ESTABLISHMENT LABS HOLDINGS INC. You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. See "Special Note Regarding Forward-Looking Statements" preceding Part I, Item I of this Quarterly Report on Form 10-Q. Overview Our line of silicone gel-filled breast implants, branded as Motiva Implants, is the centerpiece of our MotivaImagine medical technology platform. Our post-market surveillance data (which was not generated in connection with aUnited States Food and Drug Administration , or FDA, pre-market approval, or PMA, study but was self collected rather than collected at mandatory follow-ups) and published third-party data indicates that Motiva Implants show low rates of adverse events (including rupture, capsular contracture, and safety related reoperations) that we believe compare favorably with those of our competitors. We believe the proprietary technologies that differentiate our Motiva Implants enable improved safety and aesthetic outcomes and drive our revenue growth. Our MotivaImagine platform enables surgical techniques that we promote as Motiva designed surgeries. We have developed other complementary products and services on our MotivaImagine platform, which are aimed at further enhancing patient outcomes. We have devoted a majority of our resources since inception to developing our Motiva Implants, which we began selling inOctober 2010 . We have incurred net losses in each year since inception, and we have financed our operations primarily through equity financings and debt financings. Our revenue for the nine months endedSeptember 30, 2021 and 2020 was$91.4 million and$57.7 million , respectively, an increase of$33.7 million , or 58.3%. Net losses were$26.9 million for the nine months endedSeptember 30, 2021 as compared to$32.5 million for the nine months endedSeptember 30, 2020 . As ofSeptember 30, 2021 we had an accumulated deficit of$192.2 million . Our cash balance as ofSeptember 30, 2021 was$64.6 million . We are in the process of expanding of our manufacturing facilities and corporate offices in theCoyol Free Zone inCosta Rica . The initial$35.3 million project estimate includes approximately 170,000 square feet of facility space and would initially increase our manufacturing capacity by approximately 400,000 units per year, and potentially increase capacity by 800,000 units with an additional incremental$4.6 million investment in manufacturing equipment. We held the groundbreaking ceremony for our new Sulàyöm Innovation Campus inCosta Rica in the second quarter of 2021. Construction on the new building began following finalization and execution of certain contractual arrangements in the third quarter of 2021. See Note 3, "Balance Sheet Accounts" for additional information regarding this construction project and our right to purchase the title to the land and cold shell building currently under construction.
We have made and continue to make significant investments in additional
manufacturing capacity, marketing, customer service, and a direct sales force in
certain territories like
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Table of Contents As a result of these and other factors, including those set forth under "Business Update Regarding COVID-19" below, we expect to continue to incur net losses in the intermediate term and may need to raise additional capital through equity and debt financings in order to fund our operations. Our operating results may fluctuate on a quarterly or annual basis in the future, and our growth or operating results may not be consistent with predictions made by securities analysts, if any. If we are unable to achieve our revenue growth objectives, we may not be able to achieve profitability. Components of Results of Operations Revenue We commenced sales of our Motiva Implants inOctober 2010 and these products have historically accounted for the majority of our revenues. Sales of our Motiva breast implants accounted for over 98% of our revenues for the nine months endedSeptember 30, 2021 , and we expect our revenues to continue to be driven primarily by sales of these products. We primarily derive revenue from sales of our Motiva Implants to two types of customers: (1) medical distributors and (2) direct sales to physicians, hospitals, and clinics. We recognize revenue related to the sales of products at the time of shipment, except for a portion of our direct sales revenue that is generated from the sale of consigned inventory maintained at physician, hospital, and clinic locations. For consignment sales, revenue is recognized at the time we are notified by the consignee that the product has been implanted. Our contracts with distributors do not typically contain right of return or price protection and have no post-delivery obligations. We expect our revenue to increase as we enter new markets, expand awareness of our products in existing markets, and grow our distributor network and direct sales force. We also expect our revenue to fluctuate from quarter to quarter due to a variety of factors, including seasonal fluctuations in demand for Motiva