authorization by the FDA to sell a medical device and other intangible assets.
The Company’s goodwill and most intangibles at December 31, 2019 are the result of acquisitions of certain assets formerly owned by
VeriTeQ Corporation in November 2015 and Femiline AB in November 2017, and business acquisitions of Establishment Labs Brasil
Productos para Saude Ltda. in January 2016, European Distribution Center Motiva BVBA in March 2016 and Motiva Implants France in
September 2016. Finite-lived intangibles are amortized over their estimated useful lives based on expected future benefit.
In addition to the intangibles acquired, the Company capitalized certain patent and license rights as identified intangibles based on patent
and license rights agreements entered into over the past several years. Additionally, the Company capitalized certain software development
costs associated with its development of a manufacturing software module, which the Company began amortizing in fiscal 2017 upon
implementation of the software.
There were no changes in the carrying amount of goodwill during the year ended December 31, 2019:
Goodwill
Balance as of
January 1, 2019
Additions
Accumulated
Impairment
Losses
Balance as of
December 31, 2019
$
465 $
(in thousands)
— $
— $
465
F-20
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
The carrying amounts of intangible assets other than goodwill as of December 31, 2019 were as follows:
Patents and license rights
Customer relationships
510(k) authorization
Developed technology
Capitalized software development costs
Other
Capitalized patents and license rights not yet amortized
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Estimated Useful
Lives
$
$
1,693 $
1,896
567
62
780
75
291
5,364 $
(in thousands)
(766) $
(836)
(156)
(39)
(98)
(28)
—
(1,923) $
(in years)
7-12
4-10
15
10
2-5
2-5
927
1,060
411
23
682
47
291
3,441
The carrying amounts of intangible assets other than goodwill as of December 31, 2018 were as follows:
Patents and license rights
Customer relationships
510(k) authorization
Developed technology
Capitalized software development costs
Other
Capitalized patents and license rights not yet amortized
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Estimated Useful
Lives
$
$
1,669 $
1,896
567
62
98
75
291
4,658 $
(in thousands)
(564) $
(381)
(118)
(34)
(98)
(18)
—
(1,213) $
(in years)
7-12
4-10
15
10
2
2-5
1,105
1,515
449
28
—
57
291
3,445
The amortization expense associated with intangible assets was $0.6 million for years ended December 31, 2019 and 2018. Non-product
related amortization is recorded in SG&A while product related amortization is recorded in cost of revenue.
F-21
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
As of December 31, 2019, the amortization expense related to identifiable intangible assets, with definite useful lives, in future periods is
expected to be as follows:
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total
$
(in thousands)
865
821
495
251
235
483
$
3,150
The Company evaluates the recoverability of goodwill and indefinite-lived intangible assets annually and whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. As of December 31, 2019, no triggering events have occurred
which would indicate that the acquired intangible asset values may not be recoverable.
5. Fair Value Measurements
The carrying value of the Company’s cash, accounts receivable and accounts payable approximate fair value due to the short-term nature of
these items. Contingent equity consideration, warrants and embedded derivatives that qualify for liability treatment are carried at fair value
and re-measured at each reporting period.
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation
techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:
▪ Level I Unadjusted quoted prices in active markets for identical assets or liabilities;
▪ Level II Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not
active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of
the related assets or liabilities; and
▪ Level III Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair
value measurement.
F-22
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the
fair value hierarchy at period end:
Liabilities
Madryn put option liability
Acquisition-related contingent consideration
Liabilities
Madryn put option liability
Acquisition-related contingent consideration
Fair Value Measurements at December 31, 2019
Total
Level 1
Level 2
Level 3
(in thousands)
3,072 $
922
3,994 $
— $
—
— $
— $
—
— $
3,072
922
3,994
Fair Value Measurements at December 31, 2018
Total
Level 1
Level 2
Level 3
(in thousands)
4,768 $
1,828
6,596 $
— $
—
— $
— $
—
— $
4,768
1,828
6,596
$
$
$
$
The fair value measurement of derivatives and contingent consideration related to the business acquisition completed in fiscal 2017 is based
on significant inputs not observed in the market and thus represents a Level 3 measurement.
In August 2017 the Company entered into a credit agreement, or the Madryn Credit Agreement, with Madryn Health Partners, LP, or Madryn,
as administrative agent, and a syndicate of lenders (see Note 6). The Company determined that the Madryn Credit Agreement contained put
options related to early redemption mandatory prepayment terms in case of change in control or an event of default and a call option related
to voluntary repayment option. The Company allocated a fair value of $15.1 million for these identified embedded derivatives as a debt
discount on the original commitment date. An additional $5.0 million and $1.6 million debt discount was recorded on respective borrowing
dates when the Company met the required milestones and borrowed an additional $10.0 million in the fourth quarter of fiscal 2017 and $25.0
million in August 2019 (see Note 6). The Company revalued the options as of each reporting period and recorded the change in the fair value
in the consolidated statement of operations as other income or expense.
Valuation of the embedded derivatives is complex and requires interest rate simulation, estimating the resultant bond valuation and the
resultant pay-off to the option holder. The Company estimated the fair value of the embedded redemption options based on a “with” and
“without” approach using the Black-Derman-Toy model, a form of the Binomial Lattice Model that captures interest rate variability and the
prepayment optionality. The Binomial Lattice Model allows for the possibility of exercise before the end of the option’s life and considers
future interest rates, volatility and other data with regards to the Company’s credit rating and credit spread. The value of the embedded
derivatives was based on the difference between the “with” and “without” analysis. The probability of a change in control occurring was
determined to be 50% at December 31, 2019 and 50% at December 31, 2018.
F-23
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
The Company used the following assumptions to value Madryn derivatives:
Put Option Liability (Madryn)
Interest rate volatility
Market yield rate
Term (in years)
Dividend yield
December 31, 2019
21.4%
December 31,
2018
17.4%
10.1%
5.75
—%
13.0%
4.5
—%
On November 17, 2017, the Company and Femiline AB and Johan Anderson, or the Seller, entered into an agreement to purchase certain
assets from the Seller. The assets purchased included all existing inventory previously sold by the Company to the Seller, all customer
relationships and a covenant not to compete. The aggregate purchase price for the assets purchased was 100,000 Class A Ordinary shares
of the Company, contingently issuable upon achievement of specific milestones. Based on the valuation of the Company’s shares performed
by a valuation specialist, the contingently issuable shares had an aggregate value of $1.0 million calculated as a product of contingently
issuable shares and estimated fair value per share on the date of the agreement (see Note 11). As of December 31, 2019, the Company has
issued 66,666 shares to the Seller as the milestones for fiscal 2018 and 2019 were met. As of December 31, 2019, the fair value of the
contingently issuable shares was determined using the closing price of the Company’s publicly traded shares.
As of December 31, 2019 and 2018, the short term and long term portions of contingent consideration liability were included in “Other
liabilities, short term” and “Other liabilities, long term”, respectively.
The estimates are based, in part, on subjective assumptions and could differ materially in the future. During the periods presented, the
Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs. The Company
recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the
hierarchy during the years ended December 31, 2019 and 2018.
The fair value of the debt redemption feature liability includes the estimated volatility and risk-free rate. The higher/lower the estimated
volatility, the higher/lower the value of the debt redemption feature liability. The higher/lower the risk-free interest rate, the higher/lower the
value of the debt redemption feature liability.
