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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 September 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 November 6, 2020 was 23,438,160.



TABLE OF CONTENTS
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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.
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ESTABLISHMENT LABS HOLDINGS INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
September 30,
2020
December 31,
2019
(Unaudited)
Assets
Current assets:
Cash$81,431 $37,655 
Accounts receivable, net of allowance for doubtful accounts of $1,665 and $1,026
18,756 22,767 
Inventory, net28,400 28,660 
Prepaid expenses and other current assets5,431 6,757 
Total current assets134,018 95,839 
Long-term assets:
Property and equipment, net of accumulated depreciation16,263 16,418 
Goodwill465 465 
Intangible assets, net of accumulated amortization3,537 3,441 
Other non-current assets401 368 
Total assets$154,684 $116,531 
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable$6,954 $10,366 
Accrued liabilities12,092 10,677 
Other liabilities, short term1,095 2,199 
Total current liabilities20,141 23,242 
Long-term liabilities:
Note payable, Madryn, net of debt discount and issuance costs49,374 48,142 
Madryn put option2,630 3,072 
Other liabilities, long term2,582 2,461 
Total liabilities74,727 76,917 
Commitments and contingencies (Note 7)
Shareholders’ equity:
Common shares - zero par value, unlimited amount authorized; 23,827,680 and 21,057,040 shares issued at September 30, 2020 and December 31, 2019, respectively; 23,419,610 and 20,648,970 shares outstanding at September 30, 2020 and December 31, 2019, respectively
212,752 147,688 
Additional paid-in-capital25,658 21,214 
Treasury shares, at cost, 408,070 shares held at September 30, 2020 and December 31, 2019
(2,854)(2,854)
Accumulated deficit(159,602)(127,125)
Accumulated other comprehensive income4,003 691 
Total shareholders’ equity79,957 39,614 
Total liabilities and shareholders’ equity$154,684 $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
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenue$22,758 $22,854 $57,713 $65,316 
Cost of revenue7,612 8,616 19,855 26,814 
Gross profit15,146 14,238 37,858 38,502 
Operating expenses:
Sales, general and administrative15,008 19,227 48,430 53,677 
Research and development2,729 3,776 9,327 11,361 
Total operating expenses17,737 23,003 57,757 65,038 
Loss from operations(2,591)(8,765)(19,899)(26,536)
Interest income2 3 12 13 
Interest expense(2,886)(1,805)(7,162)(6,568)
Change in fair value of derivative instruments879 235 442 2,843 
Change in fair value of contingent consideration5 205 304 567 
Other income (expense), net525 (2,340)(5,568)(2,526)
Loss before income taxes(4,066)(12,467)(31,871)(32,207)
Provision for income taxes(181)(308)(606)(387)
Net loss$(4,247)$(12,775)$(32,477)$(32,594)
Basic and diluted net loss per share$(0.18)$(0.62)$(1.40)$(1.59)
Weighted average outstanding shares used for basic and diluted net loss per share23,611,925 20,620,828 23,184,322 20,478,603 
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
September 30,
Nine Months Ended
September 30,
2020201920202019
Net loss$(4,247)$(12,775)$(32,477)$(32,594)
Other comprehensive income:
Foreign currency translation gain278 659 3,312 572 
Other comprehensive gain278 659 3,312 572 
Comprehensive loss$(3,969)$(12,116)$(29,165)$(32,022)
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 
Issuance of common shares in settlement of contingent consideration33,334 618 — — — — — 618 
Stock option exercises21,195 192 — — — — — 192 
Share-based compensation11,302 11 — — 1,337 — — 1,348 
Shares withheld to cover income tax obligation upon vesting of restricted stock(938)(1)— — (17)— — (18)
Foreign currency translation gain— — — — — — 278 278 
Net loss— — — — — (4,247)— (4,247)
Balance at September 30, 202023,827,680 $212,752 (408,070)$(2,854)$25,658 $(159,602)$4,003 $79,957 
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 
Issuance of common shares in partial settlement of contingent consideration33,333 630 — — — — — 630 
Stock option exercises24,820 102 — — — — — 102 
Share-based compensation44,547 45 — — 1,399 — — 1,444 
Shares withheld to cover income tax obligation upon vesting of restricted stock(1,980)(2)— — (41)— — (43)
Foreign currency translation gain (loss)— — — — — — 659 659 
Net loss— — — — — (12,775)— (12,775)
Balance at September 30, 201920,983,139 $147,208 (408,070)$(2,854)$19,998 $(121,569)$1,021 $43,804 
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)
Nine Months Ended September 30,
20202019
Cash flows from operating activities:
