Organogenesis Holdings Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed March 18, 2019. The filing also reports unaudited fourth-quarter results. Organogenesis develops, manufactures and commercializes regenerative medicine products for advanced wound care and surgical and sports medicine. The December 2018 Avista business combination made Organogenesis Inc. a wholly owned subsidiary of the public company.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $193.4 million | $198.5 million |
| Gross profit / gross margin | $124.6 million / 64% | $137.3 million / 69% |
| Operating expenses | $176.2 million | $142.8 million |
| Operating loss | $51.6 million | $5.5 million |
| Net loss attributable to Organogenesis Holdings Inc. | $64.8 million; $0.94 per share | $8.4 million; $0.14 per share |
| Adjusted EBITDA (non-GAAP) | $(36.2) million | $(0.03) million |
| Cash used in operating activities | $60.7 million | $3.6 million |
Fourth quarter: Revenue was $63.6 million, compared with $53.1 million in Q4 2017. Gross profit was $46.1 million, operating loss was $4.5 million and net loss was $9.3 million, versus a $4.4 million net loss in the prior-year quarter.
- Advanced Wound Care revenue fell 8% to $164.3 million; Surgical & Sports Medicine revenue rose 48% to $29.1 million. PuraPly revenue was $69.8 million, down from $109.1 million.
- Gross margin declined to 64% from 69%. SG&A rose 21% to $162.0 million, chiefly reflecting increased headcount, including the direct sales force; R&D increased 18% to $10.7 million.
- At year-end, cash was $21.3 million and working capital was $4.7 million. Total debt, including capital lease obligations as presented in the filing, was $59.3 million; net debt was $38.0 million. Accumulated deficit was $130.2 million.
- Financing activities provided $81.6 million in 2018, including $92.0 million net equity proceeds. The company used $11.2 million for recapitalization costs and paid $22.0 million of affiliate-debt principal, while converting additional affiliate debt to equity.
Material changes and significant transactions
- Total revenue declined 3% year over year. Management attributed the Advanced Wound Care decrease primarily to PuraPly and PuraPly AM losing Medicare pass-through reimbursement for the first nine months of 2018; pass-through status resumed October 1, 2018 and is scheduled to end September 30, 2020.
- Surgical & Sports Medicine growth reflected a full year of NuTech Medical sales in 2018, compared with partial-year contributions in 2017. The acquisition expanded the company into amniotic products and surgical markets.
- Operating loss widened substantially as gross profit fell while operating expenses increased. Net loss also included a $3.5 million write-off of deferred costs for an abandoned IPO, $3.1 million of Avista merger transaction costs, and a $2.1 million loss on affiliate-debt extinguishment.
- The December 2018 Avista transaction included $92 million of PIPE equity proceeds and an affiliate-debt settlement involving both stock conversion and cash payment. Year-end share count was 91.3 million; 92.0 million shares were outstanding as of March 1, 2019.
Outlook, risks and contingencies
- Management expects operating losses to continue for the foreseeable future and expects SG&A and R&D expenses to rise during 2019. It cited cash at year-end, product-sale cash flows and availability under the March 2019 credit agreement as sufficient to fund operations, capital expenditures and debt service through at least March 31, 2020. This is management’s expectation, not a guarantee.
- The March 2019 credit agreement provided a $40 million funded term-loan tranche and a revolving facility of up to the lesser of $40 million and the borrowing base; additional term-loan tranches are conditional on financial tests. It includes revenue and minimum-liquidity covenants, secured substantially all assets including intellectual property, and was used to repay the prior SVB and master-lease facilities.
- Affinity production was suspended in Q1 2019 because of supplier production problems. The company identified an alternate supplier and expected production to begin no earlier than Q4 2019; management warned that lost Affinity revenue might not be fully replaced.
- The FDA’s 361 HCT/P guidance creates regulatory uncertainty for amniotic products. NuCel and ReNu may require BLA approval, potentially involving significant expense or suspension of sales; the filing describes a 36-month enforcement grace period. Coverage and reimbursement for several products also remain limited among private payers.
- Medicare pass-through treatment for PuraPly and PuraPly AM is temporary. Management noted that removing these products’ costs from bundled payments may reduce reimbursement for other skin substitutes, and that PuraPly products return to bundled payment after September 2020.
- The company reported material weaknesses in financial reporting controls, including insufficient GAAP accounting expertise and inadequate formal policies and review controls. Management concluded disclosure controls were not effective at December 31, 2018; remediation efforts were underway but the weaknesses were not yet shown to be remediated.
- The company disclosed a dispute with NuTech Medical’s sellers over the remaining $5.0 million deferred acquisition consideration and accrued interest; the company asserts indemnification claims and the sellers sued for payment. It also accrued $1.0 million for lawsuits by former employees. Separately, management said it was not party to material legal proceedings.
- Other notable risks include substantial continuing losses and cash burn, supplier and human-tissue dependence, reimbursement and regulatory changes, debt covenants and refinancing needs, and Nasdaq listing compliance. The filing also identifies a potential impairment risk for unfinished leasehold improvements; no impairment was recorded in 2018.
Key facts investors should verify
- Whether revenue stabilizes or grows after the PuraPly reimbursement disruption, and how pass-through expiry and bundled-payment changes affect product demand, pricing and margins.
- Whether the Affinity supply interruption was resolved on the expected timeline and whether other products offset any lost sales.
- Actual cash burn, liquidity and covenant compliance under the March 2019 credit agreement, including whether conditional loan tranches become available.
- Progress and costs toward FDA compliance or approval for NuCel, ReNu and other tissue products, and the resulting impact on sales.
- Whether management remediates the material weaknesses and establishes effective financial reporting controls.
- Resolution and cash impact of the NuTech deferred-consideration dispute and other accrued legal matters.
- How much of the reported loss and non-GAAP Adjusted EBITDA reflects recurring operating performance versus transaction and other excluded items; the company cautions that Adjusted EBITDA is not a substitute for GAAP results.