Establishment Labs Holdings Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited consolidated results; amounts below are in U.S. dollars unless noted. The company manufactures and sells 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.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $30.3 million | $24.5 million | Up 23.9% |
| Gross profit / margin | $20.1 million / 66.2% | $15.5 million / 63.2% | Margin up 3.0 percentage points |
| Operating expenses | $22.2 million | $23.2 million | Down $1.0 million |
| Operating loss | $2.1 million | $7.7 million | Loss narrowed |
| Net loss / loss per share | $6.9 million / $0.29 | $17.8 million / $0.79 | Loss narrowed |
| Net cash used in operations | $6.6 million | $6.8 million | Use decreased $0.2 million |
Revenue growth reflected recovery in global markets after pandemic-related elective-surgery restrictions. Management attributed improved gross margin to geographic mix, manufacturing efficiencies and planning. The smaller net loss also reflected lower foreign-currency transaction losses ($2.7 million versus $6.2 million) and a $0.2 million gain from changes in derivative fair value, compared with a $1.9 million loss in Q1 2020. Motiva Implants accounted for more than 97% of Q1 2021 revenue.
Revenue by geography was Europe $12.7 million, Latin America $8.0 million, Asia-Pacific/Middle East $9.5 million and other $0.1 million. Brazil represented 10.6% of revenue; no other individual country exceeded 10%.
Financial position and liquidity
- Cash was $78.0 million at March 31, 2021, down from $84.5 million at year-end 2020. The company reported a $6.6 million net decrease in cash during the quarter.
- Current assets were $128.3 million and current liabilities $24.8 million. Total assets were $152.3 million; total liabilities were $79.8 million.
- Madryn debt had $65.0 million outstanding principal and a $50.3 million net carrying value. No principal is due until maturity on September 30, 2025; the company reported compliance with all financial covenants. The debt is secured by substantially all company and certain subsidiary assets, and includes minimum revenue and liquidity requirements.
- Management stated that cash and cash from operations were expected to meet liquidity needs for at least 12 months, while cautioning that assumptions could prove incorrect and additional capital may be needed. Operating cash outflow was $6.6 million; investing cash outflow was $1.5 million.
- Shareholders’ equity was $72.6 million and accumulated deficit was $172.2 million. The company had no off-balance-sheet arrangements.
Outlook, material developments and risks
- Growth investment: The company was evaluating a Costa Rica manufacturing and office expansion estimated at $35.3 million, with planned initial capacity of about 400,000 additional units annually; a further estimated $4.6 million equipment investment could increase capacity by another 800,000 units. Plans remained subject to board approval and definitive agreements; management anticipated breaking ground in Q2 2021.
- U.S. regulatory pathway: The FDA IDE study was enrolling reconstruction cohorts; COVID-19 had delayed enrollment 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 expect losses in the intermediate term and provided no specific revenue or earnings guidance.
- COVID-19: Management reported increased surgical activity and record quarterly revenue, but noted that renewed infections, procedure deferrals, operational disruption and clinical-trial delays remained risks. The filing’s discussion is mixed: one section says 2021 results could be materially affected, while MD&A says management does not anticipate a material impact. The company said the impact could not be reliably estimated.
- Supply concentration: Avantor/NuSil was the sole supplier of medical-grade silicone; it represented 55.8% of purchases in Q1 2021. The supply agreement was due to expire in December 2021, with no assurance of renewal on acceptable terms.
- Financial reporting controls: Management concluded disclosure controls were not effective because of a material weakness in review of the manual consolidation process. Remediation efforts included improved controls and SAP implementation support; remediation was not reported as complete.
- Other risks and contingencies: The company cited regulatory approval and market-acceptance uncertainty, product-liability and breast-implant safety concerns, foreign exchange exposure (no hedging), and reliance on international distributors. No material legal proceedings or contingencies requiring accrual were reported. A related-party distributor owned by the CEO’s family member generated $0.2 million of quarterly revenue.
Important facts for investors to verify
- Progress on the NuSil supply agreement before its December 2021 expiration and any qualified alternative-source plans.
- FDA IDE enrollment, trial timing and costs, and any changes to the U.S. regulatory timeline.
- Whether the proposed manufacturing expansion received board approval, secured definitive agreements and remained within its stated budget.
- Quarterly cash burn, working-capital needs, covenant compliance and the basis for management’s 12-month liquidity assessment.
- Remediation and independent testing of the manual-consolidation control weakness; controls were still deemed ineffective at quarter-end.
- How COVID-19 affects elective procedures and the consistency of management’s stated outlook across the filing.