Net loss$(32,477)$(32,594)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization2,502 2,210 
Provision for doubtful accounts758 70 
Provision for inventory obsolescence1,512 (93)
Share-based compensation 4,534 5,174 
Loss from disposal of property and equipment152 75 
Unrealized foreign currency loss, net5,043 2,890 
Change in fair value of derivative instruments(442)(2,843)
Change in fair value of contingent consideration(304)(567)
Amortization of debt discount1,232 2,056 
Changes in operating assets and liabilities:
Accounts receivable3,291 (5,279)
Inventory(1,722)(2,007)
Prepaid expenses and other current assets1,043 (2,949)
Other assets(30)(3)
Accounts payable(3,267)3,683 
Accrued liabilities1,725 3,964 
Other liabilities506 256 
Net cash used in operating activities(15,944)(25,957)
Cash flows from investing activities:
Purchases of property and equipment(2,136)(5,623)
Cash used in asset acquisitions(1,652)(767)
Cost incurred for intangible assets(647)(17)
Net cash used in investing activities(4,435)(6,407)
Cash flows from financing activities:
Borrowings under Madryn credit agreement, net of issuance costs 24,748 
Repayments on capital leases(224)(264)
Proceeds from issuance of common shares, net of underwriters’ discount and issuance costs63,855  
Cash used to repurchase warrants (2,261)
Proceeds from stock option exercises566 278 
Proceeds from warrant exercises 58 
Tax payments related to shares withheld upon vesting of restricted stock(65)(135)
Net cash provided by financing activities64,132 22,424 
Effect of exchange rate changes on cash23 (140)
Net (decrease)/increase in cash43,776 (10,080)
Cash at beginning of period37,655 52,639 
Cash at end of period$81,431 $42,559 
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)
Nine Months Ended September 30,
20202019
Supplemental disclosures:
Cash paid for interest$5,213 $4,192 
Cash paid for income taxes$2 $201 
Supplemental disclosures of non-cash investing and financing activities:
Unpaid balance for property and equipment$252 $540 
Assets acquired under capital leases$ $69 
Issuance of common shares in partial settlement of contingent consideration$618 $630 
Equity consideration in an asset acquisition$ $337 
Inventory acquired in an asset acquisition$1,009 $1,257 
Intangible assets acquired in an asset acquisition$138 $ 
Consideration payable related to asset acquisition$818 $1,234 
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 September 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 September 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 and purchased certain assets from Orion Trading SRL for the Italian operations.
2.    Summary of Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies during the nine months ended September 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
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
in conjunction with the audited consolidated financial statements and the related notes thereto for the years ended 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 September 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 September 30, 2020 and for the three and nine months ended September 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 September 30, 2020, and the results of its operations and cash flows for the nine months ended September 30, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results for the nine months ended September 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.
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Geographic Concentrations
The Company derives all its revenues from sales to customers in Europe, the Middle East, Latin America, and Asia, and has not yet received approval to sell its products in the United States.
For the nine months ended September 30, 2020 Germany accounted for 10.1% and Brazil accounted for 9.8% of consolidated revenue. For the nine months ended September 30, 2019 Brazil accounted for 16.3% 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 September 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 nine months ended September 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 10.3% and 10.2% of the Company’s trade accounts receivable balance as of September 30, 2020 and December 31, 2019, respectively.
The Company relies on NuSil Technology, LLC, or NuSil, as the sole supplier of medical-grade silicone used in Motiva Implants. During the nine months ended September 30, 2020 and 2019, the Company had purchases of $12.1 million, or 67.1% of total purchases, and $12.6 million, or 60.3% of total purchases, respectively, from NuSil. As of September 30, 2020 and December 31, 2019, the Company had an outstanding balance owed to this vendor of $0.6 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.
