Organogenesis Holdings Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited consolidated results. The company develops, manufactures and sells regenerative medicine products in Advanced Wound Care and Surgical & Sports Medicine.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenue | $102.6 million | $61.7 million | Up 66% |
| Gross profit / margin | $77.1 million / 75% | $42.9 million / 70% | Profit up 79%; margin up 5 percentage points |
| Operating expenses | $64.4 million | $58.0 million | Up 11% |
| Operating income (loss) | $12.6 million | $(15.1) million | Turned positive |
| Net income (loss) | $9.9 million; $0.08 basic and $0.07 diluted per share | $(16.3) million; $(0.16) per share | Turned profitable |
| Adjusted EBITDA (non-GAAP) | $16.0 million | $(10.9) million | Turned positive |
| Operating cash flow | $(1.5) million | $(17.3) million | Cash use narrowed |
Advanced Wound Care revenue rose 77% to $90.7 million; Surgical & Sports Medicine revenue increased 13% to $11.8 million. Management attributed growth to an expanded sales force, increased sales to existing and new customers, greater adoption of amniotic products, and PuraPly line extensions. PuraPly revenue was $41.3 million versus $32.5 million.
Cost of goods sold increased 36% to $25.5 million, slower than revenue growth; management cited higher unit volumes and manufacturing and quality-control headcount. SG&A increased 11% to $58.2 million, while R&D increased 15% to $6.2 million. Inventory excess and obsolescence charges were $2.3 million versus $0.8 million.
Operating cash use reflected a $16.3 million increase in accounts receivable and a $4.2 million increase in inventory, partly offset by net income and noncash charges. Capital expenditures were $5.0 million. Cash and restricted cash declined $6.8 million during the quarter.
At March 31, 2021, cash was $77.5 million, restricted cash $0.5 million, working capital $111.2 million, and total assets $319.2 million. Total liabilities were $161.9 million. Net accounts receivable was $72.0 million, up from $56.8 million at year-end 2020; inventory was $29.7 million, up from $27.8 million.
Debt included a $60.0 million term loan and $10.0 million revolving-facility borrowing. The company reported up to $30.0 million of additional revolver availability, subject to the borrowing base. The term loan rate was 9.25% at quarter-end; interest-only payments run through June 2021, after which principal installments are scheduled. Finance lease obligations totaled $14.4 million.
Material changes and notable items
- Q1 2021 profitability contrasts with the prior-year loss. The prior-year period included a $1.3 million gain from settling a deferred acquisition consideration dispute; the company reported no such gain in Q1 2021.
- Gross margin improved to 75% from 70%, which management attributed primarily to greater sales volume and a shift toward higher-margin products.
- The company adopted ASC 842 lease accounting on January 1, 2021, recognizing an operating lease liability of $15.9 million and a right-of-use asset of $13.5 million; prior-period figures were not recast.
- The company revised its historical accounting for private warrants following SEC staff guidance. It determined prior-period error effects were not material and reclassified $2.3 million from additional paid-in capital to accumulated deficit at December 31, 2020.
- A workforce and facility restructuring is expected to cost approximately $5.5 million and be completed by year-end 2021. Q1 charges were $0.9 million; the quarter-end restructuring liability was $1.5 million.
Outlook, risks and contingencies
- Management expects cash, working capital, product-sale cash flows and credit-facility availability to fund operations, capital expenditures and debt service for at least 12 months beyond the filing date. It provided no specific revenue or earnings guidance in the supplied filing text.
- The company was in compliance with its credit-agreement financial covenants at March 31, 2021. Covenants include minimum revenue and non-PuraPly revenue tests and minimum liquidity; failure to comply could permit lenders to terminate commitments or accelerate debt.
- The FDA’s enforcement grace period for ReNu and NuCel was scheduled to end May 31, 2021. The company said it planned to cease commercial distribution after that date and continue clinical studies while pursuing BLA approval.
- PuraPly and PuraPly AM’s pass-through reimbursement status expired September 30, 2020. Management had not observed a resulting revenue decline by quarter-end, citing recently launched line extensions, but said reimbursement changes could affect sales.
- COVID-19 had not materially adversely affected results through Q1, but its future impact remained uncertain. Management cited possible effects on commercial prospects, cash and access to capital.
- A material weakness in internal control over financial reporting remained unresolved at March 31, 2021; management also concluded disclosure controls were ineffective. Remediation included control testing and an ERP implementation targeted for the second half of 2021.
- The filing reports no material legal proceedings and no material changes to the risk factors in the 2020 Form 10-K. The company had $150,000 accrued for certain pending lawsuits. It also disclosed change-in-control retention agreements effective May 10, 2021.
Important facts for investors to verify
- Whether receivables are collected and inventory converted into sales, given the working-capital-driven operating cash outflow.
- Post-May 31, 2021 commercial and regulatory developments for ReNu and NuCel, including any effect on revenue and progress toward BLA approval.
- Revenue and covenant performance, particularly non-PuraPly revenue, and actual availability under the borrowing-base-limited revolver.
- Whether PuraPly sales and margins remain resilient under bundled reimbursement after pass-through status ended.
- Progress in remediating the material weakness, including operating-effectiveness testing and ERP implementation.
- Actual restructuring costs and completion timing, and the effect of scheduled term-loan amortization beginning after June 2021.