F-24
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments as follows:
Balance at December 31, 2017
Change in fair value
De-recognition during period
Balance at December 31, 2018
Issuance of financial instruments
Change in fair value
Settlement
Balance at December 31, 2019
6. Debt
Madryn Debt
Acquisition-related
Contingent
Consideration
Put Option
Liability
(Madryn)
Call Option
Liability
(Madryn)
$
$
964 $
1,727
(863)
1,828
—
(276)
(630)
922 $
20,302 $
(15,534)
—
4,768
1,356
(3,052)
—
3,072 $
360
(360)
—
—
—
—
—
—
On August 24, 2017 the Company entered into a credit agreement, or the Madryn Credit Agreement, with Madryn Health Partners, LP, or
Madryn, as administrative agent, and a syndicate of lenders. On June 17, 2019, the Madryn Credit Agreement was amended to lower the
interest rate on the outstanding debt facilities, provide for $25.0 million of new term loan commitments, decrease the amount of the
prepayment penalties, remove all principal payments and extend the maturity date and repayment from September 30, 2023 to September
30, 2025. The Madryn Credit Agreement, as amended, provides for a term loan in a maximum principal amount of $65.0 million, $30.0 million
(Term A) of which became available upon signing and was subsequently borrowed by the Company.
Prior to amending the Madryn Credit Agreement on June 17, 2019, the Company’s ability to borrow the remaining term loans under the
Madryn Credit Agreement was subject to the Company achieving certain revenue milestones. The Company met milestones sufficient to
borrow and borrowed an additional $5.0 million (Term B-1) on October 31, 2017 and $5.0 million (Term B-2) on December 15, 2017,
increasing the total outstanding principal balance to $40.0 million as of December 31, 2017.
Pursuant to the June 2019 amendment, the Company became eligible to borrow an additional $10.0 million (Term B-3) and $15.0 million
(Term B-4) on or before September 30, 2019 and December 31, 2019, respectively. The Company borrowed the available funds under both
tranches equal to $25.0 million on August 12, 2019, bringing up the total outstanding principal balance to $65.0 million as of December 31,
2019.
In connection with the Madryn Credit Agreement, the Company and certain of its subsidiaries, granted a security interest in substantially all of
their assets, including, without limitation, intellectual property, and pledges of certain shares of the Company’s subsidiaries, subject to certain
excluded collateral exceptions.
The Madryn Credit Agreement contains customary affirmative and negative covenants, including, but not limited to, restrictions on the ability
of the Company and its subsidiaries to incur additional indebtedness, create liens, make certain investments, make restricted payments,
enter into or undertake certain liquidations, mergers, consolidations or acquisitions and dispose of assets or subsidiaries. In addition, the
Madryn Credit Agreement requires the Company to maintain minimum revenues and liquidity.
Prior to the effectiveness of the June 17, 2019 amendment, borrowings under the Madryn Credit Agreement bore interest at a rate equal to 3-
month LIBOR plus 11.0% per annum. As of the amendment on June 17, 2019, borrowings under the Madryn Credit Agreement bear interest
at a rate equal to 3-month LIBOR plus 8.0% per annum provided that no default has occurred. In an event of a default, the interest would
increase by an additional 4.0% per annum. The effective interest rate under the amended Madryn Credit Agreement is 18.4%, and the
F-25
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
weighted average interest rate was approximately 12.2% at December 31, 2019. The Company incurred $6.2 million and $5.4 million in
interest expense in connection with Madryn Credit Agreement during the years ended December 31, 2019 and 2018, respectively, including
$0.3 million of direct costs to amend the Madryn Credit Agreement in June 2019, which were expensed as interest expense. No principal
payments are due on the term loans until the final maturity date on September 30, 2025.
The Company also determined that the Madryn Credit Agreement contained put options which are mandatory repayment provisions related
to liquidity events or an event of default and a call option related to voluntary repayment option. The Company allocated a fair value of $15.1
million for these embedded derivatives as a debt discount on the original commitment date in August 2017. An additional $5.0 million and
$1.6 million debt discount was recorded on respective borrowing dates when the Company met the required milestones and borrowed an
additional $10.0 million in the fourth quarter of fiscal 2017 and $25.0 million in August 2019. The Company revalues the embedded
derivatives as of each reporting period and records the change in the fair value in the consolidated statement of operations as other income
or expense (see Note 5). The Company also incurred legal expenses of $1.3 million in 2017 and $0.3 million in 2019, which were recorded
as a debt discount and are being amortized over the term of the Madryn Credit Agreement.
The Company recorded Madryn debt on the balance sheets as follows:
Principal
Net unamortized debt discount and issuance costs
Net carrying value of Madryn debt
2019
2018
$
$
(in thousands)
65,000 $
(16,858)
48,142 $
40,000
(17,678)
22,322
As of December 31, 2019, the Company is in compliance with all financial debt covenants.
7. Commitments and Contingencies
Operating Leases
We lease certain facilities under various operating leases. Most of the lease agreements provide us with the option of renewing our leases at
the end of the initial lease term, at fair market rates. In most cases, we expect that in the normal course of business, facility leases will be
renewed or replaced by other leases.
For the years ended December 31, 2019 and 2018 rent expense was $1.1 million and $1.0 million, respectively.
F-26
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Future minimum lease payments under the operating leases as of December 31, 2019 were as follows:
Years Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Capital Lease
Operating
Leases
(in thousands)
603
467
406
374
365
1,373
3,588
$
$
The Company entered into capital lease arrangements relating to software, equipment and vehicles. The lease periods are from three to
seven years. The repayments are made monthly with an interest rates ranging from 7% to 12% per year.
Future minimum lease payments under these capital leases as of December 31, 2019 were as follows:
Years Ending December 31,
2020
2021
2022
2023
2024
Interest included in the above payments
Amount payable without interest
Short-term minimum capital lease payments (included in accrued liabilities)
Long-term minimum capital lease payments
Capital
Leases
(in thousands)
286
178
39
—
—
503
(38)
465
258
207
$
$
Contingencies
Periodically, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company
accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably
estimated. There have been no contingent liabilities requiring accrual or disclosure at December 31, 2019 and December 31, 2018 except for
contingent liabilities related to asset acquisitions (see Note 11).
Indemnification
The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the
Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified
party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to
the Company’s technology. The
F-27
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be
required to make under these agreements is not determinable because it involves claims that may be made against the Company in the
future, but have not yet been made.
The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its
directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising
from willful misconduct of the individual.
The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. No liability associated
with such indemnifications has been recorded to date.
8. Shareholders’ Equity
Under the Memorandum of Association and Articles of Association, or Articles, in effect as of December 31, 2019 and December 31, 2018,
the Company had authorized an unlimited number of common shares with no par value.
As of December 31, 2019 and 2018, 21,057,040 and 20,672,025 shares, respectively, of common shares were issued and 20,648,970 and
20,263,955 shares, respectively, were outstanding.
During the year ended December 31, 2019, the Company issued common shares in connection with an exercise of outstanding warrants
(see Note 9) and as consideration for certain assets acquired (see Note 11). The Company also granted stock options to employees and
contractors (see Note 10).
The Company had reserved common shares for future issuances at December 31:
Warrants to purchase shares
Options to purchase shares
Remaining shares available under the 2018 Equity Incentive Plan
Shares issuable on vesting of restricted stock awards
Remaining shares available under the 2018 ESPP
Total
9. Warrants
2019
5,500
1,837,576
1,312,648
128,682
287,000
3,571,406
2018
104,826
1,486,363
1,015,148
314,123
100,000
3,020,460
In March 2017, the Company issued warrants for the purchase of 145,000 Class B ordinary shares to parties related to Rockport Ventures,
with a fixed exercise price of $3.80 per share.
During the year ended December 31, 2019, warrants to purchase 92,231 shares were net exercised to obtain 87,321 shares. As of
December 31, 2019 and 2018, 5,500 and 104,826 warrants to purchase the Company’s common shares, respectively, were outstanding and
exercisable:
Warrant Holder
Rockport
Issue Date
3/3/2017
In Connection With
Warrant to
Purchase
Loan agreement
Common
Shares
5,500 $
10. Share-Based Compensation
In December 2015, the Board of Directors approved and adopted the 2015 Equity Incentive Plan, or 2015 Plan.
