Organogenesis Holdings Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Unless noted otherwise, financial amounts are in millions of dollars. Comparisons are with Q1 2018.
Business context
Organogenesis develops, manufactures and sells regenerative-medicine products in Advanced Wound Care and Surgical & Sports Medicine. It reported one operating segment. Products are sold through a direct sales force and independent agencies. Management attributed growth in part to expanded sales coverage, PuraPly regaining Medicare pass-through reimbursement in October 2018, and continued adoption of products acquired with NuTech Medical.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $57.1 | $35.5 |
| Gross profit / gross margin | $40.1 / 70% | $21.0 / 59% |
| Operating expenses | $52.3 | $41.0 |
| Operating loss | $(12.1) | $(20.0) |
| Net loss | $(15.7) | $(22.5) |
| Adjusted EBITDA (non-GAAP) | $(9.4) | $(17.3) |
| Net cash used in operating activities | $(9.6) | $(4.5) |
Revenue increased 61%. Advanced Wound Care revenue was $47.8 million, up 64%; Surgical & Sports Medicine revenue was $9.3 million, up 47%. PuraPly revenue was $25.4 million versus $10.6 million. Gross margin improved 11 percentage points. SG&A rose 28% to $48.9 million, mainly due to sales-force and other headcount growth, professional fees, amortization and royalties; R&D increased 19% to $3.4 million.
At March 31, cash was $30.6 million, restricted cash $0.1 million, and working capital $32.8 million. Cash and restricted cash increased $9.3 million during the quarter, principally reflecting financing proceeds. Current assets were $85.1 million and current liabilities $52.3 million. Total liabilities were $143.9 million.
Debt included a $40.0 million term loan (reported net of $0.4 million debt discount) and $31.0 million outstanding on the revolving facility, with $2.6 million available at quarter-end. Capital lease obligations totaled $17.4 million. The term loan bears interest at 3.75 percentage points above prime; the revolving facility bears interest at prime. The term loan has interest-only payments through March 2021 and matures in March 2024.
Material changes, outlook and risks
- In March 2019, the company entered a new credit agreement providing for a $40 million revolver and a $60 million term loan in tranches. The first $40 million term-loan tranche was funded; additional tranches depend on financial covenants and specified revenue/EBITDA milestones. The agreement also imposes quarterly minimum-revenue tests, a minimum-liquidity requirement and a requirement to amend certain facility leases by year-end 2019.
- The new financing repaid and terminated the prior master lease agreement. The company recorded a $1.9 million debt-extinguishment loss, including unamortized discount and early-payment penalties. It also paid $6.8 million to settle a put right on NuTech-related shares; those shares are held in treasury.
- Management expects operating losses to continue as it invests in growth and stated that cash at March 31, expected product-sale cash flows and availability under the new credit agreement should fund operations, capital expenditures and debt service through at least May 31, 2020. This is not earnings guidance; no specific revenue or profit forecast is provided.
- Liquidity depends on continued product sales and access to financing. Failure to meet credit covenants could permit lenders to terminate commitments or accelerate debt. Additional financing may not be available on acceptable terms. Management reported recurring losses and a $145.6 million accumulated deficit.
- The remaining $5.0 million NuTech deferred acquisition consideration, plus accrued interest, is disputed. The company asserted indemnification claims; the sellers sued for payment and related relief. The company also reported $1.0 million accrued for certain pending lawsuits and stated that management did not expect existing claims to have a material effect, while noting litigation outcomes are uncertain.
- Management concluded that disclosure controls and internal control over financial reporting were not effective at March 31, 2019 because material weaknesses persisted. Deficiencies involved formal accounting controls, reconciliations and journal entries, and accounting for complex transactions. Remediation was underway but had not been demonstrated effective.
- ASC 606 was adopted January 1, 2019; management said its impact on opening balances and Q1 results was not material. The 2018 comparative period remains under ASC 605.
Most important facts for investors to verify
- Whether revenue growth, particularly PuraPly sales, is sustainable and how results respond to pass-through reimbursement ending September 30, 2020.
- Performance against the new credit agreement’s revenue, EBITDA, liquidity and other covenant requirements, and access to undrawn or conditional loan tranches.
- Cash burn, working-capital needs and the assumptions supporting management’s stated liquidity runway through May 2020.
- Resolution and potential cash impact of the disputed NuTech acquisition consideration and other legal matters.
- Progress in remediating the disclosed material weaknesses and whether controls become effective.
- Potential dilution: 91.3 million Class A shares were outstanding at May 3, 2019; the filing also lists substantial options and warrants, though their inclusion in diluted loss per share was antidilutive.