Implants. We are also affected by foreign currency fluctuations. Cost of Revenue and Gross Margin Our implants are manufactured at our two facilities inCosta Rica . Cost of revenue is primarily the cost of silicone but also includes other raw materials, packaging, components, quality assurance, labor costs, as well as manufacturing and overhead expenses. Cost of revenue also includes depreciation expense for production equipment, and amortization of certain intangible assets. We calculate gross margin as revenue less cost of revenue for a given period divided by revenue. Our gross margin may fluctuate from period to period depending, in part, on the efficiency and utilization of our manufacturing facilities, targeted pricing programs, and sales volume based on geography, customer and product type. Operating Expenses Sales, General and Administrative Sales, general and administrative, or SG&A, expenses primarily consist of compensation, including salary, share-based compensation and employee benefits for our sales and marketing personnel, and for administrative personnel that support our general operations such as information technology, executive management, financial accounting, customer service, and human resources personnel. SG&A expenses also includes costs attributable to marketing, sales support, travel, legal services, financial audit fees, insurance costs, and consulting services. We expect to incur additional SG&A expenses in connection with being a public company, which may increase further subsequent toDecember 31, 2021 when we are no longer able to rely on the "emerging growth company" exemption we are afforded under the Jumpstart Our Business Startups Act of 2012, or JOBS Act. We expect our SG&A expenses to continue to increase in absolute dollars for the foreseeable future as our business grows and we continue to invest in our sales, marketing, medical education, training and general administration resources to build our corporate infrastructure. However, we expect our SG&A expenses to decrease as a percentage of our revenue over the long term, although our SG&A expenses may fluctuate from period to period due to the timing of expenses related to our sales and marketing campaigns. 35
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Table of Contents Research and Development Our research and development, or R&D, activities primarily consist of engineering and research programs associated with our products under development, as well as R&D activities associated with our clinical development activities. Our R&D expenses primarily consist of compensation, including salary, share-based compensation and employee benefits for our R&D and clinical personnel. We also incur significant expenses for supplies, development prototypes, design and testing, clinical study costs and product regulatory and consulting expenses. We expect our R&D expenses to continue to increase in absolute dollars and as a percentage of revenue for the foreseeable future as we continue to advance our products under development, as well as initiate and prepare for additional clinical studies. We received an approval of an investigational device exemption, or IDE, from the FDA inMarch 2018 to initiate a clinical trial and enrolled the first patient inApril 2018 . InAugust 2019 , we completed all patient surgeries for the IDE aesthetic cohorts, which include primary augmentation and revision augmentation. As ofJune 2020 , we successfully completed enrollment in the revision reconstruction sub-cohort and we are continuing to enroll subjects in the remaining reconstruction cohort. Although we continue to activate trial sites and secureInstitutional Review Board approvals, the COVID-19 pandemic has delayed enrollment in the reconstruction cohort for our IDE clinical trial, which will add at least six months to our planned regulatory timeline. We plan to enroll 800 patients in the study across 40 sites inthe United States ,Germany andSweden . The results of the study are expected to support a pre-market approval, or PMA, submission to the FDA. We estimate that total costs for this IDE clinical trial will be between$30.0 million and$40.0 million over ten years. We also have other products under development for which we may be required to conduct clinical trials in future periods in order to receive regulatory approval to market these products. Interest Expense Interest expense consists primarily of cash and non-cash interest related to outstanding debt and amortization of debt discounts. As ofSeptember 30, 2021 , we had$65.0 million in outstanding principal under our term loans. Change in Fair Value of Derivative Instruments Change in fair value of derivative instruments consists of changes in the fair value of the put and call option liabilities associated with outstanding debt instruments. Change in Fair Value of Contingent Consideration Change in fair value of contingent consideration consists of changes in the fair value of contingent equity consideration related to past asset acquisitions. Other Income (Expense), Net Other