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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One) 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38593
Establishment Labs Holdings Inc.
(Exact name of Registrant as specified in its charter)
British Virgin IslandsNot applicable
State or Other Jurisdiction of
Incorporation or Organization
I.R.S. Employer Identification No.
Building B15 and 25
Coyol Free Zone
Alajuela
Costa Rica
Not applicable
Address of Principal Executive Offices
Zip Code
+506 2434 2400
Registrant’s Telephone Number, Including Area Code
Not applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common Shares, No Par ValueESTA
The NASDAQ Capital Market
The number of the registrant’s common shares outstanding as of August 6, 2020 was 23,367,033.



TABLE OF CONTENTS
  Page
 
 
 
 

i


EXPLANATORY NOTE

In this report, unless the context indicates otherwise, the terms “Establishment Labs,” “Company,” “we”, “us” and “our” refer to Establishment Labs Holdings Inc., a British Virgin Islands entity, and its consolidated subsidiaries.
We own, or have rights to, trademarks and trade names that we use in connection with the operation of our business, including Establishment Labs and our logo as well as other brands such as Motiva Implants, SilkSurface/SmoothSilk, VelvetSurface, ProgressiveGel, TrueMonobloc, BluSeal, Divina, Ergonomix and MotivaImagine, among others. Other trademarks and trade names appearing in this report are the property of their respective owners. Solely for your convenience, some of the trademarks and trade names referred to in this report are listed without the ® and TM symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks and trade names.

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this report. Any statements that refer to projections of our future financial or operating performance, anticipated trends in our business (including the impact of the COVID-19 outbreak), our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism about future operating results, are forward-looking statements.
We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this report, or that we may make orally or in writing from time to time, are expressions of our beliefs and expectations based on currently available information at the time such statements are made. Such statements are based on assumptions, and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material.
Factors that could cause or contribute to these differences include, among others, those risks and uncertainties discussed under the sections contained in this Form 10-Q entitled “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part I, Item 3. Quantitative and Qualitative Disclosures about Market Risk,” and “Part II, Item 1A. Risk Factors”, and our other filings with the Securities and Exchange Commission. The risks included in those documents are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
We are not undertaking any obligation to update any forward-looking statements. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.
1

Table of Contents
ESTABLISHMENT LABS HOLDINGS INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
June 30,
2020
December 31,
2019
(Unaudited)
Assets
Current assets:
Cash$86,382  $37,655  
Accounts receivable, net of allowance for doubtful accounts of $1,954 and $1,026
17,142  22,767  
Inventory, net29,057  28,660  
Prepaid expenses and other current assets3,841  6,757  
Total current assets136,422  95,839  
Long-term assets:
Property and equipment, net of accumulated depreciation16,085  16,418  
Goodwill465  465  
Intangible assets, net of accumulated amortization3,480  3,441  
Other non-current assets360  368  
Total assets$156,812  $116,531  
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable$8,293  $10,366  
Accrued liabilities10,517  10,677  
Other liabilities, short term1,742  2,199  
Total current liabilities20,552  23,242  
