Organogenesis Holdings Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company develops, manufactures and sells regenerative medicine products in Advanced Wound Care and Surgical & Sports Medicine. All financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenue | $61.7 | $57.1 | +8% |
| Gross profit / margin | $42.9 / 70% | $40.1 / 70% | Profit +7%; margin broadly flat |
| Operating expenses | $58.0 | $52.3 | +11% |
| Operating loss | $(15.1) | $(12.1) | Loss widened |
| Net loss | $(16.3) | $(15.7) | Loss widened |
| Adjusted EBITDA (non-GAAP) | $(13.1) | $(9.4) | Loss widened |
| Cash used in operating activities | $(17.3) | $(9.6) | Use increased |
- Advanced Wound Care revenue rose 7% to $51.3 million; Surgical & Sports Medicine rose 13% to $10.4 million. Management attributed growth to sales-force expansion and increased sales to new and existing customers.
- PuraPly revenue was $32.5 million, up from $25.4 million. PuraPly products had Medicare pass-through status during both periods.
- Cost of goods sold increased 11% to $18.8 million, faster than revenue, while reported gross margin remained 70% (rounded). SG&A rose 8% to $52.6 million; R&D increased 60% to $5.4 million.
- Cash and restricted cash totaled $47.1 million at March 31, down $13.3 million from year-end. Working capital was $56.6 million. Capital expenditures were $4.2 million.
- Outstanding borrowings were $60.0 million under the term loan and $33.5 million under the revolving facility; $2.6 million was available to borrow. The term loan bears 9.25% interest at quarter-end. Carrying value of capital lease obligations was $16.9 million, including current and long-term portions.
Changes versus the prior comparable period
- Revenue grew 8%, but operating expenses grew faster, resulting in a larger operating loss and net loss. Adjusted EBITDA loss also increased.
- Operating cash use increased to $17.3 million from $9.6 million, and investing cash use increased to $4.2 million from $0.3 million, mainly reflecting higher capital expenditures and working-capital needs.
- Interest expense rose to $2.5 million from $1.8 million, primarily due to higher borrowings. The prior-year period included a $1.9 million debt-extinguishment loss; Q1 2020 instead included a $1.3 million gain from settling disputed NuTech Medical acquisition consideration.
Outlook, risks and unusual items
- No formal full-year revenue or earnings guidance is provided. Management expects operating losses to continue as it invests in growth, product development, sales and customer support.
- Management said COVID-19 had not materially adversely affected Q1 results or operations, but it could not quantify the effect on the remainder of 2020. Risks include weaker product demand, reduced access to healthcare customers, staffing or manufacturing disruption, supply-chain constraints and difficulty meeting credit covenants. The company implemented cost-saving measures, including curbs on non-essential programs, travel, events, marketing and clinical studies.
- PuraPly and PuraPly AM pass-through reimbursement was expected to end September 30, 2020. Management expected revenue from those products to decline under bundled reimbursement afterward, with growth in non-PuraPly products potentially offsetting some or all of the decline; the extent was uncertain, particularly given COVID-19.
- The credit agreement requires quarterly minimum revenue covenants and minimum liquidity equal to the greater of six months’ monthly burn or $10 million. The company was in compliance at March 31, 2020. Non-PuraPly revenue covenants begin in Q3 2020; failure to meet covenants could restrict revolver borrowing. Management stated cash, product-sale cash flows and credit availability were expected to fund operations, capital expenditures and debt service for at least 12 months beyond the filing date, while warning that COVID-19 could impair liquidity and access to capital.
- The company settled the NuTech Medical deferred consideration dispute for $4.0 million, with $2.0 million paid in February and the remaining $2.0 million payable in quarterly installments. It recorded a $1.3 million gain. It also recorded a $2.0 million SG&A charge for canceling certain development and consulting agreements, and accrued $1.1 million for pending lawsuits. Management said outstanding legal matters were not expected to have a material adverse effect.
- Management reported ineffective disclosure controls and internal control over financial reporting, citing a continuing material weakness in formal accounting, operational and IT policies and controls. Remediation efforts include an ERP implementation targeted for the second half of 2020, improved controls, outside assistance and control testing; the weakness remained unremediated at quarter-end.
Most important facts for investors to verify
- Whether COVID-19 affected subsequent-quarter sales, customer access, manufacturing and supply availability, and whether cost reductions are sufficient to manage cash use.
- Progress toward the 2020 revenue covenants, particularly the new non-PuraPly thresholds, and continued access to the revolver.
- Actual revenue and margin trends after PuraPly pass-through reimbursement ends, including whether non-PuraPly growth offsets any decline.
- Cash burn, capital spending, debt service and financing needs relative to the company’s liquidity expectations.
- Whether the material weakness is remediated and controls are shown to operate effectively; also confirm the status and payments related to the NuTech settlement and pending claims.