Establishment Labs(US:ESTA)2022-05-09 16:00Part I Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Q1 2022, including balance sheets, operations, and cash flows, reporting $38.5 million revenue and a $5.9 million net loss Condensed Consolidated Balance Sheets As of March 31, 2022, total assets were $141.6 million, total liabilities $93.7 million, and cash decreased to $44.7 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash | $44,656 | $53,415 | | Total Current Assets | $110,016 | $113,271 | | Total Assets | $141,556 | $139,529 | | Liabilities & Equity | | | | Total Current Liabilities | $36,510 | $31,889 | | Total Liabilities | $93,721 | $88,790 | | Total Shareholders' Equity | $47,835 | $50,739 | | Total Liabilities & Equity | $141,556 | $139,529 | Condensed Consolidated Statements of Operations For Q1 2022, revenue increased 26.8% to $38.5 million, gross profit rose to $24.9 million, but a higher operating loss of $5.6 million resulted in a net loss of $5.9 million Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Revenue | $38,452 | $30,336 | | Gross Profit | $24,936 | $20,090 | | Total Operating Expenses | $30,511 | $22,186 | | Loss from Operations | $(5,575) | $(2,096) | | Net Loss | $(5,933) | $(6,948) | | Basic and Diluted Net Loss per Share | $(0.24) | $(0.29) | Condensed Consolidated Statements of Cash Flows For Q1 2022, net cash used in operating activities was $4.8 million, investing activities $5.7 million, leading to a net decrease in cash of $8.8 million, with the balance at $44.7 million Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,840) | $(6,554) | | Net cash used in investing activities | $(5,739) | $(1,532) | | Net cash provided by financing activities | $1,695 | $1,786 | | Net decrease in cash | $(8,759) | $(6,573) | | Cash at end of period | $44,656 | $77,950 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, revenue by geography, debt agreements, and a significant subsequent debt refinancing event in April 2022, while pursuing U.S. FDA approval Revenue by Geographic Market (in thousands) | Region | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Europe | $14,339 | $12,693 | | Latin America | $12,186 | $8,001 | | Asia-Pacific/Middle East | $11,620 | $9,495 | | Other | $307 | $147 | | Total | $38,452 | $30,336 | - The company relies on NuSil Technology, LLC as the sole supplier of medical-grade silicone, with purchases from NuSil amounting to $7.3 million in Q1 2022, representing 31.4% of total purchases49 - Subsequent Event: On April 26, 2022, the company entered into a new Credit Agreement for up to $225 million, with an initial tranche of $150 million used to repay the outstanding $65.0 million Madryn Credit Agreement in full109137140 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses a 26.8% revenue increase to $38.5 million for Q1 2022, rising operating expenses, and a new $225 million credit facility to support operations and U.S. market entry Results of Operations This sub-section compares Q1 2022 and 2021 financial results, showing 26.8% revenue growth to $38.5 million, a slight gross margin decrease, and significant increases in SG&A expenses Key Operational Metrics Comparison (in thousands) | Metric | Q1 2022 | Q1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $38,452 | $30,336 | +26.8% | | Gross Profit | $24,936 | $20,090 | +24.1% | | SG&A Expense | $26,913 | $18,138 | +48.4% | | R&D Expense | $3,598 | $4,048 | -11.1% | | Net Loss | $(5,933) | $(6,948) | -14.6% | - The increase in SG&A was primarily due to a $5.6 million increase in personnel costs, a $1.7 million increase in consulting fees (partly for Sarbanes-Oxley compliance), and a $0.6 million increase in sales commissions167 - Gross margin decreased to 64.8% from 66.2% year-over-year, primarily due to geographic mix shifting to Latin American markets and a 3.1% negative impact from inventory obsolescence166 Liquidity and Capital Resources As of March 31, 2022, the company had $44.7 million in cash and an accumulated deficit of $212.3 million, with a new $225 million credit facility secured in April 2022 to strengthen liquidity - Cash balance was $44.7 million as of March 31, 2022, compared to $53.4 million at December 31, 2021175 - In April 2022, the company entered a new credit agreement for up to $225 million and repaid its existing $65.0 million Madryn debt, including a $6.5 million early repayment penalty180 - Net cash used in operating activities for Q1 2022 was $4.8 million, an improvement from $6.6 million in Q1 2021176177 Quantitative and Qualitative Disclosures About Market Risk The company reported no material changes to its market risk during