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 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 and, to a lesser degree, 2021 could be materially impacted by the COVID-19 outbreak, but, at this time, the impact from the COVID-19 outbreak has not had 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 September 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 $1.9 million and $0.3 million has been recorded as of September 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 September 30, 2020 and 2019, shipping and handling costs were $0.8 million and $0.7 million, respectively. For the nine months ended September 30, 2020 and 2019, shipping and handling costs were $2.2 million and $2.1 million, respectively.
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
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
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 September 30, 2020 and December 31, 2019, an allowance of $18,000 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:
Nine Months Ended September 30,Three Months Ended September 30,
2020201920202019
(in thousands)
Europe$25,614 $26,239 $9,681 $7,552 
Latin America13,715 21,590 5,207 9,406 
Asia-Pacific/Middle East18,042 17,073 7,692 5,851 
Other342 414 178 45 
$57,713 $65,316 $22,758 $22,854 
The Company has a limited warranty for the shelf life of the product, which is five years from the time of manufacture. Estimated warranty obligations are recorded at the time of sale. The Company also offers a warranty to patients in the event of rupture and a replacement program for capsular contracture events, provided certain registration requirements are met. Revenue for extended warranties are recognized ratably over the term of the agreement. To date, these warranty and program costs have been de minimis. The Company will continue to evaluate the warranty reserve policies for adequacy considering claims history.
Deferred revenue primarily consists of payments received in advance of meeting revenue recognition criteria. The Company has received payments from distributors to provide distribution exclusivity within a geographic area and recognizes deferred revenue on a ratable basis over the term of such contractual distribution relationship. Additionally, the Company has received payments from customers in direct markets prior to surgical implantation and recognizes deferred revenue at the time the Company is notified by the customer that the product has been implanted. For all arrangements, any revenue that has been deferred and is expected to be recognized beyond one year is classified as long-term deferred revenue and included in “Other liabilities, long term” on the condensed consolidated balance sheets (see Note 3).
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Research and Development
Costs related to research and development, or R&D, activities are expensed as incurred. R&D costs primarily include personnel costs, materials, clinical expenses, regulatory expenses, product development, consulting services, and outside research activities, all of which are directly related to research and development activities.
The Company estimates FDA clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of patient enrollment and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly.
Selling, General and Administrative Expenses
SG&A expenses include sales and marketing costs, payroll and related benefit costs, insurance expenses, shipping and handling costs, legal and professional fees and administrative overhead.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Following the exercise of its option to purchase its manufacturing facility in June 2019, the Company depreciates the owned building on a straight-line basis over 50 years of useful life. Depreciation of property and equipment is computed using the straight-line method over the assets’ estimated useful lives of five to ten years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the remaining lease term after factoring expected renewal periods. Upon retirement or disposal of assets, the costs and related accumulated depreciation are eliminated from the accounts and any gain or loss is recognized in operations. Maintenance and repairs are expensed as incurred. Substantially all of the Company’s manufacturing operations and related property and equipment is located in Costa Rica.
Goodwill and Intangible Assets
The Company records the excess of the acquisition purchase price over the net fair value of the tangible and identifiable intangible assets acquired and liabilities assumed as goodwill. In accordance with ASC 350, Intangibles - Goodwill and Other, the Company tests goodwill for impairment annually during the fourth quarter of each year and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with the annual impairment test for goodwill, the Company elected the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company determines that it was more likely than not that the fair value of the reporting unit is less than its carrying amount, then the impairment test is performed.
Consistent with the Company's assessment that it has only one reporting segment, the Company has determined that it has only one reporting unit and tests goodwill for impairment at the entity level using the two-step process required by ASC 350. In the first step, the Company compares the carrying amount of the reporting unit to the fair value of the enterprise. If the fair value of the enterprise exceeds the carrying value, goodwill is not considered impaired and no further testing is required. If the carrying value of the enterprise exceeds the fair value, goodwill is potentially impaired, and the second step of the impairment test must be performed. In the second step, the Company compares the implied fair value of the goodwill, as defined by ASC 350, to its carrying amount to determine the impairment loss, if any.