F-28
Exercise
Price
Expiration Date
8/28/2022
3.80
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Under the 2015 Plan, the Company may grant share options, equity appreciation rights, and restricted shares and restricted share units.
Pursuant to the 2015 Plan, the Company has granted RSAs and stock options to Board of Directors, employees and consultants. The 2015
Plan, as amended, reserves 2,650,000 Class A shares for issuance. If an award granted under the 2015 Plan expires, terminates, is
unexercised, or is forfeited, or if any shares are surrendered in connection with an incentive award, the shares subject to such award and the
surrendered shares become available for further awards under the 2015 Plan.
Concurrent with the closing of the IPO, the Board of Directors terminated the 2015 Plan and approved the 2018 Equity Incentive Plan, or the
2018 Plan, with an initial reserve of 1,500,000 shares of the Company’s common shares for issuance under the 2018 Plan.
Pursuant to the “evergreen” provision contained in the 2018 Plan, the number of common shares reserved for issuance under the 2018 Plan
automatically increases on first day of each fiscal year, commencing on January 1, 2019, in an amount equal to the least of (1) 750,000
shares, (2) 4% of the total number of the Company’s common shares outstanding on the last day of the preceding fiscal year, or (3) a number
of common shares as may be determined by the Company’s Board of Directors prior to any such increase date. On January 1, 2019, the
number of common shares authorized for issuance increased automatically by 750,000 shares in accordance with the evergreen provision,
increasing the number of common shares reserved under the 2018 Plan to 2,250,000. On January 1, 2020 the number of common shares
authorized for issuance increased automatically by another 750,000 shares increasing the number of common shares reserved under the
2018 Plan to 3,000,000.
During the periods presented, the Company recorded the following share-based compensation expense for stock options and restricted stock
awards:
Sales, general and administrative
Research and development
Total
Stock Options
2019
2018
$
$
(in thousands)
5,021 $
1,505
6,526 $
3,400
3,920
7,320
Balances at December 31, 2018
Granted (weighted-average fair value of $13.39 per share)
Exercised
Forfeited/canceled
Balances at December 31, 2019
Number of
Options
Outstanding
1,486,363 $
510,000
(80,991)
(77,796)
1,837,576 $
Weighted-
Average
Exercise Price
11.43
23.82
8.78
22.02
14.54
Weighted-
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic Value
(in thousands)
23,778
8.74 $
8.06 $
24,122
As of December 31, 2019, 732,411 options were vested and exercisable with weighted-average exercise price of $7.72 per share and a total
aggregate intrinsic value of $14.6 million.
During the year ended December 31, 2019, 80,991 options were exercised at a price of $8.78 per share. The intrinsic value of the options
exercised during the years ended December 31, 2019 and 2018 was $1.5 million and
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
$3.0 million, respectively. Upon the exercise of stock options, the Company issued new shares from its authorized shares.
At December 31, 2019, unrecognized compensation expense was $6.6 million related to stock options granted to employees and Board of
Directors and $3.2 million related to stock options granted to consultants. The weighted-average period over which such compensation
expense will be recognized is 2.4 years.
Stock Options Granted to Employees
Share-based compensation expense for employees is based on the grant date fair value. The Company recognizes compensation expense
for all share-based awards ratably on a straight-line basis over the requisite service period of the awards, which is generally the vesting term
of four years. During the year ended December 31, 2019 and 2018, the Company recognized $2.2 million and $0.9 million, respectively, of
stock-based compensation expense for stock options granted to employees.
The Company uses the Black-Scholes option valuation model to value options granted to employees and consultants, which requires the use
of highly subjective assumptions to determine the fair value of share-based awards. The assumptions used in the Company’s option-pricing
model represent management’s best estimates. These estimates are complex, involve a number of variables, uncertainties and assumptions
and the application of management’s judgment. If factors change and different assumptions are used, the Company’s share-based
compensation expense could be materially different in the future. The assumptions and estimates that the Company uses in the Black-
Scholes model are as follows:
▪
▪
▪
▪
▪
Fair Value of Common Shares. Following the IPO, the closing price of the Company’s publicly-traded common shares on the date of
grant is used as the fair value of the shares. Prior to the IPO, the fair value of ordinary shares was estimated on a periodic basis by
the Company’s Board of Directors, with the assistance of an independent third-party valuation firm. The Board of Directors intended
all options granted to be exercisable at a price per share not less than the estimated per share fair value of the shares underlying
those options on the date of grant.
Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied
yield available on U.S. Treasury zero-coupon issues with a term equivalent to that of the term of the options for each option group on
the measurement date.
Term. For employee stock options, the expected term represents the period that the Company’s share-based awards are expected to
be outstanding. Because of the limitations on the sale or transfer of the Company’s shares during the period the Company was a
privately held company, the Company does not believe its historical exercise pattern is indicative of the pattern it will experience as a
publicly traded company. The Company consequently uses the Staff Accounting Bulletin 110, or SAB 110, simplified method to
calculate the expected term of employee stock options, which is the average of the contractual term and vesting period. The
Company plans to continue to use the SAB 110 simplified method until it has sufficient trading history as a publicly traded company.
For consultant stock options, the term used is equal to the remaining contractual term on the measurement date.
Volatility. The Company determines the price volatility based on the historical volatilities of industry peers as it does not have
sufficient trading history for its shares. Industry peers consist of several public companies in the medical device industry with
comparable characteristics, including revenue growth, operating model and working capital requirements. The Company intends to
continue to consistently apply this process using the same or a similar peer group of public companies until a sufficient amount of
historical information regarding the volatility of its own shares becomes available, or unless circumstances change such that the
identified peer companies are no longer similar, in which case other suitable peer companies whose common share prices are
publicly available would be utilized in the calculation. The volatility is calculated based on the term on the measurement date.
Dividend Yield. The expected dividend assumption is based on the Company’s current expectations about its anticipated dividend
policy. The Company has no expectation that it will declare dividends on its common shares, and therefore has used an expected
dividend yield of zero.
F-30
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
The fair value of stock options granted to employees was estimated using the following assumptions:
Volatility
Risk-free interest rate
Term (in years)
Dividend yield
2019
56.0%
1.6%-2.6%
6.25
0%
2018
56.0% - 57.0%
2.7% - 3.1%
6.25
0%
Stock Options Granted to Non-Employees
Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options are earned using
an accelerated attribution method. The Company believes that the estimated fair value of the stock options is more readily measurable than
the fair value of the services rendered. For the years ended December 31, 2019 and 2018, the Company recognized expense of $3.2 million
and $4.3 million for stock options granted to consultants.
The fair value of stock options granted to consultants was estimated using the following assumptions during the following periods presented:
Volatility
Risk-free interest rate
Term (in years)
Dividend yield
Restricted Stock
2019
56.0% - 57.0%
1.7% - 2.1%
2018
58.0% - 59.0%
2.8% - 3.1%
10.0
0.0%
10.0
0.0%
Each vested RSA entitles the holder to be issued one common share. These awards vest according to a vesting schedule determined by the
Compensation Committee of the Company’s Board of Directors, generally over a one to four-year period.
The following table represents RSA activity for fiscal 2019:
Outstanding unvested at December 31, 2018
Granted
Vested
Forfeited/canceled
Outstanding unvested at December 31, 2019
Restricted Stock
Awards
Weighted-
Average
Grant Date
Fair Value
314,123 $
—
(181,107)
(4,334)
128,682 $
8.57
—
8.88
9.63
11.81
The fair value of restricted stock is the grant date market value of common shares. The Company recognizes share-based compensation
expense related to restricted stock using a straight-line method over the vesting term of the awards. The share-based compensation expense
for RSAs that vested during the year ended December
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
31, 2019 and 2018, was $1.1 million and $2.1 million, which was calculated based on the market value of the Company’s common shares on
the applicable date of vesting.
