Organogenesis Holdings Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Organogenesis develops, manufactures and commercializes regenerative medicine products for Advanced Wound Care and Surgical & Sports Medicine. It reports one operating segment. The company’s products are sold primarily in the United States.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenue | $123.2 | $69.0 | $225.7 | $130.7 |
| Gross profit / margin | $93.3 / 76% | $48.9 / 71% | $170.3 / 75% | $91.9 / 70% |
| Operating income (loss) | $23.6 | $(2.3) | $36.2 | $(17.3) |
| Net income (loss) | $20.7 | $(5.2) | $30.6 | $(21.5) |
| Diluted EPS | $0.15 | $(0.05) | $0.23 | $(0.21) |
| Adjusted EBITDA (non-GAAP) | $25.1 | $0.3 | $41.1 | $(10.7) |
- Q2 revenue rose 79%; six-month revenue rose 73%. Advanced Wound Care revenue was $111.4 million in Q2 (+87%) and $202.1 million for six months (+82%). Surgical & Sports Medicine revenue was $11.8 million in Q2 (+27%) and $23.6 million for six months (+20%).
- Management attributed growth mainly to sales-force expansion, greater sales to existing and new customers, and increased adoption of amniotic products, including Affinity and PuraPly line extensions. PuraPly revenue was $37.6 million in Q2 and $78.9 million for six months.
- Cost of goods sold increased with higher sales volumes and additional manufacturing and quality-control headcount. Gross margin improved, which management linked to sales volume and a shift toward higher-margin products.
- Q2 SG&A was $62.3 million (+34%); six-month SG&A was $120.6 million (+22%). R&D was $7.3 million in Q2 (+57%) and $13.5 million for six months (+34%).
- For the six months, operating cash flow was $16.2 million, versus cash use of $26.6 million in 2020. Capital expenditures were $9.3 million; cash and restricted cash increased $5.5 million to $90.3 million. Accounts receivable growth used $22.1 million of cash, and inventory growth used $5.0 million.
- At June 30, cash was $89.8 million, working capital was $117.2 million, and current assets and current liabilities were $201.8 million and $84.5 million, respectively. Total assets were $355.6 million.
- Debt at June 30 included $60.0 million of term-loan principal and $10.0 million drawn on the revolving facility. Up to $30.0 million of revolving capacity remained available, subject to the borrowing base. Term-loan interest was 9.25%; the revolver rate was 5.50%. The company also reported $13.7 million of finance lease liabilities and $28.7 million of operating lease liabilities.
Material changes, outlook and risks
- The company reported four consecutive quarters of net income through June 30, 2021, but noted it may incur operating losses as it invests to support growth. It had an accumulated deficit of $120.1 million.
- Management said cash, working capital, product-sales cash flows and availability under the then-current credit agreement were expected to fund operations, capital spending and debt service for at least 12 months beyond the filing date. No formal revenue or earnings guidance is provided in the supplied filing text.
- On August 6, 2021, after quarter-end, the company entered into a new credit agreement with a term-loan facility of up to $75 million and a revolving facility of up to $125 million, both maturing August 6, 2026. It paid amounts due under and terminated the 2019 credit agreement that day. The filing text does not provide a clear value for new borrowings under the replacement facilities.
- After the FDA’s enforcement grace period ended May 31, 2021, the company ceased commercial distribution of ReNu and NuCel. It plans to continue ReNu clinical development toward a biologics license application and discontinue NuCel clinical development.
- COVID-19 had not materially adversely affected results or operations through Q2, but management said future effects remained uncertain. It also cited risks to commercial prospects, cash position and access to capital.
- A planned restructuring consolidates manufacturing in Massachusetts and closes La Jolla facilities. The expected charge is approximately $7.0 million; $1.9 million was recorded in the first half of 2021, and the remaining facility and storage costs may continue through mid-2024.
- Inventory obsolescence charges were $4.7 million for the first half, versus $1.7 million a year earlier. The CPN acquisition earnout liability fell to $0.9 million from $4.0 million at year-end, generating a $3.1 million fair-value gain in the first half.
- Management disclosed a continuing material weakness in internal control over financial reporting; disclosure controls were also deemed ineffective at June 30. Remediation was underway, but management had not completed sufficient operating-effectiveness testing. The company targeted remediation during 2021 and anticipated its new ERP system would go live in the first half of 2022.
- The company was in compliance with financial covenants under the 2019 credit agreement at June 30. Future borrowing access was subject to borrowing-base limits and financial covenants. Management cautioned that additional financing, if needed, might not be available on acceptable terms or at all.
Most important facts for investors to verify
- Post-quarter refinancing: actual amounts drawn, pricing, fees, covenants, collateral and repayment terms under the August 2021 credit agreement.
- Whether rapid revenue growth and improved margins persist, particularly after the end of PuraPly pass-through reimbursement status and the cessation of ReNu and NuCel sales.
- Cash conversion and working-capital trends, especially receivables, inventory and the rising sales-return and doubtful-account allowance.
- Progress in remediating the material weakness, including control testing and the ERP implementation timetable.
- Restructuring costs and execution, ReNu clinical and regulatory progress, and the potential CPN earnout obligation for the July 2021–June 2022 measurement period.