Long-term liabilities:
Note payable, Madryn, net of debt discount and issuance costs48,939  48,142  
Madryn put option3,509  3,072  
Other liabilities, long term2,026  2,461  
Total liabilities75,026  76,917  
Commitments and contingencies (Note 7)
Shareholders’ equity:
Common shares - zero par value, unlimited amount authorized; 23,762,787 and 21,057,040 shares issued at June 30, 2020 and December 31, 2019, respectively; 23,354,717 and 20,648,970 shares outstanding at June 30, 2020 and December 31, 2019, respectively
211,932  147,688  
Additional paid-in-capital24,338  21,214  
Treasury shares, at cost, 408,070 shares held at June 30, 2020 and December 31, 2019
(2,854) (2,854) 
Accumulated deficit(155,355) (127,125) 
Accumulated other comprehensive income3,725  691  
Total shareholders’ equity81,786  39,614  
Total liabilities and shareholders’ equity$156,812  $116,531  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ESTABLISHMENT LABS HOLDINGS INC.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2020201920202019
Revenue$10,474  $21,684  $34,955  $42,462  
Cost of revenue3,240  8,672  12,243  18,198  
Gross profit7,234  13,012  22,712  24,264  
Operating expenses:
Sales, general and administrative14,438  18,394  33,422  34,450  
Research and development2,399  4,001  6,598  7,585  
Total operating expenses16,837  22,395  40,020  42,035  
Loss from operations(9,603) (9,383) (17,308) (17,771) 
Interest income2  4  10  10  
Interest expense(2,130) (2,521) (4,276) (4,763) 
Change in fair value of derivative instruments1,492  2,640  (437) 2,608  
Change in fair value of contingent consideration(141) 137  299  362  
Other expense, net103  118  (6,093) (186) 
Loss before income taxes(10,277) (9,005) (27,805) (19,740) 
Provision for income taxes(194) (35) (425) (79) 
Net loss$(10,471) $(9,040) $(28,230) $(19,819) 
Basic and diluted net loss per share$(0.45) $(0.44) $(1.23) $(0.97) 
Weighted average outstanding shares used for basic and diluted net loss per share23,482,031  20,448,643  22,969,162  20,407,912  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ESTABLISHMENT LABS HOLDINGS INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2020201920202019
Net loss$(10,471) $(9,040) $(28,230) $(19,819) 
Other comprehensive income (loss):
Foreign currency translation gain (loss)213  (154) 3,034  (87) 
Other comprehensive gain (loss)213  (154) 3,034  (87) 
Comprehensive loss$(10,258) $(9,194) $(25,196) $(19,906) 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ESTABLISHMENT LABS HOLDINGS INC.
Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited) (In thousands, except share data)

Common SharesTreasury SharesAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
SharesAmountSharesAmount
Balance at January 1, 202021,057,040  $147,688  (408,070) $(2,854) $21,214  $(127,125) $691  $39,614  
Issuance of common stock, net of underwriters’ discount and issuance costs2,628,571  63,855  —  —  —  —  —  63,855  
Stock option exercises39,723  181  —  —  —  —  —  181  
Share-based compensation11,062  11  —  —  1,618  —  —  1,629  
Shares withheld to cover income tax obligation upon vesting of restricted stock(1,383) (1) —  —  (33) —  —  (34) 
Foreign currency translation gain—  —  —  —  —  —  2,821  2,821  
Net loss—  —  —  —  —  (17,759) —  (17,759) 
Balance at March 31, 202023,735,013  211,734  (408,070) (2,854) 22,799  (144,884) 3,512  90,307  
Stock option exercises22,734  193  —  —  —  —  —  193  
Share-based compensation5,802  6  —  —  1,551  —  —  1,557  
Shares withheld to cover income tax obligation upon vesting of restricted stock(762) (1) —  —  (12) —  —  (13) 
Foreign currency translation gain—  —  —  —  —  —  213  213  
Net loss—  —  —  —  —  (10,471) —  (10,471) 
Balance at June 30, 202023,762,787  $211,932  (408,070) $(2,854) $24,338  $(155,355) $3,725  $81,786  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ESTABLISHMENT LABS HOLDINGS INC.
Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited) (In thousands, except share data)

Common SharesTreasury SharesAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
SharesAmountSharesAmount
Balance at January 1, 201920,672,025  $145,709  (408,070) $(2,854) $15,156  $(88,975) $449  $69,485  
Issuance of shares in an asset acquisition12,404  337  —  —  —  —  —  337  
Stock option exercises5,941  84  —  —  —  —  —  84  
Warrant exercises70,567  113  —  —  (57) —  —  56  
Share-based compensation45,394  45  —  —  1,791  —  —  1,836  
Shares withheld to cover income tax obligation upon vesting of restricted stock(2,528) (3) —  —  (53) —  —  (56) 
Foreign currency translation gain—  —  —  —  —  —  67  67  
Net loss—  —  —  —  —  (10,779) —  (10,779) 
Balance at March 31, 201920,803,803  146,285  (408,070) (2,854) 16,837  (99,754) 516  61,030  
Stock option exercises22,289  92  —  —  —  —  —  92  
Warrant exercises16,754  16  —  —  (16) —  —    
Share-based compensation41,024  41  —  —  1,853  —  —  1,894  
Shares withheld to cover income tax obligation upon vesting of restricted stock(1,451) (1) —  —  (34) —  —  (35) 
Foreign currency translation loss—  —  —  —  —  —  (154) (154) 
Net loss—  —  —  —  —  (9,040) —  (9,040) 
Balance at June 30, 201920,882,419  $146,433  (408,070) $(2,854) $18,640  $(108,794) $362  $53,787  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ESTABLISHMENT LABS HOLDINGS INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30,
20202019
Cash flows from operating activities:
Net loss$(28,230) $(19,819) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization1,629  1,416  
Provision for doubtful accounts971  (17) 
Provision for inventory obsolescence564  (22) 
Share-based compensation 3,186  3,730  
Loss from disposal of property and equipment114  24  
Unrealized foreign currency loss, net5,647  67  
Change in fair value of derivative instruments437  (2,608) 
Change in fair value of contingent consideration(299) (362) 
Amortization of debt discount797  1,731  
Changes in operating assets and liabilities:
Accounts receivable4,150  (3,715) 
Inventory(3,235) (725) 
Prepaid expenses and other current assets2,667  (234) 
Other assets4  (56) 
Accounts payable(1,289) 2,413  
Accrued liabilities(5) 2,709  
Other liabilities(5) 407  
Net cash used in operating activities(12,897) (15,061) 
Cash flows from investing activities:
Purchases of property and equipment(1,290) (4,882) 
Cash used in asset acquisition(497) (767) 
Cost incurred for intangible assets(495) (17) 
Net cash used in investing activities(2,282) (5,666) 
Cash flows from financing activities:
Repayments on capital leases(139) (185) 
Proceeds from issuance of common shares, net of underwriters’ discount and issuance costs63,855    
Proceeds from stock option exercises374  176  
Proceeds from warrant exercises  58  
Tax payments related to shares withheld upon vesting of restricted stock(48) (91) 
Net cash provided by (used in) financing activities64,042  (42) 
Effect of exchange rate changes on cash(136)   
Net (decrease)/increase in cash48,727  (20,769) 
Cash at beginning of period37,655  52,639  
Cash at end of period$86,382  $31,870  
Supplemental disclosures:
Cash paid for interest$3,464  $2,724  
Cash paid for income taxes$2  $146  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ESTABLISHMENT LABS HOLDINGS INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30,
20202019
Supplemental disclosures of non-cash investing and financing activities:
Unpaid balance for property and equipment$327  $622  
Assets acquired under capital leases$  $69  
Equity consideration in an asset acquisition$  $337  
Inventory acquired in an asset acquisition$  $1,257  
Consideration payable related to asset acquisition$779  $1,277  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Formation and Business of the Company
Formation and Business of the Company
Establishment Labs Holdings Inc. and its wholly owned subsidiaries (collectively “the Company”, “we”, “us”, or “our”) is a global company that manufactures and markets innovative medical devices for aesthetic and reconstructive plastic surgery. The Company was established in the British Virgin Islands on October 9, 2013, at which time Establishment Labs, S.A., the Costa Rican manufacturing company, was reincorporated as a wholly-owned subsidiary. As of June 30, 2020, the Company also has wholly-owned subsidiaries in the United States (JAMM Technologies, Inc. and Motiva USA LLC), Brazil (Establishment Labs Produtos para Saude Ltda), Belgium (European Distribution Center Motiva BVBA), France (Motiva Implants France SAS), Sweden (Motiva Nordica AB), Switzerland (JEN-Vault AG), the United Kingdom (Motiva Implants UK Limited), Italy (Motiva Italy S.R.L), Spain (Motiva Implants Spain, S.L.), Austria (Motiva Austria GmbH), Germany (Motiva Germany GmbH) and Argentina (Motiva Argentina S.R.L). Substantially all of the Company’s revenues are derived from the sale of silicone gel-filled breast implants, branded as Motiva Implants.