As of December 31, 2019, we had unrecognized share-based compensation cost of approximately $1.2 million associated with unvested
restricted stock awards. This cost is expected to be recognized over a weighted-average period of approximately 1.6 years.
11. Business Combinations and Asset Acquisitions
Business Combinations
On November 17, 2017, the Company and Femiline AB and Johan Anderson, or the Seller, entered into an agreement to purchase certain
assets from the Seller. The assets purchased included all existing inventory previously sold by the Company to the Seller, all customer
relationships and a covenant not to compete. The aggregate purchase price for the assets purchased was 100,000 Class A Ordinary shares
of the Company, contingently issuable upon achievement of specific milestones. Based on the valuation of the Company’s shares performed
by a valuation specialist, the contingently issuable shares had an aggregate value of $1.0 million. The book value of the inventory at the time
of the acquisition was approximately $0.7 million, which was revalued on the transaction date to be the estimated selling price less the cost to
sell, which increased the fair value of the inventory to approximately $1.5 million. As of December 2019, the Company has issued 66,666
shares to the Seller as the milestones for fiscal 2018 and 2019 were met. Concurrently, the Company entered into a Separation Agreement
with Novaform Ltd, or Novaform, and Pantelis Ioannou. In April 2015, Novaform had become a distributor for Establishment Labs S.A., a
wholly-owned subsidiary of the Company and subsequently sublicensed its distribution rights to Femiline AB. Under the Separation
Agreement, Novaform agreed to relinquish the distribution rights back to the Company for $1.0 million in cash and 35,714 Class A ordinary
shares. Based on the valuation of the Company’s shares performed by a valuation specialist, the fair value of the shares issued was $0.3
million.
This transaction enabled the Company to realign its existing distribution network in Sweden, Denmark and Norway and initiate direct sales to
customers in the region.
The purchase price and allocation of purchase price were as follows:
Purchase Price:
Cash consideration
Fair market value of Class A ordinary shares issued
Contingent consideration
Cash paid for inventory
Total purchase price
Allocation of Purchase Price:
Inventory
Customer relationships
Covenant not to compete
Goodwill
Total purchase price allocated
As of December 31, 2019, the Company has fully paid for the business combination.
F-32
(in thousands)
$
1,000
344
964
704
$
3,012
(in thousands)
1,498
1,280
24
210
3,012
$
$
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
The goodwill resulting from this acquisition is deductible for tax purposes.
Asset Acquisitions
Austria
On January 31, 2019, European Distribution Center Motiva BVBA, or EDC, entered into an asset purchase agreement with AFS Medical
GMBH, or the Austria Seller, to purchase certain assets from the Austria Seller. The assets purchased included all existing inventory
previously sold by the Company to the Austria Seller and all customer relationships and contracts. The aggregate purchase price for the
assets purchased was the aggregate sum of book value of the inventory at the time of the transaction plus a cash payment of €293,000, or
approximately $335,000, and 12,404 of the Company’s common shares.
The purchase price and allocation of purchase price were as follows:
Purchase Price:
Cash consideration
Fair market value of common shares issued on effective date
Cash paid for inventory
Total purchase price
Allocation of Purchase Price:
Inventory
(in thousands)
335
337
432
1,104
$
$
(in thousands)
$
1,104
As of December 31, 2019, the Company has fully paid for the Austria asset acquisition.
Germany
On October 3, 2018, EDC entered into an asset purchase agreement, effective November 26, 2018, with Menke Med GmbH, or the Germany
Seller, to purchase certain assets from the Germany Seller. The assets purchased included all existing inventory previously sold by the
Company to the Germany Seller and
all customer relationships and contracts. The aggregate purchase price for the assets purchased was the
aggregate sum of book value of the inventory at the time of the transaction plus a cash payment of up to a
maximum of €1.9 million, or approximately $2.2 million, to be paid out in installments upon the achievement of certain milestones as set forth
in the agreement.
The purchase price and allocation of purchase price were as follows:
Purchase Price:
Cash consideration
Minimum guaranteed milestone payments
Cash paid for inventory
Total purchase price
(in thousands)
544
1,161
917
2,622
$
$
F-33
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
Table of Contents
Allocation of Purchase Price:
Inventory
Customer relationships
Covenant not to compete
Total purchase price allocated
(in thousands)
2,137
428
57
2,622
$
$
Per the asset purchase agreement entered into with the German seller, the German Seller is entitled to three milestone payments in the next
three fiscal years following the year ended December 31, 2018. The German Seller will receive annual payments of €360,000 (approximately
$404,000), €420,000 (approximately $471,000) or €480,000 (approximately $538,000) if the German Seller meets none, one, or both of the
required milestones, respectively. Only the present value of the guaranteed minimum milestone payments of €360,000 per year for the next
three years were included in the purchase price. Contingent consideration will be recognized when the contingency is deemed probable and
reasonably estimable.
As of December 31, 2018, the Company has fully paid for the German asset acquisition excluding the milestone payments of $1.2 million.
The Company determined that it is probable that the Germany seller will achieve both of the fiscal 2019 milestones and accrued an additional
€120,000 (approximately $135,000) as of December 31, 2019.
Spain
On October 1, 2018, EDC entered into an asset purchase agreement effective October 29, 2018, with Motiva Matrix Spain SL, or the Spain
Seller, to purchase certain assets from the Spain Seller. The assets purchased included all existing inventory previously sold by the Company
to the Spain Seller and all customer relationships and contracts. The aggregate purchase price for the assets purchased was the aggregate
sum of the book value of the inventory at the time of the transaction (subject to certain adjustments as set forth in the agreement) plus a cash
payment of €1.6 million, or approximately $1.8 million, to be paid to the Spain Seller no later than December 1, 2018 following repayment by
the Spain Seller to the Company of an outstanding balance in the amount of €2.0 million, or approximately $2.3 million.
The purchase price and allocation of purchase price were as follows:
Purchase Price:
Cash consideration
Cash paid for inventory
Total purchase price
Allocation of Purchase Price:
Inventory
Customer relationships
Total purchase price allocated
As of December 31, 2019, the Company has fully paid for the Spain asset acquisition.
F-34
(in thousands)
1,838
1,774
3,612
(in thousands)
3,560
52
3,612
$
$
$
$
Table of Contents
The United Kingdom
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
On September 3, 2018, Motiva Implants UK Limited entered into an asset purchase agreement, effective October 1, 2018, with Belle Health
LTD, or the U.K. Seller, to purchase certain assets from the U.K. Seller. The assets purchased included all existing inventory previously sold
by the Company to the U.K Seller and
all customer relationships and contracts. The aggregate purchase price for the assets purchased was the
aggregate sum of book value of the inventory at the time of the transaction, a future cash payment of $100,000 to be paid 18 months after
the effective date and 5,000 of the Company’s common shares.
The purchase price and allocation of purchase price were as follows:
Purchase Price:
Cash consideration
Fair market value of common shares issued on effective date
Cash paid for inventory
Total purchase price
Allocation of Purchase Price:
Inventory
Customer relationships
Total purchase price allocated
(in thousands)
100
120
123
343
(in thousands)
235
108
343
$
$
$
$
As of December 31, 2019, the Company has fully paid for the U.K. asset acquisition excluding the future cash payment to be paid in April
2020.
