Establishment Labs Holdings Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company manufactures and sells Motiva silicone gel-filled breast implants, primarily in international markets; its products were not approved for commercial sale in the United States.
Financial performance
Amounts below are in U.S. dollars, millions, except per-share data and percentages. Statements are unaudited.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $32.0 | $10.5 | $62.3 | $35.0 |
| Gross profit | $21.5 | $7.2 | $41.6 | $22.7 |
| Gross margin | 67.1% | 69.1% | 66.7% | 65.0% |
| Operating expenses | $26.1 | $16.8 | $48.3 | $40.0 |
| Operating loss | $(4.6) | $(9.6) | $(6.7) | $(17.3) |
| Net loss | $(5.3) | $(10.5) | $(12.3) | $(28.2) |
| Basic and diluted loss per share | $(0.22) | $(0.45) | $(0.51) | $(1.23) |
| Operating cash flow | Not separately presented for the quarter | $(7.4) | $(12.9) |
For the six months, revenue increased 78.3% year over year. Management attributed the increase primarily to recovery in elective procedures and business activity after COVID-19 restrictions. Q2 revenue rose 205.5% year over year against the pandemic-affected comparison period. Six-month gross margin improved, which management attributed to geographic mix, manufacturing efficiencies, and planning; Q2 margin declined, primarily reflecting a less favorable product mix compared with Q2 2020.
- Six-month SG&A was $39.9 million, up 19.4%; R&D was $8.4 million, up 27.3%. Increased personnel costs were cited as a principal driver of both.
- Six-month interest expense was $4.4 million. Other expense, net, was $1.0 million, versus $6.1 million in the prior-year period; foreign-currency transaction losses were $0.6 million versus $5.8 million.
- Cash used in investing activities was $2.5 million; financing provided $2.2 million, mainly from stock-option exercises. Cash decreased $7.7 million to $76.8 million.
Financial position and liquidity
At June 30, 2021, cash was $76.8 million, total assets $152.1 million, and current assets $128.2 million. Current liabilities were $27.3 million; total liabilities were $83.3 million. Madryn debt had $65.0 million principal outstanding and a $50.8 million net carrying value, after unamortized discounts and issuance costs. No principal is due until September 30, 2025. The company reported compliance with its financial debt covenants. The facility is secured by substantially all company and certain subsidiary assets, including intellectual property, and includes minimum revenue and liquidity requirements.
Management said available cash and cash from operations should meet liquidity requirements for at least 12 months, while cautioning that assumptions could prove incorrect and additional capital may be needed. The company reported an accumulated deficit of $177.5 million and expected losses to continue in the intermediate term.
Outlook, developments, and risks
- COVID-19: Management reported stronger surgical activity and record quarterly revenue in both Q1 and Q2 2021. The filing is inconsistent on the outlook: the risk and note disclosures say COVID-19 could materially affect 2021 results, while the MD&A says management does not anticipate a material impact. The company says the magnitude remains difficult to estimate.
- Manufacturing expansion: The company is pursuing a proposed Costa Rica campus expansion estimated at $35.3 million, with approximately 170,000 square feet and an initial planned capacity increase of about 400,000 units annually. An additional $4.6 million in equipment could potentially increase capacity by a further 800,000 units. Groundbreaking occurred, but construction was to begin after certain contractual arrangements were finalized and executed.
- U.S. regulatory pathway: The FDA IDE trial’s remaining reconstruction cohort was still enrolling; 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. No U.S. commercial approval or financial guidance was provided.
- Supply concentration: NuSil was the sole supplier of medical-grade silicone and accounted for 58.6% of purchases in the first half of 2021. The supply agreement was due to expire in December 2021; the filing cautions that replacement or renewal on acceptable terms is not assured.
- Controls and leadership: Disclosure controls were deemed ineffective because of an unremediated material weakness in review of the manual consolidation process. Remediation included improved procedures and continued SAP implementation with third-party assistance. CFO Renee Gaeta announced her resignation effective at the end of July 2021; a replacement search had begun.
- Other risks and contingencies: Key risks include regulatory approval and clinical-trial execution, product safety and reputation, competition, foreign-exchange volatility (no hedging in place), and continued operating losses. No material legal proceeding was reported. The company disclosed no contingent liabilities requiring accrual or disclosure at June 30, 2021.
Important facts for investors to verify
- Progress and cost implications of the U.S. IDE reconstruction cohort, and any updated FDA timetable.
- Status and terms of the NuSil supply agreement after its December 2021 expiration date.
- Final cost, timing, financing, and capacity assumptions for the Costa Rica expansion.
- Whether the manual-consolidation material weakness has been remediated and controls tested effectively.
- Cash burn, covenant headroom, and funding needs as the company continues to report losses.
- Management’s current COVID-19 outlook, given the filing’s differing statements on expected impact.