Organogenesis Holdings Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company develops, manufactures and commercializes regenerative medicine products for Advanced Wound Care and Surgical & Sports Medicine. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Net revenue | $121.4 | $123.2 | $218.5 | $225.7 |
| Gross profit | $94.7 | $93.3 | $166.8 | $170.3 |
| Gross margin | 78.1% | 75.7% | 76.3% | 75.4% |
| Operating income | $11.9 | $23.6 | $11.8 | $36.2 |
| Net income | $8.7 | $20.7 | $7.8 | $30.6 |
| Diluted EPS | $0.07 | $0.15 | $0.06 | $0.23 |
- Revenue declined 1% in Q2 and 3% in H1 year over year. Advanced Wound Care revenue rose 2% in Q2 and 1% in H1; Surgical & Sports Medicine fell 35% and 38%, respectively.
- PuraPly revenue was $69.4 million in Q2 and $122.2 million in H1, up from $37.6 million and $78.9 million in the comparable periods.
- H1 operating cash flow was $11.6 million, versus $16.2 million. Capital expenditures were $12.8 million, versus $9.3 million; operating cash flow less capital expenditures was therefore negative $1.2 million. Cash, cash equivalents and restricted cash totaled $112.9 million at June 30, 2022.
- At quarter-end, working capital was $143.3 million. Term-loan principal was $73.1 million; none of the $125 million revolving facility was drawn. The balance sheet reported $72.6 million of term debt net of discount and issuance costs, and $55.6 million of operating lease liabilities.
- Adjusted EBITDA, a non-GAAP measure, was $18.6 million in Q2 and $23.6 million in H1, compared with $25.1 million and $41.1 million, respectively.
Changes and management commentary
- Q2 and H1 operating income and net income fell substantially, chiefly as selling, general and administrative expenses and research and development costs increased. H1 SG&A rose 13% to $136.2 million and R&D rose 39% to $18.8 million.
- Management attributed Advanced Wound Care growth to sales-force expansion, customer adoption and PuraPly line extensions; this was partly offset by Dermagraft sales suspension and a GPO settlement charge. Surgical & Sports Medicine declines reflected the discontinued marketing of ReNu and NuCel and, to a lesser extent, COVID-19 effects on Affinity.
- Gross margin improved, while H1 gross profit declined 2%. Management cited product-mix benefits partly offset by lower Surgical & Sports Medicine volume and higher manufacturing costs. Higher income-tax expense also weighed on earnings: H1 expense was $2.5 million versus $0.7 million, with the effective tax rate reported at 27.0% versus 2.2%.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects available cash, working capital, revolving-credit availability and cash generated from product sales to fund operations, capital expenditures and debt service for at least 12 months beyond the filing date. It says future results remain uncertain and may require changes to operating plans.
- In August 2022, the company agreed to settle disputed GPO fees for $3.3 million, recorded as a reduction of revenue: $1.6 million in Q2 2022, $1.0 million in Q1 2022 and $0.7 million in 2021. The company revised previously issued statements for the earlier amounts, determining the error was not material to those prior periods.
- Dermagraft manufacturing was suspended in Q4 2021 and sales in Q2 2022 while the company plans a transition to Massachusetts. Management expects customers to substitute Apligraf during the interruption, which may last a few years, but warns that failure to achieve expected savings or substitution could adversely affect results.
- ReNu and NuCel commercial distribution ceased after the FDA enforcement grace period ended May 31, 2021. The company continues clinical development of ReNu for potential FDA approval and discontinued clinical development of NuCel.
- The company expects approximately $3.0 million of charges from its Birmingham restructuring, committed to in March 2022 and expected to be completed by year-end. COVID-19 remains a source of uncertainty, although management reported no material adverse effect through Q2.
- Management reported compliance with credit-agreement covenants at June 30, 2022. The loan is secured by substantially all company assets and includes financial covenants and restrictions on certain actions. The company reported no material legal proceedings and no material changes to the risk factors in its 2021 Form 10-K.
- Management concluded internal control over financial reporting was not effective at June 30, 2022 because a previously disclosed material weakness remained. Remediation work includes control testing, staff training and plans for a company-wide ERP system expected to go live in 2023.
Important facts for investors to verify
- Whether Advanced Wound Care growth and PuraPly adoption can offset the loss of Dermagraft sales and continued weakness in Surgical & Sports Medicine.
- Progress, timing, costs and customer substitution outcomes for the Dermagraft manufacturing transition.
- Execution of the Birmingham restructuring, related charges and expected manufacturing savings.
- Cash generation, capital spending, debt amortization, interest-rate exposure and continued compliance with credit covenants.
- Completion and testing of internal-control remediation, including the ERP implementation, and any further accounting revisions or GPO-related effects.