Q1 2022, referring to the detailed disclosure in its Annual Report on Form 10-K - No material changes to market risk were reported for the quarter ended March 31, 2022184 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2022, due to a material weakness in internal control over financial reporting, with remediation underway - Disclosure controls and procedures were concluded to be ineffective as of March 31, 2022185 - A material weakness related to user access control deficiencies and lack of segregation of duties, first reported for year-end 2021, persists186 - A remediation plan is underway and is expected to be implemented prior to the end of fiscal 2022187 Part II Legal Proceedings The company reports no material legal proceedings requiring disclosure under Regulation S-K - The company is not a party to any material legal proceedings193 Risk Factors This section details numerous risks, including the costly and uncertain FDA approval process, reliance on a single-source supplier, intense competition, and a material weakness in internal controls Risks Related to Development and Commercialization This sub-section highlights risks in product development and market entry, including costly and uncertain U.S. FDA approval for Motiva Implants and the need for accurate demand forecasting - The company's Motiva Implants are not currently approved for sale in the U.S., and obtaining FDA approval is a costly, time-consuming, and uncertain process that is critical for future growth202 - The ability to accurately forecast customer demand and manage inventory is critical, as both shortages and oversupply could adversely impact financial results210 Risks Related to Business, Industry and Operations This sub-section outlines broad business risks, including a history of net losses, intense competition, potential negative publicity regarding breast implant safety, and global economic conditions - The company has a history of net operating losses, with an accumulated deficit of $212.3 million as of March 31, 2022, and expects to incur losses for the foreseeable future214 - Negative publicity and regulatory actions regarding breast implant-associated anaplastic large cell lymphoma (BIA-ALCL), linked to competitors' textured products, could reduce overall demand for breast implants223 - The military conflict between Russia and Ukraine may adversely affect business in Europe; Russia and Ukraine accounted for 1.7% of net revenue in Q1 2022268 Risks Related to Manufacturing and Third-Party Relationships Key risks include reliance on a single-source supplier (NuSil) for medical-grade silicone and other single-source suppliers for components, creating manufacturing and operational dependencies - The company relies on NuSil as the sole supplier for medical-grade long-term implantable silicone, and an interruption from this supplier could adversely affect the business240 - A substantial portion of sales are through exclusive distributors, and the company does not have direct control over their sales efforts or compliance with regulations244 Risks Related to Intellectual Property and Data Security The company faces risks related to protecting its intellectual property, potential infringement litigation, and vulnerabilities in internal computer systems that could lead to data security breaches and penalties - The company relies on trade secrets and patents, and the inability to protect this intellectual property could harm its competitive position246247 - Internal computer systems are vulnerable to security breaches, and failure to protect sensitive personal data in compliance with laws like GDPR and HIPAA could result in significant penalties and harm the business253254 Risks Related to Ownership of Our Securities and Corporate Structure This section covers investor risks, including share price volatility, a material weakness in internal controls, and differing shareholder rights as a British Virgin Islands company - A material weakness in internal control over financial reporting was identified as of December 31, 2021, related to user access controls and segregation of duties279281 - As a British Virgin Islands company, shareholder rights differ from U.S. law, potentially offering fewer protections and making it difficult to enforce civil liabilities against the company or its directors282283284 Other Information (Items 2, 3, 4, 5, 6) The company reports no unregistered sales of equity, no defaults, no mine safety disclosures, and lists exhibits filed with the report - No transactions or events were reported under Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), or Item 5 (Other Information)291