The main manufacturing activities are conducted at two manufacturing facilities in Costa Rica. In 2010, the Company began operating under the Costa Rica free zone regime (Régimen de Zona Franca), which provides for reduced income tax and other tax obligations pursuant to an agreement with the Costa Rican authorities.
The Company’s products are approved for sale in Europe, the Middle East, Latin America, and Asia. The Company sells its products internationally through a combination of distributors and direct sales to customers.
The Company is pursuing regulatory approval to commercialize its products in the United States. The Company received approval for an investigational device exemption, or IDE, from the FDA in March 2018 to initiate a clinical trial in the United States for its Motiva Implants. In August 2019, we completed all patient surgeries for the IDE aesthetic cohorts, which include primary augmentation and revision. As of June 30, 2020, we are continuing to enroll subjects in the remaining reconstruction cohorts.
The Company has been expanding its global operations through a series of acquisitions and establishing wholly-owned subsidiaries. In November 2015, the Company purchased certain assets from Magna Equities I, LLC and established its wholly-owned subsidiary, JAMM Technologies, Inc., in the United States. In January 2016, the Company purchased a distribution company in Brazil to support the application to sell its products in Brazil. In March 2016, the Company purchased a storage and distribution company in Belgium to support its continued growth in Europe. In September 2016, the Company purchased a distribution company in France, and it also established a wholly-owned subsidiary in Switzerland. In November 2017, the Company acquired certain assets from Femiline AB and established its wholly-owned subsidiary in Sweden, Motiva Nordica AB. During 2018, the Company established wholly-owned subsidiaries in the United Kingdom and Italy and purchased certain assets from Menke Med GmbH, Motiva Matrix Spain, S.L. and Belle Health Ltd. In 2019, the Company purchased certain assets from AFS Medical GMBH and established wholly-owned subsidiaries in Austria, Spain and Germany. In 2020, the Company established a wholly-owned subsidiary in Argentina.
2. Summary of Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2020 as compared to the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company’s audited consolidated financial statements as of December 31, 2019 and 2018 and for the years then ended. Below are those policies with current period updates.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the applicable rules and regulations of the Securities and Exchange Commission, or SEC, for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.
The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the years ended
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
December 31, 2019 and 2018 presented in the Company’s Form 10-K filed on March 16, 2020, with the U.S. Securities and Exchange Commission.
The condensed consolidated financial statements include the Company’s accounts and those of its wholly owned subsidiaries as of June 30, 2020 as follows:
SubsidiaryIncorporation/Acquisition Date
Establishment Labs, S.A. (Costa Rica)January 18, 2004
Motiva USA, LLC (USA)February 20, 2014
JAMM Technologies, Inc. (USA)October 27, 2015
Establishment Labs Produtos par Saude Ltda (Brazil)January 4, 2016
European Distribution Center Motiva BV (Belgium)March 4, 2016
Motiva Implants France SAS (France)September 12, 2016
JEN-Vault AG (Switzerland)November 22, 2016
Motiva Nordica AB (Sweden)November 2, 2017
Motiva Implants UK Limited (the United Kingdom)July 31, 2018
Motiva Italy S.R.L (Italy)July 31, 2018
Motiva Implants Spain, S.L. (Spain)January 3, 2019
Motiva Austria GmbH (Austria)January 14, 2019
Motiva Germany GmbH (Germany)August 1, 2019
Motiva Argentina S.R.L (Argentina)February 7, 2020
All intercompany accounts and transactions have been eliminated in consolidation.