12. Income Taxes
For the years ended December 31, 2019 and 2018, loss before income tax provision consisted of the following:
Costa Rica operations
Non-Costa Rica operations
F-35
2019
2018
(in thousands)
$
$
5,022 $
(42,532)
(37,510) $
3,422
(24,305)
(20,883)
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
For the years ended December 31, the income tax provision consisted of the following:
Current
Costa Rica
Non-Costa Rica
Total current
Deferred
Costa Rica
Non-Costa Rica
Total deferred
Total provision
2019
2018
(in thousands)
$
$
— $
640
640
—
—
—
640 $
105
110
215
—
—
—
215
The items accounting for the difference between income taxes computed at the Costa Rica statutory income tax rate and the income tax
provision consisted of the following at December 31:
Tax benefit at Costa Rica statutory rate
Foreign tax rate differential
Tax rate changes
Return to provision adjustment
Tax credits
Change in valuation allowance
Tax holiday benefit
Other
2019
2018
$
$
(11,253)
10,623
6
391
(56)
2,271
(1,507)
165
640
(in thousands)
30 % $
(29)
—
(1)
—
(6)
4
—
(2)% $
(6,265)
4,335
42
553
(75)
2,439
(912)
98
215
30 %
(21)
—
(3)
—
(12)
4
1
(1)%
The Company's tax holiday benefit was related to the Company’s subsidiary in Costa Rica which enjoyed a zero percent tax rate for the
years ended December 31, 2019 and 2018. The zero percent tax holiday was granted in August 2018 for a period of 8 years through the
year 2026.
F-36
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
As of December 31, the components of the Company's deferred tax assets and liabilities are as follows:
Accruals and reserves
Intangibles
Stock compensation
Net operating loss
R&D credits
Other
Valuation allowance
Total net deferred tax liabilities
2019
2018
(in thousands)
128 $
93
206
7,842
85
(93)
(8,261)
— $
62
73
131
5,738
97
(46)
(6,055)
—
$
$
As of December 31, 2019, the Company assessed that it is more-likely-than-not that it will not realize its deferred tax assets based on the
absence of sufficient positive objective evidence that it would generate sufficient taxable income in its Costa Rica, Brazil and U.S. tax
jurisdictions to realize the deferred tax assets. The Company intends to continue maintaining a full valuation allowance on its deferred tax
assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.
As of December 31, 2019, the Company had U.S. and California tax credit carryforwards of approximately $0.1 million in total. The federal
research credits begin to expire in 2037. However, the California research credits can be carried forward indefinitely.
As of December 31, 2019, the Company had U.S. federal, states and Brazil net operating losses of approximately$18.4 million, $3.8 million
and $11.2 million, respectively. The U.S. federal net operating losses of $4.5 million generated prior to 2018 and state net operating losses
will begin to expire December 31, 2030. The U.S. federal net operating losses of $13.9 million generated in 2018 and 2019 will be carried
forward indefinitely. Brazil net operating losses can be carried forward indefinitely. The United States federal and California laws impose
restrictions on the utilization of net operating loss carryforwards and R&D credit carryforwards in the event of a change in ownership of the
Company, which constitutes an “ownership change” as defined by Internal Revenue Code Sections 382 and 383. The Company has not
performed a detailed analysis to determine whether an ownership change under Section 382 and 383 of the Code has previously occurred.
As a result, the Company’s ability to utilize existing carryforwards could be substantially restricted.
The Company is incorporated as an international business company with limited liability under International Business Companies Act, 1984
of the British Virgin Islands. As of December 31, 2019, the company also conducted business in Costa Rica, Belgium, France, Brazil, United
Kingdom, Sweden, Italy, Switzerland, Germany, Austria, Argentina, Spain and the United States and is subject to tax in these jurisdictions. As
a result, the Company's worldwide income will be subject to the tax rates in which its income is generated and as such its effective tax rate
may fluctuate based on the geographic distribution of its earned income or losses and the applicable tax laws in which those earnings or
losses were generated.
Management’s intention is to indefinitely reinvest any undistributed earnings from its subsidiaries. Accordingly, no provision for withholding
taxes has been provided nor is it practical to determine the amount of this liability. Upon distribution of those earnings in the form of dividends
or otherwise, the Company will be subject to potential withholding taxes in the above-mentioned jurisdictions.
Accounting for Uncertainty in Income Taxes
The Company has adopted ASC 740-10 Accounting for Uncertainty in Income Taxes (formerly FIN 48). ASC 740-10 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
F-37
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
measurement of uncertain tax positions taken or expected to be taken in the Company's income tax return, and provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. For the years ended
December 31, 2019 and 2018 the Company has no material uncertain tax positions. The Company has R&D credits in the United States and
has recorded reserves of $20,000 which offsets R&D credit deferred tax assets. The Company does not expect any significant increases or
decreases to its unrecognized tax benefits within the next 12 months. The Company’s policy is to recognize interest and penalties accrued on
any unrecognized tax benefits as a component of income tax expense.
As of December 31, 2019, the Company is subject to taxation in Belgium, Brazil, UK, Sweden, Germany, Spain, and the United States and
the Company’s fiscal tax years 2015 through 2019 are subject to examination by the tax authorities.
Revenue From Contracts With Customers
The Company adopted ASC 606, Revenue From Contracts With Customers, in the first quarter of 2019. There is no material tax adjustment
required due to the adoption of ASC 606.
13. Net Loss Per Share
The following table summarizes the computation of basic and diluted net loss per share for the periods presented:
Numerator:
Net loss
Denominator:
Year Ended December 31,
2019
2018
(in thousands, except share and per
share data)
$
(38,150) $
(21,098)
Weighted average common shares used for basic and diluted earnings per share
20,541,528
17,350,705
Loss per share:
Basic and diluted
$
(1.86) $
(1.22)
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares outstanding for the period. Diluted
net loss per share is computed by dividing the net loss by the weighted-average number of shares and dilutive share equivalents outstanding
for the period, determined using the treasury-share method and the as-if converted method, for convertible securities, if inclusion of these is
dilutive.
If the Company reports a net loss, diluted net loss per share is the same as basic net loss per share for those periods because including the
dilutive securities would be anti-dilutive.
The following potentially dilutive securities outstanding at the end of the periods presented have been excluded from the computation of
diluted shares at December 31:
Options to purchase shares
Shares issuable on vesting of restricted stock awards
Warrants to purchase shares
Total
F-38
2019
1,689,016
128,682
5,500
1,823,198
2018
1,486,363
314,123
104,826
1,905,312
Table of Contents
ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and 2018
14. Related Party Transactions
During the years ended December 31, 2019 and 2018, the Company recorded revenue of $0.7 million and $0.9 million, respectively, for
product sales to Herramientas Medicas, S.A., a distribution company owned by a family member of the Chief Executive Officer of the
Company. Accounts receivable owed to the Company from this distribution company amounted to approximately $0.2 million as of
December 31, 2019 and 2018.
In May 2016, the Company entered into a scientific board advisory agreement with Dr. Manuel Enrique Chacón Quirós pursuant to which Dr.
Chacón Quirós joined the Company’s Scientific Advisory Board, provided general scientific advice, and served as a clinical investigator,
among other services. In exchange for these services, Dr. Chacón Quirós was granted options to purchase 20,580 shares, vesting over four
years in equal annual installments, provided that he continues to provide these services at such times. In September 2016, the Company
entered into a separate agreement with Dr. Chacón Quirós to maintain his clinic in Costa Rica as a MotivaImagine Excellence Center and to
host and train physicians in the use of the Company products in relevant procedures, among other services, in exchange for cash
reimbursement of up to $4,500 per day that such services are rendered. Dr. Chacón Quirós resigned from the Company’s Scientific Advisory
Board in November 2019. Dr. Chacón Quirós is the brother of our Chief Executive Officer, Juan José Chacón Quirós. During the years ended
December 31, 2019 and 2018, the Company paid Dr. Chacón Quirós approximately $145,000 and $90,000, respectively, for services
rendered.
