Establishment Labs Holdings Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial amounts below are in U.S. dollars; “m” means million. The company manufactures and sells Motiva silicone breast implants, principally in international markets. The filing is unaudited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $22.8m | $22.9m | $57.7m | $65.3m |
| Gross profit | $15.1m | $14.2m | $37.9m | $38.5m |
| Gross margin | 66.6% | 62.3% | 65.6% | 58.9% |
| Operating expenses | $17.7m | $23.0m | $57.8m | $65.0m |
| Operating loss | $(2.6)m | $(8.8)m | $(19.9)m | $(26.5)m |
| Net loss | $(4.2)m | $(12.8)m | $(32.5)m | $(32.6)m |
| Basic and diluted loss per share | $(0.18) | $(0.62) | $(1.40) | $(1.59) |
For the nine-month period, foreign-currency transaction losses were $5.4m, compared with $2.6m in 2019. Interest expense was $7.2m, including $0.7m of costs to amend the Madryn loan in August. Cash used in operating activities was $15.9m, versus $26.0m; investing activities used $4.4m, versus $6.4m. Financing provided $64.1m, primarily from a February follow-on share offering that generated $63.9m net proceeds.
Financial position and liquidity
At September 30, 2020, cash was $81.4m, compared with $37.7m at year-end 2019. Current assets were $134.0m and current liabilities $20.1m. Total liabilities were $74.7m and shareholders’ equity $80.0m. Madryn loan principal was $65.0m; its balance-sheet carrying value, net of discounts and issuance costs, was $49.4m. No principal payments are due until maturity on September 30, 2025. The loan is secured by substantially all company and certain subsidiary assets and includes minimum revenue and liquidity covenants; the company reported compliance at quarter-end.
Management believes available cash and expected operating cash flows are sufficient for at least 12 months from issuance of the statements, while cautioning that its assumptions may prove incorrect. The company has an accumulated deficit of $159.6m and expects continued losses in the intermediate term.
Changes versus the prior comparable period
- Q3 revenue was essentially unchanged year over year, after recovering from the significant Q2 decline as some markets reopened elective procedures.
- Nine-month revenue fell 11.6%, primarily due to COVID-19-related procedure restrictions and slower business activity, especially in Q2. For the quarter, lower Latin American sales were offset by stronger Europe and Asia-Pacific/Middle East revenue.
- Gross margin improved in both periods. Management attributed this to geographic mix, manufacturing efficiencies and better planning.
- Operating expenses declined: Q3 SG&A fell 21.9% and R&D fell 27.7%; nine-month SG&A and R&D fell 9.8% and 17.9%, respectively. Cost actions and delayed clinical-trial activity contributed.
- Q3 net loss narrowed substantially. Nine-month net loss was nearly unchanged, as improved operating results were offset in part by higher foreign-currency losses and lower derivative fair-value gains.
- Cash increased mainly because of the follow-on offering. Common shares outstanding rose from 20.65m at December 31, 2019 to 23.42m at September 30, 2020.
Outlook, risks and notable items
- No numerical revenue or earnings guidance is provided. Management expects continued losses at least in the near term and says 2020 results, and potentially 2021 to a lesser degree, may be materially affected by COVID-19. The scale of the impact is not reasonably estimable.
- COVID-19 caused elective-procedure deferrals, disrupted customer and supplier activity, and delayed U.S. clinical-trial reconstruction-cohort enrollment. Management said the delay could add at least six months to the planned regulatory timeline. Manufacturing was largely uninterrupted, but production was reduced and approximately 70 manufacturing positions were eliminated at the end of June.
- The FDA IDE trial is intended to support a U.S. premarket approval application. The company had completed aesthetic-cohort surgeries and continued enrolling reconstruction cohorts. It estimates total trial costs of $30m–$40m over ten years and plans to enroll 800 patients across 40 sites.
- A proposed Costa Rica manufacturing and office expansion has an initial estimated cost of $35.3m, with planned initial capacity of about 400,000 additional units annually; a further $4.6m equipment investment could increase capacity. It was in design and subject to board approval and definitive agreements, with groundbreaking anticipated in Q1 2021.
- NuSil is the sole supplier of medical-grade silicone, representing 67.1% of purchases in the first nine months of 2020. The supply agreement expires in December 2021. A disruption, unfavorable renewal or price increase could affect production.
- Foreign-exchange exposure is material: the company does not hedge currencies and reported a $5.4m nine-month transaction loss, principally related to the Brazilian real. Regulatory approval, market adoption, competition, distributor performance and the safety perception of breast implants are additional risks.
- The company reported no material legal proceedings or accrued contingencies beyond acquisition-related consideration. It identified COVID-19 as a potential impairment trigger but recorded no goodwill or intangible-asset impairment through September 30.
- Management concluded disclosure controls were effective and reported that the previously disclosed weakness in review of manual consolidation was remediated as of September 30, 2020.
Important facts for investors to verify
- Whether elective-procedure demand and revenue recovery continued after Q3, and how COVID-19 developments affected subsequent results.
- Progress, enrollment and timing of the U.S. IDE trial, and the implications of the stated potential six-month delay and estimated trial costs.
- Liquidity and covenant headroom under the Madryn agreement, including the revenue milestone adjusted to September 2021 and the loan’s high effective interest cost.
- Status and final approval of the proposed Costa Rica expansion, its financing, timing and expected capacity.
- Renewal or replacement plans for the NuSil supply agreement before its December 2021 expiration.
- Whether reported cost savings and improved gross margins are sustainable as sales volumes and product mix change.