Establishment Labs Holdings Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; amounts below are in U.S. dollars unless stated otherwise. The company manufactures and sells medical devices, primarily Motiva silicone gel-filled breast implants, in international markets; its products were not approved for commercial sale in the United States.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $10.5 million | $21.7 million | $35.0 million | $42.5 million |
| Gross profit | $7.2 million | $13.0 million | $22.7 million | $24.3 million |
| Gross margin | 69.1% | 60.0% | 65.0% | 57.1% |
| Operating loss | $9.6 million | $9.4 million | $17.3 million | $17.8 million |
| Net loss | $10.5 million | $9.0 million | $28.2 million | $19.8 million |
| Basic and diluted loss per share | $0.45 | $0.44 | $1.23 | $0.97 |
- Q2 revenue fell 51.7% year over year; first-half revenue declined 17.7%. Management attributed the declines principally to pandemic-related restrictions and delays in elective procedures.
- Gross margin improved in both periods, which management attributed to geographic mix, operating efficiencies and improved manufacturing planning. Lower operating expenses partly offset the revenue decline.
- First-half other expense included $6.1 million, primarily reflecting a $5.8 million foreign-currency transaction loss associated mainly with the weakening Brazilian real. First-half derivative fair-value changes were a $0.4 million loss, versus a $2.6 million gain in 2019.
- Cash was $86.4 million at June 30, 2020, compared with $37.7 million at December 31, 2019. Current assets were $136.4 million and current liabilities $20.6 million. Shareholders’ equity was $81.8 million; accumulated deficit was $155.4 million.
- Six-month cash used in operations was $12.9 million, versus $15.1 million in 2019; investing cash use was $2.3 million, versus $5.7 million. Financing provided $64.0 million, chiefly from the February follow-on offering.
- The February 2020 offering generated $63.9 million net proceeds. The company reported $65.0 million Madryn loan principal outstanding ($48.9 million net carrying value), with no principal due until September 30, 2025. The loan is secured by substantially all assets, includes minimum revenue and liquidity covenants, and the company reported covenant compliance at June 30.
Changes, outlook and risks
- COVID-19 caused widespread procedure deferrals from late March to mid-May. Demand recovered to varying degrees in late May and June but remained below pre-pandemic levels; management warned of further volatility and could not reasonably estimate the pandemic’s full operating impact.
- Management expected COVID-19 to materially affect 2020 results, but did not then expect a material effect on liquidity or financial position. It believed available cash, operating cash and additional borrowing would meet requirements for at least 12 months from the financial-statement issuance date. The company nevertheless anticipated continued losses in the intermediate term and may need additional capital.
- COVID-related enrollment delays could add at least six months to the U.S. IDE trial timeline. The trial plans to enroll 800 patients across 40 sites; management estimated trial costs of $30–$40 million over ten years. U.S. commercial approval remains uncertain.
- The company reduced discretionary spending and manufacturing output and cut approximately 70 manufacturing positions by the end of June. It was considering a Costa Rica facility expansion estimated at $35.3 million, with potential additional equipment investment of $4.6 million; timing and plans remained subject to board approval and definitive agreements.
- Foreign-exchange exposure is unhedged. Other notable risks include reliance on NuSil as the sole supplier of medical-grade silicone, regulatory and clinical-trial uncertainty, elective-procedure demand, and possible supply-chain disruption.
- Management disclosed a material weakness in review of the manual consolidation process; disclosure controls were therefore not effective at quarter-end. Remediation efforts included improved controls and work toward implementing SAP.
- The Puregraft distribution relationship ended June 18, 2020; the company reported $2.2 million of related inventory and said unresolved termination matters could lead to legal proceedings or inability to sell that inventory. No material legal proceedings were otherwise reported.
- Subsequent events: an August 1 Italian asset purchase was estimated at approximately $1.2 million including inventory and cash consideration. An August 5 Madryn amendment changed a product-revenue milestone and added European subsidiaries as guarantors.
Most important facts for investors to verify
- Whether elective-procedure demand and revenue recovered after June 2020, and the subsequent effects of COVID-19 resurgences.
- Cash burn, access to financing, and headroom under Madryn’s revenue and liquidity covenants; also verify the terms and timing of the August amendment. The filing text gives the revised milestone date as “September 31, 2021,” which is not a valid calendar date.
- Progress, enrollment, cost and regulatory implications of the U.S. IDE clinical trial, including the reported delay.
- Remediation and independent validation of the material weakness in financial reporting controls.
- NuSil supply continuity and renewal of the supply agreement, which the filing says expires in December 2021.
- Resolution of the Puregraft termination matters and recoverability or disposition of the related inventory.