Organogenesis Holdings Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 16, 2021. This is an annual report, not a standalone fourth-quarter report, and the supplied filing text does not provide a clear set of fourth-quarter-only financial results.
Business context
Organogenesis develops, manufactures and commercializes regenerative medicine products for Advanced Wound Care and Surgical & Sports Medicine. Its portfolio includes Apligraf, Dermagraft, PuraPly AM, Affinity, NuShield, NuCel and ReNu. The company reports one operating segment and had approximately 910 employees at year-end.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change or context |
|---|---|---|---|
| Net revenue | $338.3 million | $261.0 million | Up 30% |
| Advanced Wound Care revenue | $294.6 million | $220.7 million | Up 33% |
| Surgical & Sports Medicine revenue | $43.7 million | $40.2 million | Up 9% |
| PuraPly portfolio revenue | $147.3 million | $126.8 million | About 44% of FY2020 revenue |
| Gross profit / gross margin | $251.0 million / 74% | $185.0 million / 71% | Margin improved; company cites higher sales and favorable product mix |
| Operating expenses | $223.6 million | $214.5 million | SG&A $203.5 million; R&D $20.1 million |
| Income (loss) from operations | $27.4 million | $(29.5) million | Turned profitable at the operating level |
| Net income (loss) | $17.9 million | $(40.5) million | Basic EPS $0.17; diluted EPS $0.16 |
| Adjusted EBITDA | $36.9 million | $(18.2) million | Non-GAAP measure; review the company’s reconciliation and exclusions |
| Cash from operating activities | $6.8 million | $(33.5) million | FY2020 working-capital use included $18.8 million more accounts receivable and $6.7 million more inventory |
| Cash and working capital at year-end | $84.4 million cash; $106.1 million working capital | $60.2 million cash | Management said available resources and expected product-sale cash flows should fund operations, capital spending and debt service for at least 12 months after filing |
| Debt at year-end | $84.8 million total, including $70.0 million borrowed under the credit agreement | $100.6 million total | FY2020 credit-agreement borrowings: $60.0 million term loan and $10.0 million revolver; total debt also includes capital leases |
Investing activities used $24.8 million, including $21.1 million of capital expenditures and $5.8 million paid for the CPN acquisition. Financing activities provided $42.5 million, chiefly reflecting $59.1 million in net proceeds from the 2020 stock offering, partly offset by debt repayments and other payments. Total assets were $294.5 million and stockholders’ equity was $146.1 million at year-end.
Material changes versus FY2019
- Revenue increased 30%, driven primarily by Advanced Wound Care growth, expanded sales coverage, and increased adoption of amniotic products. Surgical & Sports Medicine growth was more modest, with procedures postponed or canceled due to COVID-19.
- Gross margin rose to 74% from 71%. Operating income and net income improved from losses in 2019.
- Operating cash flow improved to positive $6.8 million, though growth in receivables and inventory absorbed cash.
- PuraPly and PuraPly AM lost Medicare pass-through status on September 30, 2020; payment became bundled from October 1, 2020. Management warned that this could pressure revenue, although FY2020 PuraPly revenue still increased.
- The company acquired CPN Biosciences in September 2020 for stated consideration of $19.0 million, including cash, shares and contingent consideration. It issued approximately 1.95 million shares at closing and recorded a $3.985 million earnout liability at year-end.
- The company raised net proceeds of $59.1 million in a November 2020 public offering, issuing 19.9 million shares. Outstanding shares increased materially during the year.
Outlook, risks and unusual items
- Outlook: No numerical revenue or earnings guidance is provided. Management expected SG&A and R&D expenses to increase during 2021 as it continued investing in sales, clinical studies, product development and support.
- Products and clinical development: PuraPly XT and PuraForce were commercially launched by 2020. Management described planned launches for PuraPly MZ and Novachor, and a planned TransCyte reintroduction. The first patient in ReNu’s pivotal Phase 3 knee osteoarthritis study was enrolled in January 2021; approval and commercial success remain uncertain.
- Regulatory and reimbursement exposure: The FDA could determine that certain human-tissue products marketed as Section 361 HCT/Ps require premarket approval or clearance. NuCel and ReNu may require BLA approval. Coverage for several products is limited among private payers, and Medicare reimbursement policy changes could affect utilization and pricing.
- COVID-19: The company said the pandemic had not materially adversely affected FY2020 results, but reported disruption to medical procedures and identified continuing risks to demand, sales access, manufacturing, supplies, staffing and debt-covenant compliance.
- Debt and covenants: The credit agreement is secured by substantially all company assets, includes revenue and liquidity covenants, and could permit acceleration if covenants are breached. The company reported compliance at December 31, 2020. Term-loan principal repayments began after the interest-only period ending February 2021; the facility matures in March 2024.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because a previously reported material weakness persisted. Remediation included added accounting resources, control improvements and an ERP implementation planned to go live in the first half of 2021. The auditor did not provide an opinion on internal-control effectiveness.
- Unusual items: FY2020 included a $2.246 million gain related to settlement of the NuTech deferred consideration dispute and an assumed legacy lawsuit, a $1.516 million recovery of previously reserved related-party receivables, and a $618,000 restructuring charge. The restructuring plan was expected to cost approximately $5.5 million overall and consolidate La Jolla operations into Massachusetts by the end of 2021.
- Other exposures: An August 2020 ransomware incident temporarily impaired some IT systems; the company reported no material loss and said substantially all costs were reimbursed by insurance. It reported no material legal proceedings, while noting $150,000 accrued for certain pending lawsuits.
Important facts for investors to verify
- Whether the post-October 2020 bundled Medicare payment affects PuraPly sales, pricing, margins and customer adoption.
- Whether operating cash generation improves as receivables and inventory grow, and how much capital spending and investment remain necessary.
- Debt amortization, interest expense, liquidity requirements and continued compliance with revenue and minimum-liquidity covenants.
- Progress and outcomes for ReNu and NuCel clinical and regulatory programs, and the FDA’s treatment of the company’s Section 361 HCT/P products.
- Whether internal-control remediation and the planned ERP implementation are completed and demonstrated to operate effectively.
- The dilution and related-party aspects of the 2020 equity offering, CPN acquisition consideration and earnout, and the company’s other related-party arrangements.