Establishment Labs Holdings Inc. — Q2 2022 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2022, compared with the same 2021 periods. The company manufactures and markets medical devices, with substantially all revenue from Motiva silicone gel-filled breast implants. Products are sold internationally; Motiva implants were not approved for commercial sale in the United States as of the filing date.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $41.2 million, up 28.7% from $32.0 million | $79.6 million, up 27.8% from $62.3 million |
| Gross profit / margin | $27.5 million / 66.7%, versus $21.5 million / 67.1% | $52.4 million / 65.8%, versus $41.6 million / 66.7% |
| Operating expenses | $37.9 million, versus $26.1 million | $68.4 million, versus $48.3 million |
| Operating loss | $10.4 million, versus $4.6 million | $16.0 million, versus $6.7 million |
| Net loss | $37.1 million, or $1.52 per share, versus $5.3 million, or $0.22 per share | $43.0 million, or $1.77 per share, versus $12.3 million, or $0.51 per share |
Six-month revenue growth reflected market-share gains, particularly in Latin America, recovery in markets affected by COVID-19 and expansion of direct sales. Gross margin declined amid a shift in geographic mix toward Latin America and a first-quarter inventory obsolescence charge that reduced gross profit by 1.4%. SG&A rose 50.1% for the six months, mainly from headcount, sales and marketing, and consulting costs; R&D was broadly flat.
- Cash flow: Six-month operating cash outflow was $16.2 million, versus $7.4 million. Investing outflow was $19.6 million, including $17.0 million for construction in progress. Financing provided $74.0 million, principally from the new debt facility, partly offset by repayment of prior debt.
- Cash and liquidity: Cash was $91.3 million at June 30, up from $53.4 million at year-end 2021. Current assets were $156.4 million and current liabilities $34.8 million. Management stated available cash and operating cash flow were expected to meet liquidity needs for at least 12 months, but noted assumptions could prove incorrect and additional capital may be needed.
- Debt: The company repaid Madryn debt and entered an Oaktree facility on April 26, 2022. The initial $150 million tranche bears 9% annual interest, matures April 2027, and had $151.6 million principal outstanding at June 30, including accrued interest; carrying value was $145.5 million after discounts and issuance costs. Up to $75 million in further tranches is conditional on sales and/or FDA milestones. The facility includes minimum liquidity and gross-sales covenants; the company reported compliance at quarter-end.
Material changes, outlook and risks
- The Madryn refinancing generated a reported $19.0 million extinguishment loss, including a $6.5 million early-repayment penalty. Q2 other expense included a $4.8 million foreign-currency transaction loss, compared with a $2.0 million gain in Q2 2021.
- Management expects losses at least in the near term and does not expect profitability in 2022. It plans continued investment in sales, marketing, R&D, clinical work and manufacturing capacity. No specific revenue or earnings guidance was provided.
- The company completed enrollment in its 827-patient U.S. IDE clinical trial and completed surgeries in the primary reconstruction cohort. Results are intended to support a future FDA PMA submission; U.S. commercial approval remains uncertain.
- The first phase of the Costa Rica manufacturing-campus project was estimated at $45.6 million and expected to add approximately 730,000 units of annual capacity. The company exercised an option to buy the land and shell building, paid approximately $9.5 million, and expected to pay a further approximately $3.1 million by year-end 2022.
- Key risks include ongoing losses and financing needs, regulatory approval and clinical-trial uncertainty, dependence on a single supplier for medical-grade silicone, foreign-exchange exposure, economic and elective-procedure demand, COVID-19 and the Russia-Ukraine conflict. Russia and Ukraine together represented 1.1% of six-month revenue.
- Disclosure controls were concluded to be ineffective at June 30, 2022. The company continued remediation of a material weakness involving user-access controls and segregation of duties, with changes expected before fiscal year-end. No material legal proceedings or contingencies requiring accrual or disclosure were reported.
Important facts for investors to verify
- Progress and timing of FDA PMA submissions, clinical follow-up, and any approval requirements or restrictions.
- Cash burn, future capital needs, and compliance with Oaktree liquidity and sales covenants; confirm terms and availability of conditional debt tranches.
- Manufacturing-project spending, completion timetable, capacity ramp, and the remaining facility purchase payment.
- Whether revenue growth can outpace SG&A growth and improve margins, including the effect of regional mix and inventory reserves.
- Remediation and independent testing of the disclosed internal-control material weakness.
- Supply continuity with NuSil and exposure to currency movements, economic conditions, and changes in demand for breast implants.