During the years ended December 31, 2019 and 2018, the Company recorded revenue of approximately zero and $40,000, respectively, for
product sales to Motiva Netherlands BV, a distribution and agency company owned by Erick Vogelanzeng, our Vice President of Sales,
Europe. There were no accounts payable due to this distribution company at December 31, 2019 and December 31, 2018. As of July 8,
2019, Mr. Vogelanzeng transferred his ownership interest in Motiva Netherlands BV.
15. Employee Benefits
Short-term employee benefits, including vacation (paid absences) and year-end bonuses (also known as 13th month salary), are current
liabilities included in accrued liabilities on the consolidated balance sheets and are calculated at the non-discounted amount that the
Company expects to pay as a result of uncharged employee salaries or retentions.
Regarding employee termination benefits, Costa Rica labor laws establish the payment of benefits in case of death, retirement or termination
without cause. This compensation is calculated according to time served in the company and the corresponding salary in the last six months
of employment, and is equal to between 19.5 and 22 days salary for each year served, up to a maximum of 8 years.
Company policy recognizes termination benefits as expenses of the period during which the termination occurs, when the legal obligation is
assumed due to the aforementioned events.
The 45 employees in Brazil are represented by a labor union.
16. Subsequent Events
On January 29, 2020, the Company entered into an underwriting agreement with several underwriters relating to the issuance and sale of
2,285,714 common shares, no par value at a price of $26.25 per share. The underwriters have exercised their 30-day option to purchase an
additional 342,857 common shares. The closing of the follow-on offering occurred February 3, 2020. The net proceeds to the Company from
the offering is approximately $63.9 million, after deducting underwriting discounts and commissions and estimated offering expenses.
Between January 1, 2020 and March 16, 2020, the Board of Directors approved grants of 80,953 shares of stock options under the 2018
Plan.
The Company received notification from the U.S. Patent & Trademark Office that on March 24, 2020, the Company will be issued a key
patent protecting its proprietary implant surface technology. The U.S. Patent No. 10,595,979 will cover breast implant surface architectures.
F-39
Table of Contents
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
ESTABLISHMENT LABS HOLDINGS INC.
Dated:
March 16, 2020
By:
/s/ Juan José Chacón Quirós
Juan José Chacón Quirós
Name:
Title:
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Juan José Chacón Quirós
Juan José Chacón Quirós
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 16, 2020
/s/ Renee M. Gaeta
Renee M. Gaeta
/s/ Nicholas Lewin
Nicholas Lewin
/s/ Lisa N. Colleran
Lisa N. Colleran
/s/ Dennis Condon
Dennis Condon
/s/ Lisa Gersh
Lisa Gersh
/s/ David Hung, M.D.
David Hung, M.D.
/s/ Edward Schutter
Edward Schutter
Chief Financial Officer
(Principal Financial and Accounting Officer)
(Authorized Representative in the United States)
March 16, 2020
Chairman of the Board of Directors
March 16, 2020
Director
Director
Director
Director
Director
F-40
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
Exhibit 4.8
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934
Establishment Labs Holdings Inc. (the “Company”) has one class of securities registered under Section 12 of the Securities Exchange
Act of 1934, as amended: our common shares, no par value per share.
As used in this summary, the terms “Establishment Labs,” “the Company,” “we,” “our” and “us” refer to Establishment Labs
Holdings Inc.
We are incorporated as a British Virgin Islands company, and our affairs are governed by our amended and restated memorandum
and articles of association and the laws of the British Virgin Islands. Our authorized share capital consists of an unlimited amount of common
shares, no par value per share. In addition, we may by resolution of the board of directors, without shareholder consent, amend our amended
and restated memorandum and articles of association to create new classes of preferred shares and fix the rights preferences and restrictions
of such shares, as the board of directors in their sole discretion deem fit, which shares may be issued as one or more series. Copies of our
amended and restated memorandum and articles of association, which may be amended from time to time, is included as an exhibit to the
Annual Report on Form 10-K to which this description is an Exhibit.
Key Provisions of our Amended and Restated Memorandum and Articles of Association and British Virgin Islands Law Affecting
our Common Shares
The following are summaries of material terms and provisions of our amended and restated memorandum and articles of association
and the BVI Business Companies Act, or the BVI Act, insofar as they relate to the material terms of our common shares. This summary is not
intended to be complete, and you should read the forms of our amended and restated memorandum and articles of association.
Meetings of Shareholders
If our shareholders want us to hold a meeting of our shareholders, they may requisition the directors to hold one upon the written
request of shareholders entitled to exercise at least 30% of the voting rights in respect of the matter for which the meeting is requested. Under
British Virgin Islands law, we may not increase the required percentage to call a meeting above 30%.
Subject to our amended and restated memorandum and articles of association, a meeting of our shareholders may be called by not
less than seven days’ notice in writing. Notice of every meeting of shareholders will be given to all of our shareholders. However, the
inadvertent failure of the convener or conveners of a meeting of shareholders to give notice of the meeting to a shareholder, or the fact that a
shareholder has not received the properly given notice, does not invalidate the meeting.
A meeting may be called by shorter notice than that mentioned above, but, subject to our amended and restated memorandum and
articles of association, it will be deemed to have been duly called if shareholders holding at least 90% of the total voting rights on all the
matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting
shall constitute a waiver in relation to all the shares which that shareholder holds.
A meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not
less than 50% of the votes of the shares entitled to vote at the meeting. A quorum may be comprised of a single shareholder or proxy and then
such person may pass a Resolution of Shareholders and a certificate signed by such person accompanied where such person is a proxy by a
copy of the proxy instrument shall constitute a valid Resolution of Shareholders.
Voting Rights
Under the BVI Act, the common shares are deemed to be issued when the name of the shareholder is entered in our register of
members. Our register of members is maintained by our transfer agent, Computershare Trust Company, N.A., which will enter the name of
our shareholders in our register of members. If (a) information that is required to be entered in the register of shareholders is omitted from the
register or is inaccurately entered in the register, or (b) there is unreasonable delay in entering information in the register, a shareholder of
ours, or any person who is aggrieved by the omission, inaccuracy or delay, may apply to the British Virgin Islands courts for an order that the
register be rectified, and the court may either refuse the application or order the rectification of the register, and may direct us to pay all costs
of the application and any damages the applicant may have sustained.
Subject to any rights or restrictions attached to any shares, at any general meeting on a show of hands every shareholder of record
who is present in person (or, in the case of a shareholder being a corporation, by its duly authorized representative) or by proxy shall have
one vote and on a poll every shareholder present in person (or, in the case of a shareholder being a corporation, by its duly appointed
representative) or by proxy shall have one vote for each share which such shareholder is the holder. Voting at any meeting of the shareholders
is by show of hands unless a poll is demanded. A poll may be demanded by shareholders present in person or by proxy if the shareholder
disputes the outcome of the vote on a proposed resolution and the chairman shall cause a poll to be taken.
No shareholder shall be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is registered as
our shareholder at the applicable record date for that meeting. Shareholders of record may also pass written resolutions without a meeting.
There is nothing under the laws of the British Virgin Islands which specifically prohibits or restricts the creation of cumulative voting
rights for the election of our directors, but cumulative voting for the election of directors is permitted only if expressly provided for in the
memorandum or articles of association. We have not made provisions in our amended and restated memorandum and articles of association
for cumulative voting for such elections.
Protection of Minority Shareholders
Under the laws of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the
provisions of the BVI Act dealing with shareholder remedies. One protection under statutory law is that shareholders may bring an action to
enforce the BVI Act or our amended and restated memorandum and articles of association. Shareholders are entitled to have our affairs
conducted in accordance with the BVI Act and the amended and restated memorandum and articles of association.
