Organogenesis Holdings Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted. Organogenesis develops, manufactures and sells regenerative medicine products in Advanced Wound Care and Surgical & Sports Medicine.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $100.8 | $64.3 | $231.5 | $186.3 |
| Gross profit / margin | $77.8 / 77% | $45.1 / 70% | $169.7 / 73% | $130.8 / 70% |
| Operating income (loss) | $23.0 | $(8.3) | $5.6 | $(27.7) |
| Net income (loss) | $20.9 | $(10.7) | $(0.5) | $(36.1) |
| Adjusted EBITDA (non-GAAP) | $24.6 | $(4.8) | $12.0 | $(19.0) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(19.5) | $(27.1) |
- Q3 revenue rose 57% year over year; nine-month revenue rose 24%. Advanced Wound Care revenue increased 66% in Q3 and 28% year to date, while Surgical & Sports Medicine revenue increased 9% and 5%, respectively.
- Q3 PuraPly revenue was $40.9 million, versus $31.8 million; nine-month PuraPly revenue was $102.0 million, versus $86.9 million. Gross-margin expansion reflected higher sales volume and a shift toward higher-margin products.
- Cash was $36.5 million, restricted cash $0.4 million, and working capital $62.8 million at September 30. Cash and restricted cash declined $23.5 million from year-end 2019.
- Operating cash use was $19.5 million for the first nine months, including substantial working-capital investment, notably a $19.2 million increase in accounts receivable and $7.8 million increase in inventory. Investing cash use was $16.4 million, including $12.3 million of capital expenditures and the CPN acquisition; financing provided $12.3 million.
- At quarter-end, the company had $39.4 million drawn on its revolving facility and $60.0 million of term debt, with no availability for further revolver borrowings. Term debt bears 9.25% interest; the revolver rate was 5.50%. The term loan and revolver mature March 2024. Capital-lease obligations totaled $15.7 million, including current maturities.
- Total assets were $246.4 million and stockholders’ equity was $65.5 million. Accumulated deficit was $171.6 million.
Material changes and notable items
- Q3 moved from a net loss to $20.9 million net income; nine-month net loss narrowed to $0.5 million. Q3 operating income included favorable unusual items, including a $0.95 million gain related to settlement of a legacy lawsuit and a $1.11 million recovery of previously reserved related-party receivables. Nine-month results also included a $2.25 million gain on settlement of deferred acquisition consideration. These items affect comparability.
- Organogenesis acquired certain assets and assumed liabilities of CPN Biosciences on September 17 for preliminary consideration of $19.0 million: $6.4 million cash, shares valued at $8.8 million and a $3.8 million contingent earnout liability. The acquisition added $13.6 million of intangible assets and $3.4 million of goodwill; acquired results were not material in the quarter.
- The company recorded $2.0 million of inventory obsolescence charges in the first nine months, versus $0.8 million a year earlier. Research and development rose 24% year to date, while selling, general and administrative expense increased 2%.
- On October 21, 2020, the company committed to a workforce restructuring and La Jolla facility consolidation, expected to result in an approximately $5.5 million charge, primarily for retention benefits for about 75 employees.
Outlook, risks and contingencies
- Management said quarter-to-date COVID-19 effects had not materially adversely affected results through September 30, but it could not quantify future effects. Risks include lower product demand, reduced sales access to healthcare providers, staffing and manufacturing disruption, supply-chain constraints, and covenant compliance. Management cited postponements or cancellations of procedures as a partial offset to Surgical & Sports Medicine growth.
- PuraPly and PuraPly AM’s Medicare pass-through reimbursement status ended September 30, 2020. Management expected a revenue decline as the products returned to bundled reimbursement and could not be certain that growth in non-PuraPly products would offset it.
- Management expected cash, working capital and product-sale cash flows to fund operating expenses, capital expenditures and debt service for at least 12 months beyond the filing date. This outlook is subject to COVID-19 uncertainty and covenant risks; management noted that additional financing might be needed and is not assured.
- The company reported compliance with its credit covenants at September 30. The stated trailing-twelve-month thresholds for September were $260 million consolidated revenue and $136.5 million non-PuraPly revenue; December thresholds were $262 million and $145 million, respectively. Failure to comply could make borrowings immediately due absent lender relief.
- A ransomware incident in August temporarily impaired certain IT systems. The company reported no material loss and expected substantially all costs to date to be reimbursed by insurance, while the investigation continued.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective because a previously identified material weakness remained unremediated. The weakness involved formal accounting, operational and IT controls, including account reconciliations, journal entries, review procedures and segregation of duties. Remediation was ongoing; a new ERP system was expected to go live in the first half of 2021.
- No material legal proceedings were reported. The company disclosed accrued liabilities related to pending lawsuits and related-party lease obligations; it also noted that unpaid affiliate lease obligations are subordinated to the credit agreement.
Most important facts for investors to verify
- Whether non-PuraPly growth can offset the expected reimbursement-driven PuraPly revenue decline, and whether the company met the December 2020 covenant thresholds.
- Whether cash conversion improves given rising receivables and inventory, and whether the stated liquidity runway remains adequate while the revolver is fully drawn.
- How much reported profitability depends on settlement gains and other nonrecurring or non-cash adjustments; compare GAAP results with the company’s non-GAAP Adjusted EBITDA reconciliation.
- The final CPN purchase-price allocation, earnout exposure and integration outcomes, and the timing and realized cost savings from the announced restructuring.
- Progress in remediating the material weakness and any further effects or costs from the ransomware incident.