Organogenesis Holdings Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results. Organogenesis develops, manufactures, and sells regenerative medicine products in Advanced Wound Care and Surgical & Sports Medicine; it reports one operating segment.
Financial results
Amounts below are in millions of dollars unless stated otherwise. Margins are approximate, calculated from reported figures.
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net revenue | $116.9 | $113.8 | $335.4 | $339.5 |
| Gross profit / margin | $90.7 / 77.6% | $87.6 / 77.0% | $257.5 / 76.8% | $257.9 / 76.0% |
| Operating income / margin | $1.8 / 1.5% | $16.3 / 14.3% | $13.6 / 4.1% | $52.5 / 15.5% |
| Net income / margin | $0.2 / 0.2% | $12.6 / 11.1% | $8.0 / 2.4% | $43.2 / 12.7% |
| Diluted EPS | $0.00 | $0.09 | $0.06 | $0.32 |
| Operating cash flow | Not separately presented for quarter | $17.1 | $44.0 | |
| Capital expenditures | Not separately presented for quarter | $23.2 | $26.0 |
Revenue mix and performance
- Q3 Advanced Wound Care revenue was $109.5 million, up 2%; Surgical & Sports Medicine revenue was $7.3 million, up 15%.
- For nine months, Advanced Wound Care revenue was $313.4 million, up 1%; Surgical & Sports Medicine revenue was $22.0 million, down 27%. The latter decline primarily reflected the continued suspension of ReNu and NuCel marketing after the FDA enforcement grace period ended.
- PuraPly revenue increased to $63.7 million in Q3 from $57.0 million and to $185.9 million for nine months from $135.9 million. Management attributed growth to expanded sales coverage, sites of care, and customer adoption.
Liquidity, debt, and balance sheet
- At September 30, cash and cash equivalents were $107.3 million, restricted cash was $0.8 million, and working capital was $141.3 million. Cash, cash equivalents, and restricted cash declined $6.5 million from year-end 2021.
- Nine-month operating cash flow of $17.1 million was below capital expenditures of $23.2 million; the company reported a $6.5 million decrease in cash, cash equivalents, and restricted cash.
- Term-loan principal was $73.1 million (carrying value, net of discount and issuance costs, was $72.6 million). No revolving borrowings were outstanding; $125.0 million remained available under the revolver. The loan is secured by substantially all company assets, including intellectual property, and has quarterly financial covenants. The company reported covenant compliance.
- The credit agreement matures in August 2026 and uses variable interest rates. Operating lease liabilities totaled $55.1 million.
- Management stated that cash, working capital, revolver availability, and expected cash flows from product sales should fund operating expenses, capital expenditures, and debt service for at least 12 months beyond the filing date.
Material changes and notable items
- Despite 3% Q3 revenue growth and a higher gross margin, Q3 operating income fell to $1.8 million from $16.3 million and net income fell to $0.2 million from $12.6 million. SG&A rose 27% to $79.3 million, including higher sales-force headcount, travel and marketing, legal, royalty and consulting costs, and unusual facility-related charges. R&D rose 7% to $9.6 million.
- For nine months, revenue declined 1% and net income declined to $8.0 million from $43.2 million. SG&A increased 18% to $215.5 million and R&D increased 26% to $28.4 million. The prior-year comparison included a $4.0 million reduction in SG&A from a change in the CPN acquisition earnout’s fair value and a $1.9 million debt-extinguishment loss.
- The company recorded a $4.2 million charge for disposal of equipment made incompatible by a revised facility design and $0.6 million in vendor cancellation fees after pausing construction of a Canton manufacturing facility amid inflation and market conditions. Management’s impairment test identified no impairment.
- A $3.3 million settlement of previously disputed GPO fees was recorded as a reduction of revenue: $1.6 million in Q2 2022, with prior-period amounts corrected by $1.0 million for Q1 2022 and $0.7 million for 2021. The company characterized the prior-period error as immaterial; there was no Q3 impact.
- The company continued restructuring manufacturing operations in Massachusetts. Birmingham restructuring was expected to be completed by year-end 2022, with approximately $3.0 million in total charges expected. Dermagraft sales were suspended in Q2 2022 during the planned manufacturing transition; management expects customers to substitute Apligraf, but warned that failure to do so or failure to achieve expected cost savings could harm results.
Outlook, risks, and contingencies
- No numerical revenue, earnings, or margin guidance was provided. Management generally expects SG&A and R&D spending to increase with sales-force expansion, market development, clinical studies, and product development.
- Management said COVID-19 had not materially adversely affected results through Q3 but that future effects remained uncertain. The public health emergency had been extended through at least January 11, 2023.
- Key uncertainties include customer substitution during Dermagraft’s unavailability; reimbursement, regulatory and competitive pressures; construction and manufacturing execution; variable-rate debt; and the company’s ability to obtain additional financing on acceptable terms if needed.
- Management concluded internal control over financial reporting was not effective at September 30, 2022 because a previously disclosed material weakness remained. Remediation efforts include control testing, training, added review processes, and a planned company-wide ERP implementation in 2023; remediation was not yet complete.
- A securities class action, amended October 24, 2022, alleges misleading statements concerning revenue, sales growth, and competition related to Affinity and PuraPly XT. The company disputes the claims and intends to defend them; the case was at an early stage and claimed damages were unquantified. Management said other known legal matters were not expected to have a material effect.
- The company reported no material changes to risk factors from its 2021 Form 10-K. It also disclosed uncertainty over the rental rate for certain related-party Canton leases, which could materially increase recorded lease assets and liabilities.
Investor verification priorities
- Track whether PuraPly growth and customer substitution for Dermagraft offset the loss of Dermagraft sales and the continuing impact of ReNu and NuCel suspensions.
- Assess SG&A growth, unusual facility charges, construction-pause implications, and whether margins and earnings recover.
- Monitor operating cash conversion, receivables and inventory needs, capital spending, and liquidity against debt service and covenant requirements.
- Verify progress on the ERP implementation and remediation of the material weakness, and review any subsequent disclosures about the securities litigation.
- Review the impact of GPO fee adjustments, lease negotiations with related parties, and any changes to management’s 12-month liquidity assessment.