Organogenesis Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Organogenesis develops, manufactures and sells regenerative medicine products for Advanced Wound Care and Surgical & Sports Medicine.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $113.8 | $100.8 | $339.5 | $231.5 |
| Gross profit | $87.6 | $77.8 | $257.9 | $169.7 |
| Gross margin | 77% | 77% | 76% | 73% |
| Operating income | $16.3 | $22.8 | $52.5 | $5.1 |
| Net income (loss) | $12.6 | $20.8 | $43.2 | $(1.1) |
| Diluted EPS | $0.09 | $0.19 | $0.32 | $(0.01) |
| Adjusted EBITDA (non-GAAP) | $21.7 | $24.6 | $62.8 | $13.9 |
Revenue mix: Advanced Wound Care revenue was $107.3 million in Q3, up 19%, and $309.5 million for nine months, up 54%. Surgical & Sports Medicine revenue was $6.4 million in Q3, down 41%, and $30.0 million for nine months, down 2%.
Cash flow and liquidity: Nine-month operating cash flow was $44.0 million, compared with cash used of $17.7 million in 2020. Investing used $26.0 million, primarily capital expenditures; financing used $0.1 million. Cash and restricted cash totaled $102.7 million at September 30. Working capital was $130.8 million. Management said available cash, working capital, credit availability and expected operating cash flows should fund operations, capital expenditures and debt service for at least 12 months beyond the filing date.
Debt and leases: The company had $74.5 million outstanding on its term loan, no revolver borrowings and $125.0 million available under its revolving facility. The term loan carried a 2.08% rate at quarter-end and matures in August 2026; financial covenants apply, and the company reported compliance. Finance lease liabilities were $9.4 million and operating lease liabilities were $28.9 million.
Balance sheet: Total assets were $370.4 million and total liabilities were $181.2 million at September 30, 2021. Accounts receivable was $74.6 million and inventory was $29.5 million.
Material changes and notable items
- Nine-month revenue increased 47%; growth was concentrated in Advanced Wound Care. Management attributed gains chiefly to expanded sales coverage, higher sales to existing and new customers, adoption of amniotic products and PuraPly line extensions, and additional sites of care.
- Q3 net income declined year over year despite revenue growth: SG&A rose 22% to $62.4 million and R&D rose 141% to $9.0 million. Management cited salesforce and commission costs, travel and marketing, restructuring, and increased development and clinical activity.
- Inventory excess-and-obsolescence charges increased to $8.0 million for the first nine months, from $2.0 million a year earlier; Q3 charges were $3.4 million versus $0.3 million.
- In August, the company refinanced its prior credit agreement with a new $75 million term facility and $125 million revolver. The prior facility was repaid; the company recorded a $1.9 million debt-extinguishment loss.
- ReNu and NuCel commercial distribution ended after May 31, 2021, when the FDA enforcement grace period expired. The company is pursuing clinical development of ReNu toward a BLA and discontinued clinical development of NuCel.
- The estimated CPN acquisition earnout liability was reduced to zero, reflecting management’s reassessment of the near-term market for the acquired product portfolio.
Outlook, risks and contingencies
- The filing provides no quantified revenue or earnings guidance. Management expects SG&A and R&D investment to rise as it expands sales and develops products, and expects cost of goods sold to increase with sales volume.
- Management said COVID-19 had not materially adversely affected results through Q3 2021, but its future effects remained uncertain.
- Reimbursement is a key risk: coverage and payment methods for skin substitutes may change. The filing notes potential ASP reporting requirements beginning in January 2022 and discretion held by Medicare contractors over payment and coverage policies.
- The company is consolidating manufacturing operations in Massachusetts and closing its La Jolla facilities. It estimated restructuring charges of approximately $6.5 million overall; $3.2 million remained accrued at September 30, with some facility costs expected to continue through mid-2024.
- Management identified a continuing material weakness in internal control over financial reporting; disclosure controls were also deemed ineffective. Remediation work was underway, but management had not completed sufficient testing to conclude controls operated effectively. A new ERP system was expected to go live in the first half of 2022.
- The company revised prior-period statements for two errors it judged immaterial: a private-warrant classification issue and omitted amortization of two assets recorded as finance leases. The 2020 financial statements were adjusted, including a $4.3 million reduction to property and equipment and accumulated equity for the lease-amortization correction.
- COVID-19, competition, regulatory approval, reimbursement, covenant compliance, and the company’s ability to maintain effective controls are among the risks discussed. The company reported no material legal proceedings; it had accrued $0.15 million for certain pending lawsuits.
Investor verification priorities
- Confirm the durability and product-level sources of Advanced Wound Care growth, including PuraPly performance after loss of pass-through status.
- Assess the reasons for elevated inventory obsolescence charges and whether inventory, receivables and cash conversion remain aligned with sales growth.
- Review the new credit agreement’s covenants, debt-service requirements and headroom, along with the company’s substantial operating and finance lease obligations.
- Track reimbursement and coverage developments, potential ASP reporting requirements, and clinical and regulatory progress for ReNu.
- Monitor completion and independent testing of internal-control remediation, the ERP implementation, and any further financial-statement revisions.
- Evaluate the sustainability of reported earnings, including restructuring, debt-refinancing, earnout valuation and other unusual or non-GAAP adjustments.