There are common law rights for the protection of shareholders that may be invoked, largely dependent on English common law,
since the common law of the British Virgin Islands is limited. Under the general rule pursuant to English common law known as the rule in
Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its
shareholders who express dissatisfaction with the conduct of our affairs by the majority or the board of directors. However, every shareholder
is entitled to have our affairs conducted properly according to British Virgin Islands law and our constituent documents. As such, if those
who control the company have disregarded the requirements of applicable law or the provisions of our amended and restated memorandum
and articles of association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following: (1) an
act complained of which is illegal; (2) acts that constitute oppression, unfair discrimination or unfair prejudice against the minority; (3) acts
that infringe or are about to infringe on the personal rights of the shareholders, such as the right to vote; and (4) where we have not complied
with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded
minority shareholders under the laws of many states in the United States.
Preemption Rights
British Virgin Islands law does not make a distinction between public and private companies and some of the protections and
safeguards (such as statutory preemption rights, save to the extent that they are expressly provided for in our amended and restated
memorandum and articles of association) that investors may expect to find in relation to a public company are not provided for under British
Virgin Islands law. There are no preemption rights applicable to the issuance of new shares under either British Virgin Islands law or our
amended and restated memorandum and articles of association.
Liquidation Rights
As permitted by British Virgin Islands law and our amended and restated memorandum and articles of association, we may be
voluntarily liquidated under Part XII of the BVI Act by resolution of directors and resolution of shareholders if our assets are greater than our
liabilities and we are able to pay our debts as they fall due.
Modification of Rights
As permitted by British Virgin Islands law, and our amended and restated memorandum and articles of association, if our shares are
divided into more than one class of shares, we may vary the rights attached to any class only with the consent in writing of or by a resolution
passed at a meeting by the holders of not less than 50% of the issued shares of that class.
Transfer of Shares
Subject to any applicable restrictions set forth in our amended and restated memorandum and articles of association, any of our
shareholders may transfer all or any of his or her shares by a written instrument of transfer in the usual or common form or in any other form
which our directors may approve.
Our board of directors may, in its absolute discretion, resolve to refuse or delay the registration of any transfer of any share without
assigning any reasons therefor. If our directors refuse or delay the registration of a transfer they shall, as soon as practicable, send to each of
the transferor and the transferee notice of such refusal or delay in the agreed form.
Share Repurchase
As permitted by the BVI Act and our amended and restated memorandum and articles of association, shares may be repurchased,
redeemed or otherwise acquired by us.
Dividends
Subject to the BVI Act and our amended and restated memorandum and articles of association, our directors may, by resolution,
authorize a distribution to shareholders at such time and of such an amount as they think fit, if they are satisfied, on reasonable grounds, that,
immediately after the distribution, we will satisfy the ‘solvency test’. A company will satisfy the solvency test if (i) the value of our assets
exceeds our liabilities; and (ii) we are able to pay our debts as they fall due. Where a distribution is made to a shareholder at a time when we
did not, immediately after the distribution, satisfy the solvency test, it may be recovered by the company from the shareholder unless (i) the
shareholder received the distribution in good faith and without knowledge of our failure to satisfy the solvency test; (ii) the shareholder has
altered his position in reliance on the validity of the distribution; and (iii) it would be unfair to require repayment in full or at all.
Board of Directors
We are managed by a board of directors which currently consists of seven directors. Our amended and restated memorandum and
articles of association provide that the board of directors shall consist of not less than seven directors.
There are no share ownership qualifications for directors.
Meetings of our board of directors may be convened at any time deemed necessary by any of our directors.
A meeting of our board of directors will be competent to make lawful and binding decisions if at least a majority of the directors are
present or represented. At any meeting of our directors, each director, whether by his or her presence or by his or her alternate, is entitled to
one vote.
Questions arising at a meeting of our board of directors are required to be decided by simple majority votes of the directors present or
represented at the meeting. In the case of a tie vote, the chairman of the meeting shall have a second or deciding vote. Our board of directors
may also pass unanimous written resolutions without a meeting.
The remuneration to be paid to the directors shall be such remuneration as the directors shall determine. Under our amended and
restated memorandum and articles of association, the independent directors shall also be entitled to reimbursement of out-of-pocket expenses
in connection with the performance of his or her duties as director.
Staggered Board of Directors
Our amended and restated memorandum and articles of association provide for a staggered board of directors consisting of three
classes of directors. Directors of each Class are chosen for three year terms upon the expiration of their current terms and each year one class
will be elected by our shareholders. Our shareholders will elect directors for three-year terms upon the expiration of their current terms. Our
shareholders elect only one class of directors each year. We believe that classification of our board of directors helps to ensure the continuity
and stability of our business strategies and policies as determined by our board of directors. There is no cumulative voting in the election of
directors. As such, this classified board provision could have the effect of making the replacement of incumbent directors more time-
consuming and difficult. At least two annual meetings of shareholders, instead of one, will generally be required to effect a change in a
majority of our board of directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their
positions. The staggered terms of directors also may delay, defer or prevent a tender offer or an attempt to change control of us, even though
a tender offer or change in control might be believed by our shareholders to be in their best interest.
Duties of Directors
British Virgin Islands law provides that each of our directors, in exercising his powers or performing his duties, shall act honestly and
in good faith and in what the director believes to be in the best interests of the company. Additionally, the director shall exercise the care,
diligence, and skill that a reasonable director would exercise in the same circumstances taking into account the nature of the company, the
nature of the decision and the position of the director and his responsibilities. In addition, British Virgin Islands law provides that a director
shall exercise his powers as a director for a proper purpose and shall not act, or agree to the company acting, in a manner that contravenes
British Virgin Islands law or the memorandum or articles of association of the company.
Issuance of Additional Common Shares
Our amended and restated memorandum and articles of association authorize our board of directors to issue additional common
shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.
Changes in Authorized Shares
We are authorized to issue an unlimited number of common shares which will be subject to the same provisions with reference to the
payment of calls, lien, transfer, transmission, forfeiture and otherwise as the shares in issue. We may by resolution:
•
•
•
combine all of our shares into shares of larger par value than our existing shares;
divide all of our shares into shares of smaller par value than our existing shares; or
create new classes of shares with preferences to be determined by the board of directors at the time of authorization, which could
adversely affect the voting power of holders of common shares and the likelihood that such holders will receive dividend payments
and payments upon our liquidation or have the effect of delaying, deferring or preventing a change in control of our company or
other corporate action.
Inspection of Books and Records
Under British Virgin Islands law holders of our common shares are entitled, on giving written notice to us, to inspect and make
copies or take extracts of our: (a) amended and restated memorandum and articles of association; (b) register of shareholders; (c) register of
directors; and (d) minutes of meetings and resolutions of shareholders and those classes of shareholders of which he is a shareholder.
Subject to our amended and restated memorandum and articles of association, our directors may, if they are satisfied that it would be
contrary to our interest to allow a shareholder to inspect any document, or part of a document as referenced in (b), (c) or (d) above, refuse to
permit the shareholder to inspect the document or limit the inspection of the document, including limiting the making of copies or the taking
of extracts from the records. Where our directors exercise their powers in these circumstances, they shall notify the shareholder as soon as
reasonably practicable.
Differences in Corporate Law
We were incorporated under, and are governed by, the laws of the British Virgin Islands. The flexibility available under British Virgin
Islands law has enabled us to adopt the amended and restated memorandum and articles of association that will provide shareholders with
rights that do not vary in any material respect from those they enjoyed under the Delaware Corporate Law.
Conflicts of Interest
Pursuant to the BVI Act and our amended and restated memorandum and articles of association, a director of a company who has an
interest in a transaction and who has declared such interest to the other directors, may:
•
•
•
vote on a matter relating to the transaction;
attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the
meeting for the purposes of a quorum; and
sign a document on our behalf, or do any other thing in his capacity as a director, that relates to the transaction.
Anti-money Laundering Laws
In order to comply with legislation or regulations aimed at the prevention of money laundering we may require subscribers to provide
evidence to verify their identity.
