Organogenesis Holdings Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The company develops, manufactures and sells regenerative medicine products in Advanced Wound Care and Surgical & Sports Medicine.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $64.3 | $50.8 | $186.3 | $129.9 |
| Gross profit | $45.1 | $31.3 | $130.8 | $78.6 |
| Gross margin | 70% | 62% | 70% | 60% |
| Operating expenses | $53.4 | $41.4 | $158.5 | $125.6 |
| Operating loss | $(8.3) | $(10.1) | $(27.7) | $(47.1) |
| Net loss | $(10.7) | $(13.1) | $(36.1) | $(55.6) |
| Adjusted EBITDA loss | $(4.8) | $(7.3) | $(19.0) | $(36.1) |
- Q3 Advanced Wound Care revenue was $54.3 million, up 25%; Surgical & Sports Medicine revenue was $10.0 million, up 39%. Nine-month growth was 43% and 44%, respectively.
- PuraPly revenue was $31.8 million for Q3 and $86.9 million for the nine months, versus $17.9 million and $41.3 million in the comparable 2018 periods.
- SG&A rose 28% in Q3 and 29% year to date, primarily from sales-force headcount, commissions and marketing. R&D increased 41% and 46%, respectively.
- Nine-month operating cash use was $27.1 million, compared with $43.2 million in 2018. Investing cash use was $2.8 million; financing provided $31.7 million. Cash and restricted cash ended at $23.2 million.
- At September 30, cash was $23.0 million and working capital was $24.1 million. Total assets were $174.6 million; total liabilities were $161.8 million; stockholders’ equity was $12.8 million.
Debt, liquidity and capital
- Outstanding borrowings were $50.0 million under the term loan and $33.5 million under the revolving facility. Up to $6.5 million of additional revolver borrowing was available, subject to the borrowing base.
- The credit agreement also permits a conditional $10 million third term-loan tranche through March 31, 2020, subject to covenant compliance and revenue requirements. The company reported compliance with its financial covenants at September 30.
- The term loan bears interest at 3.75% above the Wall Street Journal Prime Rate, with interest-only payments through February 2021 and maturity in March 2024. It includes a final payment equal to 6.25% of original principal. Revolver advances bear interest at Prime.
- Capital lease obligations totaled $17.8 million on the balance sheet. Contractual debt payments, including interest and the term-loan final payment, were reported as $108.5 million; this is not the same as outstanding principal.
- Management expects cash, product-sales cash flow and credit-facility availability to fund operating expenses, capital expenditures and debt service for at least 12 months beyond the filing date. The company nevertheless expects operating losses for the foreseeable future and may seek additional financing.
Material changes and notable items
- Revenue increased 27% in Q3 and 44% year to date. Management attributed growth to sales-force expansion, adoption of NuTech Medical’s amniotic products, and restored Medicare pass-through reimbursement for PuraPly effective October 1, 2018.
- PuraPly and PuraPly AM had pass-through status through September 30, 2020. Management noted that reimbursement rules and rates could change, affecting demand and revenue.
- Gross margin improved, which management attributed to sales mix, higher volume and manufacturing efficiencies. The nine-month gross profit increase also reflects the stronger revenue base.
- The company refinanced prior borrowings in March 2019 with a new credit agreement, repaid and terminated the Master Lease Agreement, and recorded a $1.9 million debt-extinguishment loss.
- In August, the company exchanged or exercised its remaining public and private warrants, issuing approximately 3.3 million shares (about 3% of shares outstanding after issuance). No warrants remained at September 30. The exchange resulted in a $0.6 million non-cash deemed dividend and $0.9 million of transaction costs.
- Adoption of ASC 606 in January 2019 did not materially affect reported results, according to the filing.
Outlook, risks and contingencies
- Management expected R&D costs to continue increasing through 2019 and anticipated continued SG&A growth as the business and sales footprint expanded.
- Affinity production was suspended in Q1 2019 because of supplier production issues. The company identified an alternate supplier but did not expect it to begin production before the end of Q1 2020 at the earliest; management warned that the disruption would reduce Affinity revenue and that replacement sales were not assured.
- Revenue covenants require minimum trailing-12-month revenue of $231.5 million for the period ending December 31, 2019. The filing states that 2020 covenant levels were to be agreed with lenders by February 15, 2020. Failure to comply could permit lenders to terminate commitments or accelerate debt.
- The company had an accumulated deficit of $166.6 million and used $27.1 million of cash in operations in the first nine months. Management’s liquidity assessment says available resources should cover at least 12 months beyond filing, but additional financing may not be available on acceptable terms.
- The remaining $5.0 million NuTech Medical deferred acquisition consideration, plus accrued interest, was disputed. The sellers sued for payment and attorneys’ fees; the company asserted indemnification claims that could offset some or all of the amount. The balance sheet included $0.8 million of related accrued interest.
- Other disclosed risks include Medicare reimbursement changes, product supply and inventory interruptions, and the possibility that stockholder ownership changes limit use of net operating loss carryforwards. The company reported $0.5 million accrued for certain pending lawsuits; management did not expect existing claims to have a material effect.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at September 30, 2019 because material weaknesses persisted in formal accounting controls and accounting for complex transactions. Remediation was ongoing, and management had not performed enough control testing to conclude the weaknesses were remediated.
Investor verification priorities
- Track PuraPly reimbursement and sales trends, including the September 2020 end of its stated pass-through period and any subsequent CMS changes.
- Verify Affinity supply recovery, alternate-supplier timing and the extent to which other products offset lost Affinity sales.
- Monitor operating cash burn, working-capital needs, borrowing-base availability, covenant headroom and the conditions for any remaining term-loan tranche.
- Review the status and potential resolution of the disputed NuTech acquisition consideration and related lawsuit.
- Assess progress in remediating the reported material weaknesses and whether controls are tested and operating effectively.