Establishment Labs Holdings Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited consolidated results. The company manufactures and sells medical devices, principally Motiva silicone breast implants, in international markets. It had not received U.S. commercial approval for Motiva Implants by quarter-end.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Revenue | $38.5 million | $30.3 million | Up 26.8%; management cited market-share gains, recovery in global markets, and expansion of direct sales. |
| Gross profit / margin | $24.9 million / 64.8% | $20.1 million / 66.2% | Margin down 1.4 percentage points, attributed to geographic mix and Puregraft inventory obsolescence; the latter reduced gross profit by 3.1%. |
| Operating expenses | $30.5 million | $22.2 million | SG&A rose 48.4% to $26.9 million, primarily from higher personnel costs, consulting, and commissions; R&D fell 11.1% to $3.6 million. |
| Operating loss | $5.6 million | $2.1 million | Loss widened as operating expenses grew faster than gross profit. |
| Net loss / loss per share | $5.9 million / $0.24 | $6.9 million / $0.29 | Net loss narrowed; Q1 2022 included a $2.8 million foreign-currency transaction gain, mostly unrealized. |
| Operating cash flow | $(4.8) million | $(6.6) million | Cash used decreased year over year. |
| Investing cash flow | $(5.7) million | $(1.5) million | Included $4.6 million of construction-in-progress spending, principally for the new Costa Rica manufacturing facility. |
| Cash | $44.7 million at March 31 | $53.4 million at December 31, 2021 | Quarterly cash decrease was $8.8 million. |
| Debt | $65.0 million Madryn principal; $52.5 million net carrying value | — | Madryn weighted-average rate was approximately 10.6%; reported effective rate was 18.4%. No principal was due before September 2025. |
Business changes and outlook
- Revenue grew across regions: Europe $14.3 million, Latin America $12.2 million, and Asia-Pacific/Middle East $11.6 million. Brazil represented 17.4% of revenue, versus 10.6% a year earlier. No customer accounted for more than 10% of quarterly revenue.
- Management described Q1 as record quarterly revenue and linked growth particularly to Latin America and expanded direct sales. The filing gives no specific full-year revenue or earnings guidance; management expected near-term losses and stated it did not expect to be profitable in 2022.
- The company planned to complete enrollment of 800 patients at 40 sites in its U.S. IDE study during fiscal 2022. COVID-19 had delayed enrollment in the remaining reconstruction cohort. A modular FDA PMA submission had begun in Q4 2021; the first module was submitted. Preliminary two-year primary-augmentation follow-up results were released in April 2022.
- The first phase of the Costa Rica manufacturing-campus project was estimated at $45.6 million, with approximately 100,000 square feet and an expected initial capacity increase of about 730,000 units annually. The company reported $4.6 million of construction-in-progress capital spending in Q1.
- Management said available cash and cash from operations were expected to meet liquidity needs for at least 12 months, but noted assumptions could prove incorrect and additional capital might be needed.
Subsequent financing and other notable items
- On April 26, 2022, the company entered into an Oaktree credit agreement for up to $225 million. It drew $150 million; part of the proceeds repaid the $65 million Madryn principal and interest and a $6.5 million early-repayment penalty. The Madryn facility was terminated.
- The Oaktree loans mature five years after closing and carry 9% interest, potentially falling to 8.25% after specified milestones. Additional $25 million tranches are conditional on sales and/or FDA milestones. The agreement includes a minimum-liquidity covenant of $20 million, rising to $25 million after funding of Tranche B, and minimum-sales covenants. It also includes original issue discounts, a 3% exit fee, and prepayment premiums.
- Russia and Ukraine together represented 1.7% of Q1 2022 revenue; management anticipated regional revenue would be negatively affected while the conflict continued.
- The sole supplier of medical-grade silicone, NuSil, supplied 31.4% of the company’s purchases in Q1. Its supply agreement was due to expire May 13, 2022; the filing lists amendments dated April 1 and May 1, 2022.
- Disclosure controls were deemed ineffective as of March 31, 2022. The company was addressing a material weakness involving user-access controls and segregation of duties, with remediation changes expected before fiscal year-end.
- The company reported no material legal proceedings and no contingent liabilities requiring accrual or disclosure at quarter-end.
Key risks and items to verify
- Regulatory execution: Motiva Implants lacked U.S. commercial approval; verify IDE enrollment, clinical results, PMA progress, and any approval conditions.
- Financing and liquidity: Review Oaktree drawdowns, covenant headroom, future funding conditions, interest and prepayment costs, and cash runway against continuing operating losses and capital spending.
- Supplier continuity: Confirm the status and terms of the NuSil supply agreement and whether alternatives are qualified; the silicone supplier is single-source.
- Margins and inventory: Track geographic mix, gross margin, and the elevated inventory-obsolescence reserve, which increased to $2.6 million from $1.2 million at year-end.
- Controls remediation: Verify whether the disclosed access-control and segregation-of-duties weakness was remediated and whether disclosure controls were subsequently judged effective.
- Foreign exchange and regional exposure: Q1’s net loss benefited from a largely unrealized currency gain; currency movements, Brazil concentration, COVID-19, and the Ukraine conflict may affect results.
- Reported-value consistency: The statements of operations report other income, net, of $2.709 million, while MD&A reports $2.729 million. Verify the correct figure against the filed financial statements.