Organogenesis Holdings Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; amounts below are in millions of dollars unless noted. Organogenesis develops, manufactures, and sells regenerative medicine products in Advanced Wound Care and Surgical & Sports Medicine.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $64.9 | $43.6 | $122.1 | $79.1 |
| Gross profit | $45.5 | $26.3 | $85.6 | $47.3 |
| Gross margin | 70% | 60% | 70% | 60% |
| Operating loss | $(7.3) | $(17.0) | $(19.4) | $(37.0) |
| Net loss | $(9.6) | $(20.0) | $(25.3) | $(42.5) |
| Adjusted EBITDA (non-GAAP) | $(4.8) | $(11.5) | $(14.2) | $(28.8) |
- Q2 basic and diluted loss per share was $0.11, compared with $0.30 a year earlier; first-half loss per share was $0.28 versus $0.65.
- First-half operating cash use was $21.7 million, compared with $20.2 million in 2018. Investing cash use was $1.5 million; financing provided $21.9 million. Cash and restricted cash ended the period at $20.2 million.
- At June 30, cash was $20.0 million and working capital was $25.7 million. Net accounts receivable was $34.2 million; inventory was $18.7 million, up from $13.3 million at year-end.
- Debt included a $40.0 million term loan (carrying value $39.7 million after discount) and $33.5 million drawn on the revolving facility. The revolver had up to $6.5 million of additional borrowing availability, subject to its borrowing base. Capital lease obligations had a carrying value of $17.1 million.
- Total liabilities were $144.9 million, versus $116.6 million at December 31, 2018; stockholders’ equity was $23.2 million, versus $47.0 million.
Material changes versus prior period
- Revenue grew 49% in Q2 and 54% in the first half. Advanced Wound Care revenue rose 50% and 56%, respectively; Surgical & Sports Medicine revenue rose 46% and 47%.
- PuraPly revenue was approximately $29.7 million in Q2 and $55.1 million in the first half, compared with $12.7 million and $23.4 million in the respective 2018 periods. Management attributed growth to sales-force expansion, PuraPly’s restored Medicare pass-through status, and adoption of acquired amniotic products.
- Gross margin increased to 70% from 60%. Despite higher selling, general and administrative expenses and R&D spending, operating and net losses narrowed year over year as revenue and gross profit grew.
- In March 2019, the company entered a new credit agreement, drew $40 million of term debt and refinanced existing borrowings. It repaid and terminated its Master Lease Agreement, recording a $1.9 million debt-extinguishment loss in the first half.
Outlook, risks, and unusual items
- Management expects operating losses to continue for the foreseeable future and R&D expenses to rise during 2019; it also expects SG&A to increase with growth, sales-force investment, and market development. No specific revenue or earnings guidance for the full year is provided.
- Management stated that cash on hand, product-sale cash flows, and availability under the new credit agreement were expected to fund operating expenses, capital expenditures, and debt service through at least August 31, 2020. This depends on operating performance and access to financing.
- The credit agreement has quarterly revenue and liquidity covenants. The company reported compliance at June 30 and said it had met conditions for access to the second $10 million term-loan tranche. A further $10 million tranche is conditional on later covenant and revenue milestones. Failure to comply could permit lenders to terminate commitments or accelerate repayment.
- PuraPly and PuraPly AM had Medicare pass-through reimbursement through September 30, 2020; afterward, reimbursement and sales could be affected. The filing describes prior revenue pressure when products moved to bundled reimbursement.
- A $5.0 million deferred NuTech acquisition payment, plus accrued interest of $0.8 million, is disputed. The company asserted indemnification claims; the sellers sued for payment and related relief. The company also reported a $1.0 million accrual for certain pending lawsuits, while stating management did not expect legal claims to have a material financial effect.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, 2019 because previously identified material weaknesses remained. Remediation efforts were underway but not yet sufficiently tested to conclude the weaknesses were resolved.
- ASC 606 was adopted January 1, 2019; management said its impact was not material. The July 2019 warrant exchange offer was a subsequent event: eligible warrant holders could exchange warrants for shares, subject to a 65% tender threshold. The offer could affect share dilution.
Important facts for investors to verify
- Whether revenue growth—particularly PuraPly sales—persists and how sales develop after pass-through reimbursement expires.
- Cash burn, inventory growth, working-capital needs, and the basis for management’s liquidity runway through August 2020.
- Compliance with debt covenants, actual borrowing availability, and the conditions and timing for additional term-loan tranches.
- Resolution and potential cash impact of the disputed NuTech consideration and other legal matters.
- Progress in remediating material weaknesses and whether future testing supports a conclusion that controls are effective.
- Outcome and dilution consequences of the warrant exchange offer and the amount of shares ultimately issued.