ESTABLISHMENT LABS HOLDINGS INC. - 10-Q filing on 2018-11-13

Shareholders' Equity (Deficit)

9 Months Ended

Sep. 30, 2018

Shareholders’ Equity (Deficit)

General

Under the Memorandum of Association and Articles of Association, or Articles, in effect as of December 31, 2017, the Company had authorized 84,050,000 common shares with a par value of $1.00 per share, 13,482,782 Class A ordinary shares with a par value of $1.00 per share, 7,723,848 Class B ordinary shares with a par value of $1.00 per share, 96,301 Class C ordinary shares with no par value, 1,539,359 Class D ordinary shares with no par value, 323,366 Class E ordinary shares with no par value and 357,143 Class F ordinary shares with no par value. During the first half of 2018, the Company amended its Articles to authorize 1,250,000 Class G and 625,000 Class G-1 ordinary shares with no par value.

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.

All outstanding shares of ordinary stock were converted on a 1-to-1 basis into shares of the Company’s common stock of a single class of no par value. An unlimited number of common shares was authorized.

Common Shares

As of September 30, 2018 and December 31, 2017, 20,539,095 and zero shares, respectively, of common shares were issued and 20,131,025 and zero shares, respectively, were outstanding.

During the nine months ended September 30, 2018, the Company issued restricted stock awards to employees and contractors. The Company records the awards as outstanding equity as they vest (see Note 10).

Ordinary Shares

As of September 30, 2018 and December 31, 2017, zero and 15,743,705 shares, respectively, of ordinary shares were issued and zero and 14,522,495 shares, respectively, were outstanding.

Class A and B Ordinary Shares

As of September 30, 2018 and December 31, 2017, zero and 13,427,536 shares, respectively, of ordinary Class A and Class B shares were issued and zero and 12,206,326 shares, respectively, were outstanding. Class A and Class B ordinary shares have a par value of $1.00 per share.

Class C, D, E, F, G and G-1 Ordinary Shares

As of September 30, 2018 and December 31, 2017, zero and 2,316,169 shares, respectively, of ordinary Class C, D, E, F, G and G-1 shares were issued and outstanding. Class C, D, E, F, G and G-1 shares had no par value.

In multiple closings during the first nine months ended September 30, 2018, the Company issued an aggregate of $6.2 million of Class G ordinary shares at a purchase price of $16.00 per share to several investors. In connection with the issuance of these shares, the Company amended and restated its Articles to increase the authorized shares of the Company to a total of 109,447,799 shares and to authorize 1,250,000 Class G and 625,000 Class G-1 shares.

In May 2018, the Company issued an aggregate of $10.0 million of Class G-1 ordinary shares at a purchase price of $16.00 per share to entities affiliated with RTW Investments.

The Company had reserved common shares for future issuances as follows:




	September 30, 2018	December 31, 2017
Warrants to purchase shares	113,526	145,000
Options to purchase shares	1,460,863	863,932
Remaining shares available under the 2015 Equity Incentive Plan	—	91,181
Remaining shares available under the 2018 Equity Incentive Plan	1,047,148	—
Shares issuable on vesting of restricted stock awards	394,984	585,056
Remaining shares available under the 2018 ESPP	100,000	—
Total	3,116,521	1,685,169

Warrants

In connection with the Notes issued to CPH in August 2015, the Company agreed to issue warrants to purchase ordinary shares to CPH and to Rockport Ventures, the placement agent for the Notes.

In March 2017, the Rockport Warrants were canceled and new warrants for the purchase of 145,000 Class B ordinary shares were issued to parties related to Rockport Ventures, with a fixed exercise price of $3.80 per share.

During the first half of 2017, the Company classified the fair value of these warrants as liabilities on the balance sheet due to the existence of certain cash settlement features that are not within the sole control of the Company and variable settlement provision that cause them to not be indexed to the Company’s own shares.

The value of the CPH warrants was estimated using the Black-Scholes valuation model which approximates a Lattice valuation model, and at issuance, the Company initially recorded the fair value of the warrants as a debt discount against the related loan balance in its consolidated balance sheet. The recorded value of the warrants is being amortized to interest expense over the estimated repayment term of the related loans. The value of the Rockport Ventures warrants was estimated using the Black Sholes valuation model which approximates a Lattice valuation model, and at issuance, the Company initially recorded the fair value of the warrants as a debt offering cost against the related loan balance in its balance sheet. The recorded value of the warrants is being amortized to interest expense using the straight-line method over the term of the related loans.

During the nine months ended September 30, 2018, a warrant to purchase 31,474 shares was exercised. As of September 30, 2018 and December 31, 2017, 113,526 and 145,000 warrants to purchase the Company’s common shares, respectively, were outstanding and exercisable:

Warrant Holder

Issue Date

In Connection With

Warrant to
Purchase

Exercise
Price

Expiration Date

Rockport

3/3/2017

Loan agreement

Common

113,526

3.80

8/28/2022

In July 2017, the Company early adopted ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities From Equity (Topic 480); Derivatives And Hedging (Topic 815): (Part I) Accounting For Certain Financial Instruments With Down Round Features, (Part Ii) Replacement Of The Indefinite Deferral For Mandatorily Redeemable Financial Instruments Of Certain Nonpublic Entities And Certain Mandatorily Redeemable Noncontrolling Interests With A Scope Exception. As a result, certain warrants that were previously classified as a liability due to an existence of down round features became qualified to be classified as equity. The adoption of this standard resulted in $1.0 million reclassification of warrant liability into additional paid in capital as of July 1, 2017.