We reserve the right to request such information as is necessary to verify the identity of a subscriber. In the event of delay or failure
on the part of the subscriber in producing any information required for verification purposes, we may refuse to accept the application, in
which case any funds received will be returned without interest to the account from which they were originally debited.
If any person resident in the British Virgin Islands knows or suspects that another person is engaged in money laundering or terrorist
financing and the information for that knowledge or suspicion came to their attention in the course of their business, the person will be
required to report his belief or suspicion to the Financial Investigation Agency of the British Virgin Islands, pursuant to the Proceeds of
Criminal Conduct Act 1997 (as amended). Such a report shall not be treated as a breach of confidence or of any restriction upon the
disclosure of information imposed by any enactment or otherwise.
Anti-takeover Provisions
The BVI Act does not prevent companies from adopting a wide range of defensive measures, such as staggered boards, blank check
preferred shares, removal of directors only for cause and provisions that restrict the rights of shareholders to call meetings and submit
shareholder proposals. Our amended and restated memorandum and articles of association contain the following provisions which may be
regarded as defensive measures: (i) a requirement of the affirmative vote of two-thirds or more of the shares entitled to vote on special
matters such as mergers or acquisitions; (ii) the prevention of ‘‘business combinations’’ with ‘‘interested shareholders’’ for a period of three
years after the date of the transaction in which the person became an interested shareholder, unless the business combination is approved in
accordance with our amended and restated memorandum and articles of association by a general meeting of our shareholders or satisfies
other requirements specified in our amended and restated memorandum and articles of association; (iii) directors’ ability, in their absolute
discretion, to decline to register any transfer of shares without assigning any reason; (iv) our board of directors’ ability to issue, from time to
time, one or more classes of preferred shares and, with respect to each such class, to fix the terms thereof by resolution; (v) restrictions on the
ability of shareholders to call meetings and bring proposals before meetings; (vi) elimination of the ability of shareholders to act by written
consent; and (vii) the requirement of the affirmative vote of two-thirds of the shares entitled to vote to amend certain provisions of our
amended and restated memorandum and articles of association.
Interested Directors
The BVI Act provides that a director shall, after becoming aware that he is interested in a transaction entered into or to be entered
into by the company, disclose that interest to our board of directors. The failure of a director to disclose that interest does not affect the
validity of a transaction entered into by us or the director, so long as the director’s interest was disclosed to the board prior to our entry into
the transaction or was not required to be disclosed (for example where the transaction is between us and the director himself or is otherwise
in the ordinary course of business and on usual terms and conditions). As permitted by British Virgin Islands law and our amended and
restated memorandum and articles of association, a director interested in a particular transaction may vote on it, attend meetings at which it is
considered, and sign documents on our behalf which relate to the transaction.
Voting Rights and Quorum Requirements
Under British Virgin Islands law, the voting rights of shareholders are regulated by our amended and restated memorandum and
articles of association and, in certain circumstances, the BVI Act. Our amended and restated memorandum and articles of association govern
matters such as quorum for the transaction of business, rights of shares, and majority votes required to approve any action or resolution at a
meeting of the shareholders or board of directors. Unless the amended and restated memorandum and articles of association otherwise
provide, the requisite majority is usually a simple majority of votes cast.
Mergers and Similar Arrangements
Under the BVI Act, two or more companies may merge or consolidate in accordance with the statutory provisions. A merger means
the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or
more constituent companies into a new company. In order to merger or consolidate, the directors of each constituent company must approve a
written plan of merger or consolidation which must be authorized by a resolution of shareholders.
Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan or merger or
consolidation contains any provision which, if proposed as an amendment to the memorandum of association or articles of association, would
entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger
or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of
merger or consolidation.
Shareholder Suits
We are not aware of any reported class action or derivative action having been brought in a British Virgin Islands court.
Under the BVI Act, if a company or a director of a company engages in, or proposes to engage in, conduct that contravenes the BVI
Act or the memorandum of association or articles of the company, the BVI Court may, on the application of a shareholder or a director of the
company, make an order directing the company or director to comply with, or restraining the company or director from engaging in that
conduct.
In addition, under the BVI Act, the BVI Court may, on the application of a shareholder of a company, grant leave to that shareholder
to bring proceedings in the name and on behalf of that company or to intervene in proceedings to which the company is a party for the
purpose of continuing, defending or discontinuing the proceedings on behalf of the company. In determining whether to grant leave for such
derivative actions, the Court must take into account certain matters, including whether the shareholder is acting in good faith, whether the
derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters and
whether an alternative remedy to the derivative claim is available.
A shareholder of a company may bring an action against the company for breach of a duty owed by the company to him as a
shareholder. The BVI Act also includes provisions for actions based on oppression, and for representative actions where the interests of the
claimant are substantially the same as those of other shareholders.
Corporate Governance
British Virgin Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty to act honestly, in
good faith and in what the directors believe to be in the best interests to the companies for which they serve.
Indemnification
British Virgin Islands law and our amended and restated memorandum and articles of association provide for the indemnification of
our directors against all losses or liabilities incurred or sustained by him or her as a director of our company in defending any proceedings,
whether civil or criminal and this indemnity only applies if he or she acted honestly and in good faith with a view to our best interests and,
with respect to any criminal action, he or she must have had no reasonable cause to believe his or her conduct was unlawful.
Transfer Agent and Registrar
The transfer agent and registrar for our common shares is Computershare Trust Company, N.A., and their address is 250 Royall
Street, Canton, Massachusetts 02021.
Listing
Our common shares are listed on The Nasdaq Capital Market under the symbol “ESTA.”
SUBSIDIARIES OF ESTABLISHMENT LABS HOLDINGS INC.
EXHIBIT 21.1
Name of Subsidiary
Establishment Labs, S.A.
Motiva USA, LLC
JAMM Technologies, Inc.
Establishment Labs Produtos par Saude Ltda
European Distribution Center Motiva BVBA *
Motiva Implants France SAS
JEN-Vault AG
Motiva Nordica AB **
Motiva Implants UK Limited
Motiva Italy S.R.L
Motiva Implants Spain, S.L.
Motiva Austria GmbH
Motiva Germany GmbH
Jurisdiction of Organization
Costa Rica
Delaware
Delaware
Brazil
Belgium
France
Switzerland
Sweden
The United Kingdom
Italy
Spain
Austria
Germany
* European Distribution Center Motiva BVBA owns 99% of Establishment Labs Brasil Produtos Para Saude Ltda., with 1% owned by a local
Brazilian party.
** European Distribution Center Motiva BVBA owns 100% of Motiva Nordica AB.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Juan José Chacón Quirós, certify that:
1. I have reviewed this quarterly report on Form 10-K of Establishment Labs Holdings Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date:
March 16, 2020
/s/ Juan José Chacón Quirós
Juan José Chacón Quirós
Chief Executive Officer and Director
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Renee M. Gaeta, certify that:
1. I have reviewed this quarterly report on Form 10-K of Establishment Labs Holdings Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date:
March 16, 2020
/s/ Renee M. Gaeta
Renee M. Gaeta
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002
Exhibit 32.1
Pursuant to the requirement set forth in Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Juan José Chacón Quirós, as
Chief Executive Officer, and Renee M. Gaeta, as Chief Financial Officer, of Establishment Labs Holdings Inc. (the “Company”), hereby certifies that to the
best of his and her knowledge:
(1)
(the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
The Company’s Annual Report on Form 10‑K for the period ended December 31, 2019, to which this Certification is attached as Exhibit 32.1
(2)
Company.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Date:
March 16, 2020
Date:
March 16, 2020
/s/ Juan José Chacón Quirós
Juan José Chacón Quirós
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Renee M. Gaeta
Renee M. Gaeta
Chief Financial Officer
(Principal Financial and Accounting Officer)
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of Establishment Labs Holdings Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.