income (expense), net primarily consists of foreign currency gains/losses and interest income. Income Tax Expense Income tax expense consists primarily of income taxes in foreign jurisdictions in which we conduct business. Due to our history of losses, with the exception ofBelgium , we maintain a full valuation allowance for deferred tax assets including net operating loss carry-forwards, R&D tax credits, capitalized R&D and other book versus tax differences. Business Update Regarding COVID-19 The COVID-19 pandemic has presented a substantial public health and economic challenge around the world and materially and adversely affected our business in fiscal 2020 and has continued to create business uncertainties in fiscal 2021. We continue to closely monitor developments related to the COVID-19 pandemic and our decisions will continue to be driven by the health and well-being of our employees, our distributor and plastic surgeon customers, and their patients while maintaining operations to support our customers and their patients in the near-term. •Surgery Deferrals: From lateMarch 2020 tomid-May 2020 , among other impacts on our business related to the pandemic, plastic surgeons and their patients deferred surgical procedures in which our products otherwise could have been used, including surgeries for our clinical trial participants. This decrease in demand for our products recovered to varying degrees in the latter half of May and intoJune 2020 , though still below pre-pandemic levels though the rest of fiscal 2020, as certain geographies reopened 36
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Table of Contents after an initial improvement in COVID-19 infection rates and allowed plastic surgeons to resume providing procedures. However, the impact from the COVID-19 outbreak in fiscal 2020 has not had a material effect on the Company's liquidity or financial position. During the first nine months of 2021, we saw an increase in surgical activity as women's interest in plastic surgery exceeded pre-pandemic levels, and most geographies modified procedures to mitigate infection risk to allow returning to normalized operating levels. However, if a resurgence of infections is observed, we may see continued volatility through at least the duration of the pandemic as geographies respond to current local conditions. The duration of further deferrals of surgical procedures, the magnitude of such deferrals, the timing and extent of the economic impact of the pandemic, and the pace at which the economy recovers therefrom, cannot be determined at this time. We continue to work closely with our plastic surgeon customers, distributors and suppliers to navigate through this unforeseen event while maintaining flexible operations and investing for future growth. •Operations: Our sales, marketing and research and development efforts have continued since the outbreak of the pandemic. However, the pandemic has adversely affected our business despite the steps taken to mitigate its impact. To protect the safety, health and well-being of our employees, distributor and plastic surgeon customers, and communities, we implemented preventative measures including travel restrictions and requiring all office-based employees to work from home, except for those related to manufacturing and select others, as permitted under governmental orders. Our manufacturing, distribution and supply chain has largely been uninterrupted, but could be disrupted as a result of the pandemic due to staffing shortages, production slowdowns, stoppages, or disruptions in delivery systems. •2020 Results: Given that the onset of COVID-19 occurred toward the end of the first quarter of 2020, our total revenue for the second quarter of 2020 was significantly lower compared to the same period in 2019. Our revenue for the third and fourth quarters of 2020, however, recovered and was comparable or exceeded the revenue in corresponding quarters of fiscal 2019. The first and second quarters of 2021 resulted in record quarterly revenue, which points to the recovering global business environment and normalizing medical protocols as countries manage new COVID-19 infections. •2021 Results: The third quarter of 2021 saw a decline in revenue as compared to the previous quarters in fiscal 2021, following more normalized seasonal patterns. Despite this decline, surgical activity remained above pre-pandemic levels during the third quarter of 2021. •Outlook: At this time, the full extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is uncertain and cannot be predicted with reasonable accuracy and will depend on future developments that are also uncertain and cannot be predicted with reasonable accuracy. However, management does not expect future results of operations to be materially impacted by the COVID-19 pandemic.
For additional information on the various risks posed by the COVID-19 pandemic on our business, financial condition and results of operations, please see Part II, Item 1A. Risk Factors in this report.
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