Organogenesis Holdings Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparisons are with the same 2019 periods. Amounts below are in millions unless otherwise stated. Organogenesis develops, manufactures and sells regenerative medicine products in Advanced Wound Care and Surgical & Sports Medicine.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net revenue | $69.0 | $64.9 | $130.7 | $122.1 |
| Gross profit | $48.9 | $45.5 | $91.9 | $85.6 |
| Gross margin | 71% | 70% | 70% | 70% |
| Operating loss | $(2.3) | $(7.3) | $(17.3) | $(19.4) |
| Net loss | $(5.2) | $(9.6) | $(21.5) | $(25.3) |
| Net loss per share | $(0.05) | $(0.11) | $(0.21) | $(0.28) |
- Q2 revenue grew 6%; Advanced Wound Care rose 8% to $59.7 million, while Surgical & Sports Medicine fell 5% to $9.2 million. First-half revenue grew 7%, with growth in both categories.
- Q2 SG&A decreased 5% to $46.5 million, largely reflecting reduced travel and marketing, partly offset by sales-force hiring. First-half SG&A increased 1% to $99.1 million. R&D rose 21% in Q2 and 39% in the first half, to $4.7 million and $10.1 million, respectively.
- First-half operating cash use was $26.6 million, versus $21.7 million in 2019; investing cash use was $6.1 million, and financing provided $13.1 million. Cash and restricted cash declined $19.6 million to $40.8 million.
- At June 30, cash was $40.5 million and working capital was $51.6 million. Total assets were $216.5 million; total liabilities were $180.7 million.
- Debt included $60.0 million of term loans and $39.4 million drawn on the revolving facility. No revolving availability remained. The term loan rate was 9.25%; the revolver rate was 5.50%. Capital lease obligations were $16.3 million.
Material changes and notable items
- The Q2 net loss narrowed year over year, with higher gross profit and lower SG&A; increased interest expense partly offset the improvement. First-half net loss also improved, including a $1.3 million gain on settlement of deferred NuTech Medical acquisition consideration.
- Inventory increased to $28.6 million from $22.9 million at year-end 2019. The company recorded $1.7 million of excess and obsolete inventory charges in the first half, versus $0.5 million in 2019.
- First-half SG&A included a $2.0 million cancellation fee for product-development and consulting agreements. First-half capital expenditures were $6.4 million, versus $1.3 million in 2019.
- PuraPly revenue was $28.5 million in Q2 and $61.0 million in the first half. Its pass-through reimbursement status was scheduled to end September 30, 2020; management expected revenue to decline afterward as products transition to bundled reimbursement, and said growth in non-PuraPly products might not fully offset the decline.
Outlook, risks and contingencies
- Management expects operating losses to continue as it invests in growth. It stated that cash, working capital and expected product-sale cash flows should fund operating expenses, capital expenditures and debt service for at least 12 months beyond the filing date. It may seek additional equity, debt or strategic financing; availability and terms are uncertain.
- Management said COVID-19 had not materially adversely affected results through Q2, but its future effects were uncertain. Risks include weaker demand or delayed procedures, limited sales access to healthcare customers, staffing and manufacturing disruption, supply-chain or tissue-supply constraints, and covenant compliance. COVID-19 contributed to the Q2 decline in Surgical & Sports Medicine revenue.
- The credit agreement requires quarterly revenue and liquidity covenants. The company reported compliance at June 30, 2020. Minimum trailing-12-month revenue thresholds rise to $260 million for September 30 and $262 million for December 31, 2020; non-PuraPly revenue thresholds are $136.5 million and $145 million for those respective dates. Failure to comply could accelerate debt unless lenders grant relief.
- The company disclosed a continuing material weakness in internal control over financial reporting and concluded disclosure controls were ineffective at June 30. Remediation included control improvements, outside assistance and an ERP implementation targeted for the second half of 2020; management said remediation was not yet complete.
- Pending claims were accrued at $1.1 million; management did not expect the ultimate resolution of claims to materially affect the company. The filing reported no material legal proceedings and no subsequent events through August 10, 2020.
Important facts for investors to verify
- Whether revenue and liquidity covenants are met at upcoming test dates, particularly as PuraPly pass-through status expires and the non-PuraPly revenue tests begin.
- Actual post-September 2020 PuraPly sales and reimbursement effects, and whether other products offset any decline.
- Cash burn, working-capital needs, remaining revolver capacity and management’s stated 12-month liquidity outlook.
- Whether the material weakness is remediated and the ERP system and related controls become operational and effective.
- COVID-19 effects on procedures, sales access, production and supply availability, and the significance of elevated inventory and obsolescence charges.