Establishment Labs Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company manufactures and sells medical devices, with substantially all revenue from Motiva silicone gel-filled breast implants. Products were sold internationally; Motiva Implants were not approved for commercial sale in the United States.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $29.0m | $22.8m | $91.4m | $57.7m |
| Gross profit | $19.6m | $15.1m | $61.2m | $37.9m |
| Gross margin | 67.6% | 66.6% | 67.0% | 65.6% |
| Operating expenses | $28.7m | $17.7m | $77.0m | $57.8m |
| Operating loss | $(9.0)m | $(2.6)m | $(15.8)m | $(19.9)m |
| Net loss | $(14.7)m | $(4.2)m | $(26.9)m | $(32.5)m |
| Net loss per share | $(0.61) | $(0.18) | $(1.13) | $(1.40) |
For the nine months, revenue rose 58.3% year over year, while gross margin improved 1.4 percentage points. Net loss narrowed, but Q3 net loss increased substantially year over year as operating expenses rose faster than revenue. Q3 SG&A increased 65.1% to $24.8m, mainly from higher personnel costs, consulting, sales and marketing. Q3 R&D increased 42.3% to $3.9m. Foreign currency transaction losses were $4.0m for the nine months, versus $5.4m a year earlier.
Cash, liquidity and debt
- Cash was $64.6m at September 30, 2021, down from $84.5m at December 31, 2020. The company used $19.8m in operating cash flow and $3.5m in investing cash flow during the first nine months; financing provided $3.8m, primarily from stock-option exercises.
- Madryn debt had $65.0m principal outstanding and a $51.3m net carrying value after unamortized discounts and issuance costs. It matures September 30, 2025, with no principal payments due before maturity. The weighted-average interest rate was approximately 10.6%; the disclosed effective interest rate was 18.4%. The company reported compliance with financial covenants.
- Management said available cash and cash from operations should fund liquidity needs for at least 12 months, while noting assumptions could prove incorrect and additional capital may be needed. The debt agreement restricts additional borrowing and other actions.
- Current assets were $124.7m and current liabilities $30.5m. Accumulated deficit was $192.2m.
Changes, outlook and notable items
- Management attributed revenue growth primarily to recovery in global elective surgery activity after COVID-19 disruptions. It said Q3 revenue was below the first two quarters of 2021, consistent with more normalized seasonality, although surgical activity remained above pre-pandemic levels.
- Management expects continued losses in the intermediate term as it invests in sales, marketing, manufacturing capacity, R&D and U.S. clinical and regulatory work. No specific revenue or earnings guidance was provided. Management said it did not expect future operations to be materially affected by COVID-19, while acknowledging substantial uncertainty.
- The U.S. IDE reconstruction cohort remained in enrollment; COVID-19 had delayed enrollment and added at least six months to the planned regulatory timeline. The company estimated total IDE trial costs of $30m–$40m over ten years.
- Expansion of the Costa Rica manufacturing campus was underway. The initial project estimate was $35.3m for approximately 170,000 square feet, with planned initial capacity of about 400,000 additional units annually; a further $4.6m equipment investment could raise added capacity to 800,000 units. The filing also describes a right to purchase the land and cold-shell building for about $12.6m, or lease it, and an option to buy adjacent land for about $2.8m.
- NuSil was the sole supplier of medical-grade silicone and represented 59.9% of purchases for the nine months. The supply agreement was due to expire in December 2021 and was being renegotiated.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in review of the manual consolidation process. Management had begun remediation, including improved procedures and SAP implementation support; the weakness would remain until controls operated effectively for a sufficient period and testing confirmed remediation.
- No material legal proceedings or accrued contingent liabilities were reported. The company reported no off-balance-sheet arrangements.
Important investor verification points
- Track cash burn, working-capital needs and whether the stated 12-month liquidity outlook remains supportable; assess potential financing needs and dilution.
- Verify progress and cost of the Costa Rica facility expansion, including the purchase-versus-lease decision and capacity timing.
- Monitor the NuSil contract renewal and any qualified alternative supply arrangements.
- Follow FDA trial enrollment, timing, costs and the prospects and requirements for U.S. approval.
- Assess whether the manual-consolidation control weakness is remediated and whether subsequent filings report effective controls.
- Evaluate currency exposure, foreign-exchange losses and the high-cost Madryn debt, including covenant compliance and maturity terms.