Unaudited Interim Condensed Consolidated Financial Information
The accompanying interim condensed consolidated financial statements as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019, and the related interim information contained within the notes to the condensed consolidated financial statements, are unaudited. The unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP and on the same basis as the audited consolidated financial statements. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments which are necessary to state fairly the Company’s financial position as of June 30, 2020, and the results of its operations and cash flows for the six months ended June 30, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results for the six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year 2020, or for any future period.
Segments
The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reportable and operating segment structure. The Company and its Chief Executive Officer evaluate performance based primarily on revenue in the geographic regions in which the Company operates.
Geographic Concentrations
The Company derives all its revenues from sales to customers in Europe, the Middle East, Latin America, and
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Asia, and has not yet received approval to sell its products in the United States.
For the six months ended June 30, 2020 and 2019, Brazil accounted for 9.6% and 16.1% of consolidated revenue and no other individual country exceeded 10% of consolidated revenue, on a ship-to destination basis.
The Company’s long-lived assets located in Costa Rica represented the majority of the total long-lived assets as of June 30, 2020 and December 31, 2019.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant accounting estimates and management judgments reflected in the condensed consolidated financial statements include items such as accounts receivable valuation and allowances, inventory valuation and allowances, valuation of acquired intangible assets, valuation of derivatives, estimation of assets’ useful lives and valuation of deferred income tax assets, including tax valuation allowances. Estimates are based on historical experience, where applicable, and other assumptions believed to be reasonable by management. Actual results may differ from those estimates under different assumptions or conditions.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and accounts receivable. The majority of the Company’s cash is held at two financial institutions in the United States. Balances in the Company’s cash accounts exceed the Federal Deposit Insurance Corporation, or FDIC, limit of $250,000. The Company has not experienced any losses to its deposits of cash.
All of the Company’s revenue has been derived from sales of its products in international markets, principally Europe, the Middle East, Latin America, and Asia. In the international markets in which the Company participates, the Company uses a combination of distributors and makes direct sales to customers. The Company performs ongoing credit evaluations of its distributors and customers, does not require collateral, and maintains allowances for potential credit losses on customer accounts when deemed necessary.
During the six months ended June 30, 2020 and 2019, no customers accounted for more than 10% of the Company’s revenue. Substantially all of the Company’s revenues are derived from the sale of Motiva Implants. One customer accounted for 13.0% and another customer accounted for 11.5% of the Company’s trade accounts receivable balance as of June 30, 2020. One customer accounted for 10.2% of the Company’s trade accounts receivable balance as of December 31, 2019.
The Company relies on NuSil Technology, LLC, or NuSil, as the sole supplier of medical-grade silicone used in Motiva Implants. During the six months ended June 30, 2020 and 2019, the Company had purchases of $8.1 million, or 67.4% of total purchases, and $8.1 million, or 62.1% of total purchases, respectively, from NuSil. As of June 30, 2020 and December 31, 2019, the Company had an outstanding balance owed to this vendor of $2.0 million and $2.7 million, respectively.
The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of regulatory approval of the Company’s current and potential future products, uncertainty of market acceptance of the Company’s products, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals and sole source suppliers.
Products developed by the Company require clearances from the FDA or other international regulatory agencies prior to commercial sales. There can be no assurance that the products will receive the necessary clearances. If the Company was denied clearance, clearance was delayed, or the Company was unable to maintain its existing clearances, these developments could have a material adverse impact on the Company.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic which has spread globally, including locations where the Company does business. The full extent of the outbreak, related business and travel restrictions and changes to behavior intended to reduce its spread are uncertain and continues to evolve globally. Therefore, the full extent to which COVID-19 may impact the
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Company’s results of operations, liquidity or financial position is uncertain. This outbreak has already had a material disruption on the operations of the Company and its suppliers and customers. Management continues to monitor the impact that the COVID-19 pandemic is having on the Company, the breast aesthetics and reconstruction market and the economies in which the Company operates. The Company anticipates that its future results of operations, including the results for 2020, will be materially impacted by the COVID-19 outbreak, but, at this time, does not currently expect that the impact from the COVID-19 outbreak will have a material effect on the Company’s liquidity or financial position. However, given the speed and frequency of continuously evolving developments with respect to this pandemic, the Company cannot reasonably estimate the magnitude of the impact to the results of its operations. To the extent that the Company’s customers continue to be materially and adversely impacted by the COVID-19 outbreak, this could materially interrupt the Company’s business operations.