The Company capitalizes certain costs related to intangible assets, such as patents, trademarks and software development costs. The Company follows the provisions of ASC 350-40, Internal Use Software for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use. The Company expenses all costs incurred during the preliminary project stage of software development and capitalizes the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. Costs incurred to improve and support products after they become available are charged to expense as incurred.

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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company records purchased intangible assets at their respective estimated fair values at the date of acquisition. Purchased finite-lived intangible assets are being amortized using the straight-line method over their remaining estimated useful lives, which range from two to fifteen years. The Company evaluates the remaining useful lives of intangible assets on a periodic basis to determine whether events or circumstances warrant a revision to the remaining estimated amortization period. The Company tests indefinite-lived intangible assets for impairment on at least an annual basis and whenever circumstances suggest the assets may be impaired. If indicators of impairment are present, the Company evaluates the carrying value of the intangible assets in relation to estimates of future undiscounted cash flows. The Company also evaluates the remaining useful life of an indefinite-lived intangible asset to determine whether events and circumstances continue to support an indefinite useful life.
During the year ended December 31, 2019, there was no impairment of goodwill or intangible assets based on the qualitative assessments performed by the Company. As of September 30, 2020, the Company determined that the economic impact of the global COVID-19 pandemic constituted a triggering event which would indicate that the acquired intangible asset values may not be recoverable. During the nine months ended September 30, 2020, there has been no impairment of goodwill or intangible assets based on the qualitative assessments performed by the Company.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group’s carrying value. If an asset is considered impaired, the asset is written down to fair value, which is determined based either on discounted cash flows or appraised value, depending on the nature of the asset. There were no impairment charges, or changes in estimated useful lives recorded during the year ended December 31, 2019 or the nine months ended September 30, 2020.
Debt and Embedded Derivatives
The Company applies the accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting for hybrid contracts. The Company accounts for convertible debt instruments when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments in accordance with ASC 470-20 Debt with Conversion and Other Options (see Note 6).
The Company uses option pricing valuation models to determine the fair value of embedded derivatives and records any change in fair value as a component of other income or expense in the condensed consolidated statements of operations (see Note 5).
Debt Issuance Costs and Debt Discounts
Costs incurred in connection with the issuance of new debt are capitalized. Capitalizable debt issuance costs paid to third parties and debt discounts, net of amortization, are recorded as a reduction to the long-term debt balance on the condensed consolidated balance sheets. Amortization expense on capitalized debt issuance costs and debt discounts related to loans are calculated using the effective interest method over the term of the loan commitment and is recorded as interest expense in the condensed consolidated statements of operations.
Income Taxes
The Company records income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or income tax returns. In estimating future tax consequences, expected future events, enactments or changes in the tax law or rates are considered. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities.
The Company records uncertain tax positions based on a two-step process whereby (1) a determination is made as to whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold the Company
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. Significant judgment is required in the identification of uncertain tax positions and in the estimation of penalties and interest on uncertain tax positions.
There were no material uncertain tax positions in fiscal 2019 and for the nine months ended September 30, 2020.
Foreign Currency
The financial statements of the Company’s foreign subsidiaries whose functional currencies are the local currencies are translated into U.S. dollars for consolidation as follows: assets and liabilities at the exchange rate as of the balance sheet date, stockholders’ equity at the historical rates of exchange, and income and expense amounts at the average exchange rate for the period. Translation adjustments resulting from the translation of the subsidiaries’ accounts are included in “Accumulated other comprehensive income (loss)” as equity in the condensed consolidated balance sheet. Transactions denominated in currencies other than the applicable functional currency are converted to the functional currency at the exchange rate on the transaction date. At period end, monetary assets and liabilities are remeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Gains and losses resulting from foreign currency transactions are included within “Other income (expense), net” in the condensed consolidated statement of operations. For the nine months ended September 30, 2020, foreign currency transaction loss amounted to $5.4 million as compared to a foreign currency transaction loss of $2.6 million for the nine months ended September 30, 2019.
