Establishment Labs Holdings Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are to Q1 2019 unless stated otherwise. The company manufactures and sells Motiva silicone gel-filled breast implants, primarily in international markets; it had not received U.S. commercial marketing approval.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $24.5 million | $20.8 million | +17.8% |
| Gross profit / margin | $15.5 million / 63.2% | $11.3 million / 54.2% | Margin +9.0 percentage points |
| Operating expenses | $23.2 million | $19.6 million | Higher SG&A and R&D |
| Operating loss | $7.7 million | $8.4 million | Loss narrowed |
| Net loss | $17.8 million | $10.8 million | Loss widened |
| Basic and diluted loss per share | $0.79 | $0.53 | Loss per share increased |
| Operating cash flow | $(6.8) million | $(8.0) million | Cash use decreased |
Revenue growth reflected greater Motiva Implant sales from deeper penetration in existing markets and sales in new geographies. Manufacturing efficiencies reduced cost of revenue and lifted gross margin; the filing says acquired-inventory amortization reduced Q1 2020 margin by 1.1 percentage points. SG&A rose 18.2% to $19.0 million, mainly with added personnel and related costs; R&D rose 17.2% to $4.2 million, primarily from U.S. clinical-trial costs.
Cash, liquidity and debt
- Cash was $93.6 million at March 31, 2020, compared with $37.7 million at December 31, 2019. The increase largely reflected $63.9 million of net proceeds from a February follow-on share offering.
- Operating activities used $6.8 million; investing activities used $0.9 million. Financing activities provided $63.9 million.
- Madryn debt principal was $65.0 million, with a reported net carrying value of $48.5 million after unamortized discounts and issuance costs. No principal was due before the September 30, 2025 maturity; the debt is secured by substantially all company and certain subsidiary assets and has financial covenants. The company reported covenant compliance at quarter-end.
- The Madryn put-option liability was $5.0 million. The company reported $22.5 million of current liabilities and $147.9 million of current assets.
- Management believed available cash, operating cash and additional borrowing would meet liquidity requirements for at least 12 months, while cautioning that assumptions could prove incorrect and additional capital might be needed.
Material changes, outlook and risks
- Net loss increased substantially despite improved operating results, chiefly because other expense included a $6.2 million foreign-currency transaction loss, primarily associated with Brazilian-real weakening, versus $0.4 million in Q1 2019. The Madryn derivative revaluation also produced a $1.9 million loss, compared with $0.03 million in Q1 2019. The company reported no foreign-currency hedging.
- COVID-19 had already disrupted the business and customer and supplier operations. Elective procedure deferrals, facility closures or reduced hours, travel restrictions and limits on in-person sales were affecting demand and commercial activity. Management expected materially greater negative financial effects in Q2 than Q1 and said the full-year impact could not be reasonably estimated; it provided no 2020 revenue or other full-year financial guidance.
- After quarter-end, the company reduced headcount by 15% and cut base salaries for most personnel by 25% from April 20 through June 30, 2020; the CEO voluntarily accepted a 50% reduction for that period. It also cited savings measures in travel, events and consulting. Management did not then expect COVID-19 to materially affect liquidity or financial position, but warned that this assessment was uncertain.
- COVID-19 delayed enrollment in the U.S. reconstruction clinical-trial cohorts and could add at least six months to the planned regulatory timeline. The company estimated total IDE trial costs of $30–$40 million over ten years. It continued to pursue U.S. FDA approval; Motiva implants were not approved for U.S. commercial sale.
- The company was considering a Costa Rica manufacturing and office expansion estimated at $35.3 million, with potential added equipment investment of $4.6 million for further capacity. It was in design, subject to board approval and definitive agreements, and anticipated groundbreaking in Q4 2020 or Q1 2021.
- Other notable exposures include reliance on NuSil as sole supplier of medical-grade silicone (64.9% of Q1 purchases; supply agreement expires December 2021), international regulatory and market risks, and dependence on Motiva Implants for more than 94% of Q1 revenue.
- Disclosure controls were not effective at quarter-end because of a previously identified material weakness in review of the manual consolidation process. Remediation efforts included improved procedures and SAP implementation support. The company reported no material legal proceedings and no other contingent liabilities requiring accrual or disclosure beyond acquisition-related contingent consideration.
Important facts for investors to verify
- How COVID-related procedure deferrals affected Q2 and subsequent demand, revenue, cash use and manufacturing or supply continuity.
- Whether the company maintained liquidity and compliance with Madryn’s revenue and liquidity covenants as conditions evolved.
- Progress and enrollment in the U.S. IDE trial, the revised regulatory timeline, and the cost and funding plan for the trial.
- Whether the material weakness was remediated and whether financial reporting controls became effective.
- NuSil supply continuity and renewal terms before the December 2021 contract expiration.
- Board approval, final cost, timing and funding of the proposed Costa Rica expansion.
- Foreign-exchange exposure and the effect of further Brazilian-real movements on reported results.