Cash
The Company’s cash consists of cash maintained in checking and interest-bearing accounts. The Company accounts for financial instruments with original maturities of three months or less at the date of purchase as cash equivalents. The Company held no cash equivalents as of June 30, 2020 and December 31, 2019.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is stated at invoice value less estimated allowances for returns and doubtful accounts. The Company continually monitors customer payments and maintains an allowance for estimated losses resulting from customers’ inability to make required payments. In evaluating the Company’s ability to collect outstanding receivable balances, the Company considers various factors including the age of the balance, the creditworthiness of the customer, which is assessed based on ongoing credit evaluations and payment history, and the customer’s current financial condition. In cases where there are circumstances that may impair a specific customer’s ability to meet its financial obligations, an allowance is recorded against amounts due, which reduces the net recognized receivable to the amount reasonably believed to be collectible.
Inventory and Cost of Revenue
Inventory is stated at the lower of cost to purchase or manufacture the inventory or the net realizable value of such inventory. Cost is determined using the standard cost method which approximates actual costs using the first-in, first-out basis. The Company regularly reviews inventory quantities considering actual losses, projected future demand, and remaining shelf life to record a provision for excess and slow-moving inventory. An inventory reserve of $0.9 million and $0.3 million has been recorded as of June 30, 2020 and December 31, 2019, respectively.
The Company recognizes the cost of inventory transferred to the customer in cost of revenue when revenue is recognized.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in selling, general and administrative, or SG&A, expenses. For the three months ended June 30, 2020 and 2019, shipping and handling costs were $0.6 million and $0.7 million, respectively. For each of the six months ended June 30, 2020 and 2019, shipping and handling costs were $1.4 million.
Revenue Recognition
The Company recognizes revenue related to sales of products to distributors or directly to customers in markets where it has regulatory approval, net of discounts and allowances. The Company recognizes revenue in accordance with Accounting Standards Codification, or ASC, 606, Revenue from Contracts with Customers. ASC 606 requires the Company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services.
The Company recognizes revenue related to the sales of products to distributors at the time of shipment of the product, which represents the point in time when the distributor has taken ownership and assumed the risk of loss and the required revenue recognition criteria are satisfied. The Company’s distributors are obligated to pay within specified terms regardless of when, or if, they sell the products. The Company’s contracts with distributors typically do not contain right of return or price protection and have no post-delivery obligations.
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Appropriate reserves are established for anticipated sales returns based on historical experience, recent gross sales and any notification of pending returns. The Company recognizes revenue when title to the product and risk of loss transfer to customers, provided there are no remaining performance obligations required of the Company or any written matters requiring customer acceptance. The Company allows for the return of product from direct customers in certain regions within fifteen days after the original sale and records estimated sales returns as a reduction of sales in the same period revenue is recognized. Sales return provisions are calculated based upon historical experience with actual returns. Actual sales returns in any future period are inherently uncertain and thus may differ from the estimates. If actual sales returns differ significantly from the estimates, an adjustment to revenue in the current or subsequent period is recorded. As of June 30, 2020 and December 31, 2019, an allowance of $24,000 and $36,000 was recorded for product returns, respectively.
A portion of the Company’s revenue is generated from the sale of consigned inventory maintained at physician, hospital, and clinic locations. For these products, revenue is recognized at the time the Company is notified by the consignee that the product has been implanted, not when the consigned products are delivered to the consignee’s warehouse.
Revenue was generated in these primary geographic markets:
Six Months Ended June 30,Three Months Ended June 30,
2020201920202019
(in thousands)
Europe$15,932  $18,687  $6,153  $9,280  
Latin America8,508  12,184  1,366  6,017  
Asia-Pacific/Middle East10,350  11,222  2,880  6,276  
Other165  369