Comprehensive Income (Loss)
The Company’s comprehensive loss consists of net loss and foreign currency translation adjustments arising from the consolidation of the Company’s foreign subsidiaries.
Share-Based Compensation
The Company measures and recognizes compensation expense for all stock-based awards in accordance with the provisions of ASC 718, Stock Compensation. Stock-based awards granted include stock options, restricted stock units, or RSUs, and restricted stock awards, or RSAs. Share-based compensation expense for stock options and RSAs granted to employees is measured at the grant date based on the fair value of the awards and is recognized as an expense ratably on a straight-line basis over the requisite service period. The fair value of options to purchase shares granted to employees is estimated on the grant date using the Black-Scholes option valuation model.
The calculation of share-based compensation expense requires that the Company make assumptions and judgments about the variables used in the Black-Scholes model, including the expected term, expected volatility of the underlying common shares, risk-free interest rate and dividends.
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to shareholders by the weighted-average number of shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, any shares issuable upon exercise of share warrants, share options and non-vested restricted stock outstanding under the Company’s equity plan are potentially dilutive securities. Diluted net loss per share is the same as basic net loss per share for periods where the Company reported a net loss because including the dilutive securities would be anti-dilutive.
Recent Accounting Standards
Periodically, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, the Company meets the definition of an emerging growth company and has elected the
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. The Company will remain an emerging growth company until the earliest of (1) the last day of its first fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million of the prior June 30th and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
The following recent accounting pronouncements issued by the FASB, could have a material effect on our financial statements:
Recently Issued Accounting Standards
In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For non-public business entities and emerging growth companies the standard is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the effect the updated standard will have on its consolidated financial statements and footnote disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements. The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the changes in unrealized gains and losses for the period included in other comprehensive income ("OCI") for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. This update is effective for non-public entities for annual and interim periods beginning after December 15, 2020, with early adoption permitted. As the requirements of this literature are disclosure only, ASU 2018-13 will not impact our financial condition or results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the impairment methodology in current GAAP, which delays recognition of credit losses until it is probable a loss has been incurred, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For non-public business entities and emerging growth companies the standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently assessing the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and footnote disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of their classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective for non-public business entities and emerging growth companies for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company
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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
is currently assessing the impact the adoption of ASC 842 will have on its consolidated financial statements and footnote disclosures.
3.     Balance Sheet Accounts
Inventory, Net
September 30,
2020
December 31,
2019
(in thousands)
Raw materials$6,188 $5,506 
Work in process1,256 1,200 
Finished goods20,956 21,954 
$28,400 $28,660 
Property and Equipment, Net
September 30,
2020
December 31,
2019
(in thousands)
Machinery and equipment$9,010 $8,045 
Building improvements6,456 6,443 
Furniture and fixtures3,952 3,614 
Building2,472 2,472 
Leasehold improvements2,031 2,101 
Land802 802 
Vehicles397 463 
Construction in Process161  
Total25,281 23,940 
Less: Accumulated depreciation and amortization(9,018)(7,522)
$16,263 $16,418 
For each of the three months ended September 30, 2020 and 2019, depreciation and amortization expense related to property and equipment was $0.6 million. For the nine months ended September 30, 2020 and 2019, depreciation and amortization expense related to property and equipment was $1.8 million and $1.9 million, respectively.
The Company entered into capital leases relating to equipment and vehicles and recorded the fair value of the lease payments on the initial contract date and is amortizing the assets over the term of the leases. As of each of September 30, 2020 and December 31, 2019, the gross asset value for capital lease assets was $1.4 million and $1.5 million. Depreciation expense for assets under capital leases was $20,000 and $21,000 for the three months ended September 30, 2020 and 2019, respectively. Depreciation expense for assets under capital leases was $62,000 and $63,000 for the nine months ended September 30, 2020 and 2019, respectively.

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ESTABLISHMENT LABS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Accrued Liabilities
Accrued liabilities consisted of the following: