Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the Quarterly Period Ended
OR
Commission File Number
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The number of shares of the registrant’s Class A common stock outstanding as of August 1, 2023 was
Table of Contents
Organogenesis Holdings Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2023
Table of Contents
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 1. |
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Item 1A |
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Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements. These statements may relate to, but are not limited to, expectations of our future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under “Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “might,” “would,” “continue” or the negative of these terms or other comparable terminology. These forward-looking statements are based on our management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and discussed elsewhere in this Form 10-Q and in “Part I, Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. These forward-looking statements speak only as of the date of this Form 10-Q. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the U.S. Securities and Exchange Commission (the “SEC”) after the date of this Form 10-Q.
As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” “the Company,” “Organogenesis” and “ORGO” will refer to Organogenesis Holdings Inc. and its subsidiaries.
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Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements.
ORGANOGENESIS HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(amounts in thousands, except share and per share data)
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June 30, |
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December 31, |
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2023 |
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2022 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Accounts receivable, net |
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Inventory, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Intangible assets, net |
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Goodwill |
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Operating lease right-of-use assets, net |
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Deferred tax asset, net |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Current portion of term loan, net of debt issuance costs |
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$ |
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$ |
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Current portion of finance lease obligations |
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- |
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Current portion of operating lease obligations |
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Accounts payable |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Term loan, net of current portion and debt issuance costs |
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Finance lease obligations, net of current portion |
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- |
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Operating lease obligations, net of current portion |
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Other liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Table of Contents
ORGANOGENESIS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(amounts in thousands, except share and per share data)
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Three Months Ended |
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Six Months Ended |
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2023 |
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2022 |
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2023 |
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2022 |
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Net revenue |
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$ |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Research and development |
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Total operating expenses |
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Income from operations |
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Other expense, net: |
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Interest expense |
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( |
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( |
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( |
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( |
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Other income (expense), net |
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( |
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( |
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Total other expense, net |
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( |
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( |
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( |
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( |
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Net income before income taxes |
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Income tax expense |
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( |
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( |
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( |
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( |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Net income, per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-average common shares outstanding |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Table of Contents
ORGANOGENESIS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(amounts in thousands, except share data)
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Three and Six Months Ended June 30, 2023 |
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Additional |
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Common Stock |
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Paid-in |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Deficit |
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Stockholders’ Equity |
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Balance as of March 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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Vesting of RSUs, net of shares surrendered to pay taxes |
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- |
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( |
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- |
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( |
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Stock-based compensation expense |
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- |
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- |
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- |
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Net income |
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- |
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- |
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- |
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Balance as of June 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Balance as of December 31, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Cumulative effect of adopting new accounting principle |
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- |
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- |
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- |
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( |
) |
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( |
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Vesting of RSUs, net of shares surrendered to pay taxes |
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- |
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( |
) |
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- |
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( |
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Stock-based compensation expense |
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- |
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- |
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- |
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Net income |
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- |
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- |
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- |
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Balance as of June 30, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Three and Six Months Ended June 30, 2022 |
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Additional |
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Common Stock |
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Paid-in |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Deficit |
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Stockholders’ Equity |
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Balance as of March 31, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Exercise of stock options |
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- |
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- |
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Vesting of RSUs, net of shares surrendered to pay taxes |
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- |
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( |
) |
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- |
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( |
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Issuance of common stock associated with business acquisition |
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- |
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- |
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Stock-based compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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Balance as of June 30, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Balance as of December 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
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Exercise of stock options |
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- |
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- |
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Vesting of RSUs, net of shares surrendered to pay taxes |
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- |
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( |
) |
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- |
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( |
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Issuance of common stock associated with business acquisition |
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- |
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- |
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Stock-based compensation expense |
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- |
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- |
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- |
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Net income |
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- |
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- |
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- |
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Balance as of June 30, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Table of Contents
ORGANOGENESIS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(amounts in thousands)
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Six Months Ended |
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2023 |
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2022 |
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Cash flows from operating activities: |
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Net Income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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Amortization of intangible assets |
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Reduction in the carrying value of right-of-use assets |
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Non-cash interest expense |
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Deferred interest expense |
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Provision recorded for credit losses |
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Loss on disposal of property and equipment |
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Adjustment for excess and obsolete inventories |
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Stock-based compensation |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
) |
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( |
) |
Inventory |
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( |
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( |
) |
Prepaid expenses and other current assets |
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( |
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( |
) |
Operating leases |
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( |
) |
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( |
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Accounts payable |
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( |
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Accrued expenses and other current liabilities |
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( |
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Other liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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( |
) |
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( |
) |
Net cash used in investing activities |
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( |
) |
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( |
) |
Cash flows from financing activities: |
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Payments of term loan under the 2021 Credit Agreement |
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( |
) |
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( |
) |
Payments of withholding taxes in connection with RSUs vesting |
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( |
) |
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( |
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Proceeds from the exercise of stock options |
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- |
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Principal repayments of finance lease obligations |
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( |
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( |
) |
Payment of deferred acquisition consideration |
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- |
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( |
) |
Net cash used in financing activities |
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( |
) |
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( |
) |
Change in cash, cash equivalents and restricted cash |
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( |
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( |
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Cash, cash equivalents, and restricted cash, beginning of period |
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Cash, cash equivalents, and restricted cash, end of period |
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$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes |
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$ |
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$ |
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Supplemental disclosure of non-cash investing and financing activities: |
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Purchases of property and equipment included in accounts payable and accrued expenses |
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$ |
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$ |
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Right-of-use assets obtained through lease obligations |
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$ |
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$ |
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Shares issued for deferred acquisition consideration |
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$ |
- |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Table of Contents
ORGANOGENESIS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
1. Nature of Business and Basis of Presentation
Organogenesis Holdings Inc. (“ORGO” or the “Company”) is a leading regenerative medicine company focused on the development, manufacture, and commercialization of solutions for the Advanced Wound Care and Surgical & Sports Medicine markets. Several of the existing and pipeline products in the Company’s portfolio have Premarket Application (“PMA”) approval, or Premarket Notification 510(k) clearance from the United States Food and Drug Administration (“FDA”). The Company’s customers include hospitals, wound care centers, government facilities, ambulatory service centers (“ASCs”) and physician offices. The Company has
COVID-19 pandemic
On April 10, 2023, President Biden signed a joint congressional resolution ending the national emergency related to COVID-19, and the Biden Administration ended the public health emergency declaration related to COVID-19 on May 11, 2023. Nonetheless, COVID-19 continues to present a public health and economic challenge around the world, and the Company continues to closely monitor the impact of the pandemic on all aspects of its business. While the COVID-19 pandemic has not materially adversely affected the Company’s financial results and business operations through June 30, 2023, the Company is unable to predict the impact that COVID-19 (including the emergence of new variants) will have on its financial position and operating results in the future.
Liquidity and Capital Resources
Since its inception, the Company funded its operations and capital expenditures through cash flows from product sales, loans from affiliates and entities controlled by certain of its affiliates, third-party debt and proceeds from the sale of its capital stock. As of June 30, 2023, the Company had an accumulated deficit of $
The Company continues to closely monitor ongoing developments in connection with the COVID-19 pandemic that could negatively affect its commercial prospects, cash position, and access to capital in fiscal 2023 or beyond. The Company is also closely monitoring ongoing developments in connection with the published local coverage determinations as discussed in “Part II, Item 1A—Risk Factors” of this Form 10-Q, which may negatively impact its revenue and projected cash position. The Company will continue to assess its cash and other sources of liquidity and, if circumstances warrant, make appropriate adjustments to its operating plan.
2. Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note “2. Significant Accounting Policies” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report”). There have been no material changes to the significant accounting policies previously disclosed in the Annual Report.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in the United States (“GAAP”), and the rules and regulations of the SEC regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report.
The unaudited condensed consolidated financial statements include the accounts and results of operations of Organogenesis Holdings Inc. and its wholly-owned subsidiaries, Organogenesis Inc., Organogenesis GmbH (a Switzerland corporation) and Prime Merger Sub, LLC. All intercompany balances and transactions have been eliminated in consolidation. The Company considers events
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or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods indicated. The results for the six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023, any other interim periods, or any future years or periods.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported results of operations during the reporting periods. In preparing the condensed consolidated financial statements, the estimates and assumptions that management consider to be significant and that present the greatest amount of uncertainty include: revenue recognition; sales returns and credit losses; inventory reserve; recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived and indefinite lived assets (including intangible assets); assessing impairment of goodwill; and the valuation and recognition of stock-based compensation. Actual results and outcomes may differ significantly from those estimates and assumptions.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents. The Company invests its cash equivalents in highly rated money market funds. Deposits may exceed federally insured limits, and the Company is exposed to credit risk on deposits in the event of default by the financial institutions to the extent account balances exceed the amount insured by the Federal Deposit Insurance Corporation (“FDIC”). However, the Company mitigates the risk by sweeping cash daily overnight and diversifies among financial institutions to reduce such exposure.
Recently Issued Accounting Pronouncements Adopted
Credit Loss
In June 2016, the FASB issued , Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued a few amendments to ASU 2016-13. ASU 2016-13 and all the related updates replace the incurred loss impairment methodology previously required under generally accepted accounting principles, with an expected loss methodology that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
The Company
3. Acquisition
On September 17, 2020 (the “Acquisition Date”), the Company acquired certain assets and assumed certain liabilities of CPN Biosciences, LLC (“CPN”) pursuant to an asset purchase agreement dated July 24, 2020. CPN offered a physician office management solution and advanced wound care products.
The aggregate consideration amounted to $
The Company was obligated to pay the Earnout to CPN’s former equity holders if CPN’s legacy product revenue in the Earnout Period (July 1, 2021 to June 30, 2022), exceeded CPN’s 2019 revenue. The amount of the Earnout, if any, would be equal to
9
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of the Earnout liability at each reporting period. Subsequent changes in the estimated fair value of the liability were reflected in earnings until the liability was settled. See Note “5. Fair Value Measurement of Financial Assets and Liabilities.”
4. Revenue
The Company generates revenue through the sale of Advanced Wound Care and Surgical & Sports Medicine products. There is a single performance obligation in all of the Company’s contracts, which is the Company’s promise to transfer the Company’s products to customers based on specific payment and shipping terms in the arrangement. Product revenue is recognized when a customer obtains control of the Company’s products which occurs at a point in time and may be upon shipment, procedure date, or delivery, based on the terms of the contract. Revenue is recorded net of a reserve for returns, discounts and Group Purchasing Organization (“GPO”) rebates, which represent a direct reduction to the revenue recognized. These reductions are accrued at the time revenue is recognized, based upon historical experience and specific circumstances. For the three months ended June 30, 2023 and 2022, the Company recorded GPO fees of $
The following tables set forth revenue by product category:
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Advanced Wound Care |
|
$ |
|
|
$ |
|
||
Surgical & Sports Medicine |
|
|
|
|
|
|
||
Total net revenue |
|
$ |
|
|
$ |
|
||
|
|
Six Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Advanced Wound Care |
|
$ |
|
|
$ |
|
||
Surgical & Sports Medicine |
|
|
|
|
|
|
||
Total net revenue |
|
$ |
|
|
$ |
|
||
For all periods presented, net revenue generated outside the United States represented less than
5. Fair Value Measurement of Financial Assets and Liabilities
Earnout Liability
In connection with accounting for the CPN acquisition on September 17, 2020, the Company recorded an Earnout liability of $
The Company did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2023 and December 31, 2022.
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6. Accounts Receivable, Net
Accounts receivable consisted of the following:
|
|
June 30, |
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|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Accounts receivable |
|
$ |
|
|
$ |
|
||
Less — allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
The Company’s allowance for credit losses was comprised of the following:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Balance at beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Cumulative effect of adopting ASU 2016-13 |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
Additions (adjustments) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Write-offs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
7. Inventories
Inventories, net of related reserves for excess and obsolescence, consisted of the following:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Raw materials include various components used in the Company’s manufacturing process. The Company’s excess and obsolete inventory review process includes analysis of sales forecasts and historical sales as compared to inventory level, and working with operations to maximize recovery of excess inventory. During the three months ended June 30, 2023 and 2022, the Company charged $
8. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
|
|
June 30, |
|
|
December 31, |
|
||
Subscriptions |
|
$ |
|
|
$ |
|
||
Conferences and marketing expenses |
|
|
|
|
|
|
||
Deposits |
|
|
|
|
|
|
||
Insurance |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Deposits are funds held by vendors which are expected to be released within twelve months and therefore they are recorded as current assets.
11
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9. Property and Equipment, Net
Property and equipment consisted of the following:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Leasehold improvements |
|
$ |
|
|
$ |
|
||
Buildings |
|
|
|
|
|
|
||
Furniture, computers and equipment |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Construction in progress |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Depreciation expense was $
10. Goodwill and Intangible Assets
Goodwill was $
Intangible assets consisted of the following as of June 30, 2023:
|
|
Original |
|
|
Accumulated |
|
|
Net Book |
|
|||
|
|
Cost |
|
|
Amortization |
|
|
Value |
|
|||
Developed technology |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Trade names and trademarks |
|
|
|
|
|
( |
) |
|
|
|
||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
|
||
Independent sales agency network |
|
|
|
|
|
( |
) |
|
|
- |
|
|
Patent |
|
|
|
|
|
( |
) |
|
|
- |
|
|
Non-compete agreements |
|
|
|
|
|
( |
) |
|
|
|
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Intangible assets consisted of the following as of December 31, 2022:
|
|
Original |
|
|
Accumulated |
|
|
Net Book |
|
|||
|
|
Cost |
|
|
Amortization |
|
|
Value |
|
|||
Developed technology |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Trade names and trademarks |
|
|
|
|
|
( |
) |
|
|
|
||
Customer relationship |
|
|
|
|
|
( |
) |
|
|
|
||
Independent sales agency network |
|
|
|
|
|
( |
) |
|
|
- |
|
|
Patent |
|
|
|
|
|
( |
) |
|
|
- |
|
|
Non-compete agreements |
|
|
|
|
|
( |
) |
|
|
|
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Amortization of intangible assets, calculated on a straight-line basis or using an accelerated method, was $
12
Table of Contents
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Personnel costs |
|
$ |
|
|
$ |
|
||
Royalties |
|
|
|
|
|
|
||
Accrued but unpaid lease obligations and interest |
|
|
|
|
|
|
||
Accrued taxes |
|
|
|
|
|
|
||
Accrued litigation |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
The accrued but unpaid lease obligations and the interest accrual on these obligations are related to the buildings in Canton, Massachusetts. See Note “17. Leases.”
12. Restructuring
In order to reduce the Company’s cost structure and improve operating efficiency, the Company consolidated its manufacturing operations in various locations into Massachusetts facilities.
On October 21, 2020, the Company committed to a plan to restructure its workforce and operations in its La Jolla, California facilities. The restructuring involved
On February 3, 2023, the Company committed to a plan to restructure its workforce to increase productivity and enhance profitability. The reduction in force reduced the Company’s headcount by
As a result of the restructuring activities, the Company recorded a pre-tax adjustment of $(
|
|
Employee |
|
|
Other |
|
|
Total |
|
|||
Liability balance as of December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Expenses |
|
|
|
|
|
|
|
|
|
|||
Payments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Liability balance as of June 30, 2023 |
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|||
|
|
Employee |
|
|
Other |
|
|
Total |
|
|||
Liability balance as of December 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Expenses |
|
|
|
|
|
|
|
|
|
|||
Payments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Liability balance as of June 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
13
Table of Contents
13. Debt Obligations
Debt obligations consisted of the following:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Line of credit |
|
$ |
|
|
$ |
|
||
Term loan |
|
|
|
|
|
|
||
Less debt discount and debt issuance cost |
|
|
( |
) |
|
|
( |
) |
Term loan, net of debt discount and debt issuance cost |
|
$ |
|
|
$ |
|
||
2021 Credit Agreement
In August 2021, the Company, as borrower, its subsidiaries, as guarantors, and Silicon Valley Bank (“SVB”), and the several other lenders thereto (collectively, the “Lenders”) entered into a credit agreement, as amended (the “2021 Credit Agreement”), providing for a term loan facility not to exceed $
Advances made under the 2021 Credit Agreement may be either SOFR Loans or ABR Loans, at the Company’s option.
The 2021 Credit Agreement requires the Company to make consecutive quarterly installment payments equal to the following: (a) from September 30, 2021 through and including June 30, 2022, $
The Company must pay in arrears, on the first day of each quarter prior to August 6, 2026 (the “Revolving Termination Date”) and on the Revolving Termination Date, a fee for the Company’s non-use of available funds (the “Commitment Fee”). The Commitment Fee rate is between
14
Table of Contents
The Company recorded debt issuance costs and related fees of $
As of June 30, 2023 and December 31, 2022, the Company had outstanding borrowings of $
Future payments of the 2021 Credit Agreement, as of June 30, 2023, are as follows for the calendar years ending December 31:
|
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Total |
|
$ |
|
|
14. Stockholders’ Equity
Common Stock
As of June 30, 2023, the issued shares of Class A common stock include
As of June 30, 2023 and December 31, 2022, the Company reserved the following shares of Class A common stock for future issuance:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Shares reserved for issuance for outstanding options |
|
|
|
|
|
|
||
Shares reserved for issuance for outstanding restricted stock units |
|
|
|
|
|
|
||
Shares reserved for issuance for future grants |
|
|
|
|
|
|
||
Total shares of authorized common stock reserved for future issuance |
|
|
|
|
|
|
||
15. Stock-Based Compensation
Stock Incentive Plans-the 2018 Plan
On November 28, 2018, the Board of Directors of the Company adopted, and on December 10, 2018 the Company’s stockholders approved, the Organogenesis 2018 Equity and Incentive Plan (the “2018 Plan”). The purposes of the 2018 Plan are to provide long-term incentives and rewards to the Company’s employees, officers, directors and other key persons (including consultants), to attract and retain persons with the requisite experience and ability, and to more closely align the interests of such employees, officers, directors and other key persons with the interests of the Company’s stockholders.
The 2018 Plan authorizes the Company’s Board of Directors or a committee of not less than two independent directors (in either case, the “Administrator”) to grant the following types of awards: non-statutory stock options; incentive stock options; restricted stock awards; restricted stock units; stock appreciation rights; unrestricted stock awards; performance share awards; and dividend equivalent rights. The 2018 Plan is administered by the Company’s Board of Directors.
15
Table of Contents
At the adoption of the 2018 Plan, a total of
Stock Incentive Plans-the 2003 Plan
The Organogenesis 2003 Stock Incentive Plan (the “2003 Plan”), provides for the Company to issue restricted stock awards, or to grant incentive stock options or non-statutory stock options. Incentive stock options may be granted only to the Company’s employees. Restricted stock awards and non-statutory stock options may be granted to employees, members of the Board of Directors, outside advisors and consultants of the Company.
Effective December 10, 2018, no additional awards may be made under the 2003 Plan and as a result (i) any shares in respect of stock options that are expired or terminated under the 2003 Plan without having been fully exercised will not be available for future awards; (ii) any shares in respect of restricted stock that are forfeited to, or otherwise repurchased by the Company, will not be available for future awards; and (iii) any shares of Class A common stock that are tendered to the Company by a participant to exercise an award will not be available for future awards.
Stock-Based Compensation Expense
Stock options awarded under the stock incentive plans expire
Stock-based compensation expense was $
Restricted Stock Units (RSUs)
The Company granted
The activity of restricted stock units is set forth below:
|
Number |
|
|
Weighted Average |
|
|||
|
of RSUs |
|
|
Grant Date |
|
|||
|
|
|
|
Fair Value |
|
|||
Unvested at December 31, 2022 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Canceled/Forfeited |
|
|
( |
) |
|
|
|
|
Unvested at June 30, 2023 |
|
|
|
|
$ |
|
||
As of June 30, 2023, the total unrecognized compensation cost related to unvested restricted stock units expected to vest was $
Stock Options
The stock options granted during the six months ended June 30, 2023 and 2022 were
16
Table of Contents
|
|
June 30, |
|
|
June 30, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Risk-free interest rate |
|
|
% |
|
|
% |
||
Expected term (in years) |
|
|
|
|
|
|
||
Expected volatility |
|
|
% |
|
|
% |
||
Expected dividend yield |
|
|
% |
|
|
% |
||
Exercise price |
|
$ |
|
|
$ |
|
||
Underlying stock price |
|
$ |
|
|
$ |
|
||
These assumptions resulted in an estimated weighted-average grant-date fair value per share of stock options granted during the six months ended June 30, 2023 and 2022 of $
The following table summarizes the Company’s stock option activity since December 31, 2022:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
||||
|
|
|
|
|
|
|
|
Average |
|
|
|
|
||||
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
||||
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
||||
|
|
Number of |
|
|
Exercise |
|
|
Term |
|
|
Intrinsic |
|
||||
|
|
Options |
|
|
Price |
|
|
(in years) |
|
|
Value |
|
||||
Outstanding as of December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercised |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
Canceled / forfeited |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Outstanding as of June 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Options exercisable as of June 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Options vested or expected to vest as of June 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s Class A common stock for those stock options that have exercise prices lower than the fair value of the Company’s Class A common stock.
The total fair value of options vested during the six months ended June 30, 2023 and 2022 was $
As of June 30, 2023, the total unrecognized stock compensation expense related to unvested stock options expected to vest was $
16. Earnings per Share (EPS)
Basic EPS is calculated by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of shares outstanding plus the dilutive effect, if any, of outstanding equity awards using the treasury stock method which includes consideration of unrecognized compensation expenses as additional proceeds.
A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net income attributable to the Class A common stockholders is as follows.
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net Income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding —basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares outstanding—diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share—basic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Earnings per share—diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
17
Table of Contents
The Company’s potentially dilutive securities include restricted stock units and stock options to purchase shares of Class A common stock. For the three and six months ended June 30, 2023, outstanding stock-based awards of
17. Leases
The Company’s leases consist primarily of real estate, equipment and vehicle leases.
The Company leases real estate for office, lab, warehouse and production space under noncancelable leases that expire at various dates through 2035, subject to the Company’s options to terminate or renew certain leases for an additional to
On January 1, 2013, the Company entered into finance lease arrangements with 65 Dan Road SPE, LLC, 85 Dan Road Associates, LLC, Dan Road Equity I, LLC and 275 Dan Road SPE, LLC for office and laboratory space in Canton, Massachusetts. 65 Dan Road SPE, LLC, 85 Dan Road Associates, LLC, Dan Road Equity I, LLC and 275 Dan Road SPE, LLC are related parties as the owners of these entities are also directors, former directors and / or stockholders of the Company. In August 2021, the Company purchased the building under the lease with 275 Dan Road SPE, LLC (the “275 Dan Road Building”) for $
The Company owes some accrued but unpaid lease obligations under the aforementioned leases. Effective April 1, 2019, the Company accrued interest on the accrued but unpaid lease obligations at an interest rate of
The accrued but unpaid lease obligations as well as the related interest accruals are shown below.
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Principal portion of rent in arrears |
|
|
|
|
|
|
||
Total accrued but unpaid lease obligations |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Accrued interest on accrued but unpaid lease obligations |
|
|
|
|
|
|
||
Before being paid off in January 2023, the principal portion of rent in arrears related to the 275 Dan Road Building as well as the interest accrual were included in accrued expenses and other current liabilities on the consolidated balance sheet as of December 31, 2022. For the other three buildings, the principal portion of rent in arrears was included in the short-term portion of operating lease obligations on the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022. The accrued interest on the accrued but unpaid lease obligations was included in accrued expenses and other current liabilities on the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022.
18
Table of Contents
The components of lease cost were as follows:
|
|
Classification |
|
Six Months Ended |
|
|||||
|
|
|
|
2023 |
|
|
2022 |
|
||
Finance lease |
|
|
|
|
|
|
|
|
||
Amortization of right-of-use assets |
|
COGS and SG&A |
|
$ |
|
|
$ |
|
||
Interest on lease liabilities |
|
Interest Expense |
|
|
|
|
|
|
||
Total Finance lease cost |
|
|
|
|
|
|
|
|
||
Operating lease cost |
|
COGS, R&D, SG&A |
|
|
|
|
|
|
||
Short-term lease cost |
|
COGS, R&D, SG&A |
|
|
|
|
|
|
||
Variable lease cost |
|
COGS, R&D, SG&A |
|
|
|
|
|
|
||
Total lease cost |
|
|
|
$ |
|
|
$ |
|
||
Supplemental balance sheet information related to finance leases was as follows:
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Property and equipment, gross |
|
$ |
|
|
$ |
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
$ |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
||
Finance lease obligations |
|
$ |
( |
) |
|
$ |
- |
|
Supplemental cash flow information related to leases was as follows:
|
|
Six Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
||
Operating cash flows for operating leases |
|
|
|
|
|
|
||
Operating cash flows for finance leases |
|
|
|
|
|
|
||
Financing cash flows for finance leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Right-of-use assets obtained in exchange for lease obligations |
|
|
|
|
|
|
||
Operating leases |
|
|
|
|
|
|
||
Finance leases |
|
|
|
|
|
- |
|
|
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Weighted-average remaining lease term |
|
|
|
|
|
|
||
Finance leases |
|
|
|
|
|
- |
|
|
Operating leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Weighted-average discount rate |
|
|
|
|
|
|
||
Finance leases |
|
|
% |
|
|
- |
|
|
Operating leases |
|
|
% |
|
|
% |
||
19
Table of Contents
As of June 30, 2023, maturities of lease liabilities were as follows:
|
|
Operating leases |
|
|
Finance leases |
|
||
2023 (remaining 6 months) |
|
$ |
|
|
$ |
|
||
2024 |
|
|
|
|
|
|
||
2025 |
|
|
|
|
|
|
||
2026 |
|
|
|
|
|
|
||
2027 |
|
|
|
|
|
- |
|
|
Thereafter |
|
|
|
|
|
- |
|
|
Total lease payments |
|
|
|
|
|
|
||
Less: interest |
|
|
( |
) |
|
|
( |
) |
Total lease liabilities |
|
$ |
|
|
$ |
|
||
18. Commitments and Contingencies
Royalties
The Company entered into a license agreement with a university for certain patent rights related to the development, use, and production of one of its advanced wound care products. Under this agreement, the Company incurred a royalty based on a percentage of net product sales, for the use of these patents until the patents expired, which was in November 2006. Accrued royalties totaled $
In October 2017, the Company entered into a license agreement with a third party. Under the license agreement, the Company is required to pay royalties based on a percentage of net sales of the licensed product that occur, after December 31, 2017, through the expiration of the underlying patent in October 2026, subject to minimum royalty payment provisions. The Company recorded royalty expense under this license agreement of $
Legal Matters
In conducting its activities, the Company, from time to time, is subject to various claims and also has claims against others. In management’s opinion, the ultimate resolution of such claims would not have a material effect on the financial position, operating results or cash flows of the Company. The Company accrues for these claims when amounts due are probable and estimable. The Company accrued $
19. Related Party Transactions
Lease obligations to affiliates, including accrued but unpaid lease obligations, purchase of an asset under a finance lease with an affiliate, and renewal of leases with affiliates are further described in Note “17. Leases.”
20. Taxes
The Company is principally subject to taxation in the United States. The Company has a history of net operating losses both federally and in various states and began utilizing those losses to offset current taxable income in 2020. As net operating loss carryovers become limited or are fully utilized, the Company will accrue current federal and state income tax expense. The Company’s wholly owned Swiss subsidiary, Organogenesis GmbH, is subject to taxation in Switzerland and has a transfer pricing arrangement in place with Organogenesis Inc., its U.S. parent.
The income tax rate for the six months ended June 30, 2023 varied from the U.S. statutory rate of
The Company examines all positive and negative evidence to estimate whether sufficient future taxable income in the U.S. will be generated to permit the use of existing deferred tax assets. In the fourth quarter of 2021, the Company released the valuation allowance recorded against its U.S. deferred tax assets. Upon reviewing the positive evidence of net operating loss utilization,
20
Table of Contents
cumulative profits, and forecasted taxable income, the Company believed that it was more likely than not that these U.S. deferred tax assets would be utilized. There are no material deferred tax assets in the other jurisdictions. On a quarterly basis, the Company reassesses the need for a valuation allowance on deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. After assessing both the positive and negative evidence, including net operating loss utilization, cumulative profits, and forecasted taxable income, the Company determined that it is more likely than not the U.S. deferred assets will be realized in full. As such, the Company did not record a valuation allowance against its U.S. deferred tax assets as of June 30, 2023 and December 31, 2022.
21. Subsequent Events
The Company has evaluated subsequent events through August 9, 2023, the date on which these condensed consolidated financial statements were issued and has determined that there are no such events to report.
21
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Form 10-Q and the financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC, on March 1, 2023. Please refer to our cautionary note regarding forward-looking statements on page 3 of this Form 10-Q, which is incorporated herein by this reference.
Overview
Organogenesis is a leading regenerative medicine company focused on the development, manufacture, and commercialization of solutions for the Advanced Wound Care and Surgical & Sports Medicine markets. Our products have been shown through clinical and scientific studies to support and in some cases accelerate tissue healing and improve patient outcomes. We are advancing the standard of care in each phase of the healing process through multiple breakthroughs in tissue engineering and cell therapy. Our solutions address large and growing markets driven by aging demographics and increases in comorbidities such as diabetes, obesity, cardiovascular and peripheral vascular disease and smoking. We offer our differentiated products and in-house customer support to a wide range of health care customers including hospitals, wound care centers, government facilities, ambulatory service centers (“ASCs”) and physician offices. Our mission is to provide integrated healing solutions that substantially improve medical outcomes and the lives of patients while lowering the overall cost of care.
We offer a comprehensive portfolio of products in the markets we serve that address patient needs across the continuum of care. We have and intend to continue to generate data from clinical trials, real-world outcomes and health economics research that validate the clinical efficacy and value proposition offered by our products. Several of our existing and pipeline products in our portfolio have PMA approval, or 510(k) clearance from the FDA. Given the extensive time and cost required to conduct clinical trials and receive FDA approvals, we believe that our data and regulatory approvals provide us with a strong competitive advantage. Our product development expertise and multiple technology platforms provide a robust product pipeline, which we believe will drive future growth.
In the Advanced Wound Care market, we focus on the development and commercialization of advanced wound care products for the treatment of chronic and acute wounds in various treatment settings. We have a comprehensive portfolio of regenerative medicine products, capable of supporting patients from early in the wound healing process through wound closure regardless of wound type. Our Advanced Wound Care products include Apligraf for the treatment of venous leg ulcers and diabetic foot ulcers (“DFUs”); Dermagraft for the treatment of DFUs (manufacturing currently suspended pending transition to a new manufacturing facility or engagement of a third-party manufacturer); PuraPly AM as an antimicrobial barrier for a broad variety of wound types; and the Affinity, Novachor and NuShield wound coverings to address a variety of wound sizes and types. We have a highly trained and specialized direct wound care sales force paired with comprehensive customer support services.
In the Surgical & Sports Medicine market, we are leveraging our broad regenerative medicine capabilities to address chronic and acute surgical wounds and tendon and ligament injuries. Our Sports Medicine products include NuShield for surgical applications in targeted soft tissue repairs; and Affinity, Novachor, PuraPly MZ and PuraPly AM for management of open wounds in the surgical setting. We currently sell these products through independent agencies and our direct sales force.
For the six months ended June 30, 2023, we generated net revenue of $225.0 million and net income of $2.3 million compared to net revenue of $218.5 million and net income of $7.8 million for the six months ended June 30, 2022. We have incurred significant losses since inception and, while we reported net income for the most recent three years, we may incur operating losses in the future as we expend resources as part of our efforts to grow our organization to support the planned expansion of our business. As of June 30, 2023, we had an accumulated deficit of $43.6 million. Our primary sources of capital to date have been from sales of our products, borrowings from related parties and institutional lenders and proceeds from the sale of our Class A common stock. We operate as one segment of regenerative medicine.
COVID-19 pandemic
On April 10, 2023, President Biden signed a joint congressional resolution ending the national emergency related to COVID-19, and the Biden Administration ended the public health emergency declaration related to COVID-19 on May 11, 2023. Nonetheless, COVID-19 continues to present a public health and economic challenge around the world, and we continue to closely monitor the impact of the pandemic on all aspects of our business. While the COVID-19 pandemic has not materially adversely affected our financial results and business operations through June 30, 2023, we are unable to predict the impact that COVID-19 (including the emergence of new variants) will have on our financial position and operating results in the future.
Dermagraft
22
Table of Contents
As previously disclosed, manufacturing of Dermagraft was suspended in the fourth quarter of 2021 and sales of Dermagraft were suspended in the second quarter of 2022. We currently plan to transition our Dermagraft manufacturing to a new manufacturing facility or engage a third-party manufacturer, which we expect will result in substantial long-term cost savings. In the period when Dermagraft is not available, we expect that customers will be willing to substitute Apligraf for Dermagraft and that the suspension of Dermagraft sales will not have a material impact on our net revenue. However, if we do not realize the expected substantial long-term cost savings or if customers are unwilling to substitute Apligraf for Dermagraft during the period in which Dermagraft is unavailable, it could have an adverse effect on our net revenue and results of operations.
Components of Our Condensed Consolidated Results of Operations
In assessing the performance of our business, we consider a variety of performance and financial measures. We believe the items discussed below provide insight into the factors that affect these key measures.
Revenue
We derive our net revenue from our portfolio of Advanced Wound Care and Surgical & Sports Medicine products. We primarily sell our Advanced Wound Care products through direct sales representatives who manage and maintain the sales relationships with hospitals, wound care centers, government facilities, ASCs and physician offices. We primarily sell our Surgical & Sports Medicine products through third party agencies. As of June 30, 2023, we had approximately 310 direct sales representatives and approximately 155 independent agencies.
We recognize revenue from sales of our Advanced Wound Care and Surgical & Sports Medicine products when the customer obtains control of our product, which occurs at a point in time and may be upon procedure date, shipment, or delivery, based on the contractual terms of a contract. We record revenue net of a reserve for returns, discounts and GPO rebates, which represent a direct reduction to the revenue we recognize.
Several factors affect our reported revenue in any period, including product, payer and geographic sales mix, operational effectiveness, pricing realization, marketing and promotional efforts, the timing of orders and shipments, regulatory actions including healthcare reimbursement scenarios, competition and business acquisitions.
Cost of goods sold and gross profit
Cost of goods sold includes personnel costs, product testing costs, quality assurance costs, raw materials and product costs, manufacturing costs, and the costs associated with our manufacturing and warehouse facilities. The changes in our cost of goods sold correspond with the changes in sales units and are also affected by product mix.
Gross profit is calculated as net revenue less cost of goods sold and generally increases as revenue increases. Our gross profit is affected by product and geographic sales mix, realized pricing of our products, the efficiency of our manufacturing operations, and the costs of materials used and fees charged by third-party manufacturers to produce our products. Regulatory actions, including healthcare reimbursement scenarios, which may require costly expenditures or result in pricing pressures, may decrease our gross profit.
Selling, general and administrative expenses
Selling, general and administrative expenses generally include personnel costs for sales, marketing, sales support, customer support, and general and administrative personnel, sales commissions, incentive compensation, insurance, professional fees, depreciation, amortization, bad debt expense, royalties, information systems costs, gain or loss on disposal of long-lived assets, and costs associated with our administrative facilities. We generally expect our selling, general and administrative expenses to continue to increase due to increased investments in market development and the geographic expansion of our sales forces as we drive for continued revenue growth.
Research and development expenses
Research and development expenses include expenses for clinical trials, personnel costs for our research and development personnel, expenses related to improvements in our manufacturing processes, enhancements to our currently available products, and additional investments in our product and platform development pipeline. We expense research and development costs as incurred. We generally expect that research and development expenses will increase as we continue to conduct clinical trials on new and existing products, move products through the regulatory pathway (e.g., seek biologics license application approval), add personnel to support product enhancements as well as to bring new products to market, and enhance our manufacturing process and procedures.
23
Table of Contents
Other expense, net
Interest expense—Interest expense consists of interest on our outstanding indebtedness, including amortization of debt discount and debt issuance costs, net of interest income recognized.
Income taxes
We account for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized.
In determining whether a valuation allowance for deferred tax assets is necessary, we analyze both positive and negative evidence related to the realization of deferred tax assets including projected future taxable income, recent financial results and estimates of future reversals of deferred tax assets and liabilities. In addition, we consider whether it is more likely than not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position. In consideration of the factors discussed above, in the fourth quarter of 2021, we determined it was more likely than not that our deferred tax assets would be realized in the future and released the valuation allowance on our net U.S. deferred tax assets as of December 31, 2021, resulting in a benefit of $48.3 million in income taxes. We maintained the same position that our net U.S. deferred tax assets did not require a valuation allowance as of June 30, 2023 and December 31, 2022.
We account for uncertainty in income taxes recognized in the condensed consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the condensed consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.
Results of Operations
The following table sets forth, for the periods indicated, our results of operations:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(Unaudited) (in thousands) |
|
|||||||||||||
Net revenue |
|
$ |
117,316 |
|
|
$ |
121,401 |
|
|
$ |
224,958 |
|
|
$ |
218,518 |
|
Cost of goods sold |
|
|
26,316 |
|
|
|
26,652 |
|
|
|
52,923 |
|
|
|
51,732 |
|
Gross profit |
|
|
91,000 |
|
|
|
94,749 |
|
|
|
172,035 |
|
|
|
166,786 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
70,317 |
|
|
|
72,609 |
|
|
|
144,151 |
|
|
|
136,187 |
|
Research and development |
|
|
10,938 |
|
|
|
10,205 |
|
|
|
22,140 |
|
|
|
18,792 |
|
Total operating expenses |
|
|
81,255 |
|
|
|
82,814 |
|
|
|
166,291 |
|
|
|
154,979 |
|
Income from operations |
|
|
9,745 |
|
|
|
11,935 |
|
|
|
5,744 |
|
|
|
11,807 |
|
Other expense, net: |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest expense |
|
|
(594 |
) |
|
|
(730 |
) |
|
|
(1,243 |
) |
|
|
(1,467 |
) |
Other expense, net |
|
|
28 |
|
|
|
(21 |
) |
|
|
51 |
|
|
|
(24 |
) |
Total other expense, net |
|
|
(566 |
) |
|
|
(751 |
) |
|
|
(1,192 |
) |
|
|
(1,491 |
) |
Net income before income taxes |
|
|
9,179 |
|
|
|
11,184 |
|
|
|
4,552 |
|
|
|
10,316 |
|
Income tax expense |
|
|
(3,863 |
) |
|
|
(2,440 |
) |
|
|
(2,205 |
) |
|
|
(2,485 |
) |
Net income |
|
$ |
5,316 |
|
|
$ |
8,744 |
|
|
$ |
2,347 |
|
|
$ |
7,831 |
|
EBITDA and Adjusted EBITDA
Our management uses financial measures that are not in accordance with generally accepted accounting principles in the United States (“non-GAAP”), in addition to financial measures in accordance with generally accepted accounting principles in the United
24
Table of Contents
States (“GAAP”) to evaluate our operating results. These non-GAAP financial measures should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. Our management uses Adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. Our management believes Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the items that we exclude. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.
The following is a reconciliation of GAAP net income to non-GAAP EBITDA and non-GAAP Adjusted EBITDA for each of the periods presented:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(Unaudited) (in thousands) |
|
|||||||||||||
Net Income |
|
$ |
5,316 |
|
|
$ |
8,744 |
|
|
$ |
2,347 |
|
|
$ |
7,831 |
|
Interest expense, net |
|
|
594 |
|
|
|
730 |
|
|
|
1,243 |
|
|
|
1,467 |
|
Income tax expense |
|
|
3,863 |
|
|
|
2,440 |
|
|
|
2,205 |
|
|
|
2,485 |
|
Depreciation |
|
|
2,228 |
|
|
|
1,528 |
|
|
|
4,922 |
|
|
|
2,875 |
|
Amortization |
|
|
1,229 |
|
|
|
1,221 |
|
|
|
2,459 |
|
|
|
2,442 |
|
EBITDA |
|
|
13,230 |
|
|
|
14,663 |
|
|
|
13,176 |
|
|
|
17,100 |
|
Stock-based compensation expense |
|
|
2,299 |
|
|
|
1,692 |
|
|
|
4,213 |
|
|
|
2,995 |
|
Restructuring charge (adjustment) (1) |
|
|
(126 |
) |
|
|
643 |
|
|
|
1,782 |
|
|
|
907 |
|
Settlement fee (2) |
|
|
- |
|
|
|
1,600 |
|
|
|
- |
|
|
|
2,600 |
|
Adjusted EBITDA |
|
$ |
15,403 |
|
|
$ |
18,598 |
|
|
$ |
19,171 |
|
|
$ |
23,602 |
|
Comparison of Three and Six Months Ended June 30, 2023 and 2022
Revenue
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Advanced Wound Care |
|
$ |
110,075 |
|
|
$ |
113,791 |
|
|
$ |
(3,716 |
) |
|
|
(3 |
%) |
Surgical & Sports Medicine |
|
|
7,241 |
|
|
|
7,610 |
|
|
|
(369 |
) |
|
|
(5 |
%) |
Net revenue |
|
$ |
117,316 |
|
|
$ |
121,401 |
|
|
$ |
(4,085 |
) |
|
|
(3 |
%) |
|
|
Six Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Advanced Wound Care |
|
$ |
210,992 |
|
|
$ |
203,881 |
|
|
$ |
7,111 |
|
|
|
3 |
% |
Surgical & Sports Medicine |
|
|
13,966 |
|
|
|
14,637 |
|
|
|
(671 |
) |
|
|
(5 |
%) |
Net revenue |
|
$ |
224,958 |
|
|
$ |
218,518 |
|
|
$ |
6,440 |
|
|
|
3 |
% |
Net revenue from our Advanced Wound Care products decreased by $3.7 million, or 3%, to $110.1 million in the three months ended June 30, 2023, from $113.8 million in the three months ended June 30, 2022. The decrease in Advanced Wound Care net revenue was primarily attributable to a decrease in sales of certain of our products due to changes in customer buying patterns, partially offset by an increase in sales of certain of our products to our existing and new customers.
Net revenue from our Advanced Wound Care products increased by $7.1 million, or 3%, to $211.0 million in the six months ended June 30, 2023, from $203.9 million in the six months ended June 30, 2022. The increase in Advanced Wound Care net revenue was primarily attributable to an increase in sales of certain of our products to our existing and new customers partially offset by a decrease in sales of certain of our products due to changes in customer buying patterns.
25
Table of Contents
Net revenue from our Surgical & Sports Medicine products decreased by $0.4 million, or 5% to $7.2 million in the three months ended June 30, 2023 from $7.6 million in the three months ended June 30, 2022. Net revenue from our Surgical & Sports Medicine products decreased by $0.7 million, or 5%, to $14.0 million in the six months ended June 30, 2023 from $14.6 million in the six months ended June 30, 2022. The decrease in Surgical & Sports Medicine net revenue was primarily due to attrition within our sales force, as well as the decrease in the pricing for certain of our products.
Cost of goods sold and gross profit
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Cost of goods sold |
|
$ |
26,316 |
|
|
$ |
26,652 |
|
|
$ |
(336 |
) |
|
|
(1 |
%) |
Gross profit |
|
$ |
91,000 |
|
|
$ |
94,749 |
|
|
$ |
(3,749 |
) |
|
|
(4 |
%) |
|
|
Six Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Cost of goods sold |
|
$ |
52,923 |
|
|
$ |
51,732 |
|
|
$ |
1,191 |
|
|
|
2 |
% |
Gross profit |
|
$ |
172,035 |
|
|
$ |
166,786 |
|
|
$ |
5,249 |
|
|
|
3 |
% |
Cost of goods sold in the three months ended June 30, 2023 was $26.3 million, which is relatively consistent with the cost of goods sold of $26.7 million in the three months ended June 30, 2022. Cost of goods sold increased by $1.2 million, or 2%, to $52.9 million in the six months ended June 30, 2023 from $51.7 million in the six months ended June 30, 2022. The increase in cost of goods sold was primarily due to increased sales volume in our Advanced Wound Care products.
Gross profit decreased by $3.7 million, or 4%, to $91.0 million in the three months ended June 30, 2023 from $94.7 million in the three months ended June 30, 2022. The decrease in gross profit resulted primarily from decreased sales volume.
Gross profit increased by $5.2 million, or 3%, to $172.0 million in the six months ended June 30, 2023 from $166.8 million in the six months ended June 30, 2022. The increase in gross profit resulted primarily from increased sales volume in our Advanced Wound Care products as well as a shift in product mix to our higher gross margin products.
Research and Development Expenses
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Research and development |
|
$ |
10,938 |
|
|
$ |
10,205 |
|
|
$ |
733 |
|
|
|
7 |
% |
|
|
Six Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Research and development |
|
$ |
22,140 |
|
|
$ |
18,792 |
|
|
$ |
3,348 |
|
|
|
18 |
% |
Research and development expenses increased by $0.7 million, or 7%, to $10.9 million in the three months ended June 30, 2023 from $10.2 million in the three months ended June 30, 2022. Research and development expenses increased by $3.3 million, or 18%, to $22.1 million in the six months ended June 30, 2023 from $18.8 million in the six months ended June 30, 2022.The increase in research and development expenses was primarily due to an increase in product costs associated with our pipeline products not yet commercialized, an increase in the clinical study and related costs necessary to seek regulatory approvals for certain of our products, and increased headcount associated with our existing Advanced Wound Care and Surgical & Sports Medicine products.
26
Table of Contents
Selling, General and Administrative Expenses
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Selling, general and administrative |
|
$ |
70,317 |
|
|
$ |
72,609 |
|
|
$ |
(2,292 |
) |
|
|
(3 |
%) |
|
|
Six Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Selling, general and administrative |
|
$ |
144,151 |
|
|
$ |
136,187 |
|
|
$ |
7,964 |
|
|
|
6 |
% |
Selling, general and administrative expenses decreased by $2.3 million, or 3%, to $70.3 million in the three months ended June 30, 2023 from $72.6 million in the three months ended June 30, 2022. The decrease in selling, general and administrative expenses was primarily due to a $4.1 million decrease in compensation cost, largely related to decreased commissions paid to our sales force, and a $0.8 million decrease in restructuring cost as our restructuring activities were substantially completed as of March 31, 2023. These decreases were partially offset by a $2.0 million increase related to increased travel and marketing programs along with the ending of the COVID-19 national emergency, and a $0.6 million increase in legal, consulting and other costs associated with the ongoing operations of our business and the enterprise resource planning (“ERP”) system implementation.
Selling, general and administrative expenses increased by $8.0 million, or 6%, to $144.2 million in the six months ended June 30, 2023 from $136.2 million in the six months ended June 30, 2022. The increase in selling, general and administrative expenses was primarily due to a $6.3 million increase related to increased travel and marketing programs, as well as an annual sales meeting that was held in the first quarter of 2023 (and in 2022, the sales meeting was held in the third quarter instead of the first quarter), a $2.7 million increase in legal, consulting and other costs associated with the ongoing operations of our business and the ERP system implementation, and a $0.9 million increase in restructuring costs primarily due to the reduction in force in the first quarter of 2023. The increases were partially offset by a $1.9 million decrease in compensation cost, largely related to decreased commissions paid to our sales force.
Other Expense, net
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Interest expense, net |
|
$ |
(594 |
) |
|
$ |
(730 |
) |
|
$ |
136 |
|
|
|
(19 |
%) |
Other income (expense), net |
|
|
28 |
|
|
|
(21 |
) |
|
|
49 |
|
|
** |
|
|
Total other expense, net |
|
$ |
(566 |
) |
|
$ |
(751 |
) |
|
$ |
185 |
|
|
|
(25 |
%) |
|
|
Six Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Interest expense, net |
|
$ |
(1,243 |
) |
|
$ |
(1,467 |
) |
|
$ |
224 |
|
|
|
(15 |
%) |
Other expense, net |
|
|
51 |
|
|
|
(24 |
) |
|
|
75 |
|
|
** |
|
|
Total other expense, net |
|
$ |
(1,192 |
) |
|
$ |
(1,491 |
) |
|
$ |
299 |
|
|
|
(20 |
%) |
** not meaningful
Other expense, net, decreased by $0.2 million, or 25%, to $0.6 million in the three months ended June 30, 2023 from $0.8 million in the three months ended June 30, 2022. Other expense, net, decreased by $0.3 million, or 20% to $1.2 million in the six months ended June 30, 2023 from $1.5 million in the six months ended June 30, 2022. The decrease in other expense, net was primarily due to the decrease in interest expense resulting from the lower debt balance under the 2021 Credit Agreement.
27
Table of Contents
Income Tax Expense
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Income tax expense |
|
$ |
(3,863 |
) |
|
$ |
(2,440 |
) |
|
$ |
(1,423 |
) |
|
|
58 |
% |
|
|
Six Months Ended |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Income tax expense |
|
$ |
(2,205 |
) |
|
$ |
(2,485 |
) |
|
$ |
280 |
|
|
|
(11 |
%) |
Income tax expense increased by $1.4 million, or 58%, to $3.9 million in the three months ended June 30, 2023 from $2.4 million in the three months ended June 30, 2022. Income tax expense decreased by $0.3 million, or 11%, to $2.2 million in the six months ended June 30, 2023 from $2.5 million in the six months ended June 30, 2022. The changes in income tax expense were due to a combined impact of changes in pre-tax income in these periods and a higher effective rate for the twelve months ended December 31, 2023 resulting from the larger forecasted tax adjustment in 2023 as compared to 2022.
Liquidity and Capital Resources
Since our inception, we have funded our operations and capital expenditures through cash flows from product sales, loans from affiliates and entities controlled by certain of our affiliates, third-party debt and proceeds from the sale of our capital stock. As of June 30, 2023, we had an accumulated deficit of $43.6 million and working capital of $143.0 million which included $88.9 million in cash and cash equivalents. We also have $125.0 million available for future revolving borrowings under our Revolving Facility (see Note “13. Long-Term Debt Obligations” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). For the six months ended June 30, 2023, we reported net revenue of $225.0 million, a net income of $2.3 million and $3.6 million of cash inflows from operating activities. We expect that our cash on hand and other components of working capital as of June 30, 2023, availability under the 2021 Credit Agreement, plus net cash flows from product sales, will be sufficient to fund our operating expenses, capital expenditure requirements and debt service payments for at least 12 months beyond the filing date of this quarterly report.
While the COVID-19 pandemic has not materially adversely affected our financial results and business operations to date, we continue to closely monitor ongoing developments in connection with the pandemic that could negatively affect our commercial prospects, cash position and access to capital in fiscal 2023 or beyond. We are also closely monitoring ongoing developments in connection with the published local coverage determinations as discussed in “Part II, Item 1A—Risk Factors” of this Form 10-Q, which may negatively impact our revenue and projected cash position. We will continue to assess our cash and other sources of liquidity and, if circumstances warrant, we will make appropriate adjustments to our operating plan.
Our primary uses of cash are working capital requirements, capital expenditure and debt service payments. Additionally, from time to time, we may use capital for acquisitions and other investing and financing activities. Working capital is used principally for our personnel as well as manufacturing costs related to the production of our products. Our working capital requirements vary from period to period depending on manufacturing volumes, the timing of shipments and the payment cycles of our customers and payers. Our capital expenditures consist primarily of building improvements, manufacturing equipment, and computer hardware and software.
To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute on our business strategy, we anticipate that they will be obtained through additional equity or debt financings, other strategic transactions or a combination of these potential sources of funds. There can be no assurance that we will be able to obtain additional funds on terms acceptable to us, on a timely basis or at all.
28
Table of Contents
Cash Flows
The following table summarizes our cash flows for each of the periods presented:
|
|
Six Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
Net cash provided by operating activities |
|
$ |
3,569 |
|
|
$ |
11,606 |
|
Net cash used in investing activities |
|
|
(15,061 |
) |
|
|
(12,840 |
) |
Net cash used in financing activities |
|
|
(2,290 |
) |
|
|
(350 |
) |
Net change in cash, cash equivalents, and restricted cash |
|
$ |
(13,782 |
) |
|
$ |
(1,584 |
) |
Operating Activities
During the six months ended June 30, 2023, net cash provided by operating activities was $3.6 million, resulting from our net income of $2.3 million and non-cash charges of $19.7 million, partially offset by net cash used in connection with changes in our operating assets and liabilities of $18.4 million. Net cash used in changes in our operating assets and liabilities included an increase in accounts receivable of $5.0 million, an increase in inventory of $4.0 million, an increase in prepaid expenses and other current assets of $2.9 million, a decrease in operating leases liabilities of $4.2 million, and a decrease in accounts payable of $3.5 million, partially offset by an increase in accrued expenses and other liabilities of $1.2 million.
During the six months ended June 30, 2022, net cash provided by operating activities was $11.6 million, resulting from our net income of $7.8 million and non-cash charges of $18.0 million, partially offset by net cash used in connection with changes in our operating assets and liabilities of $14.2 million. Net cash used in changes in our operating assets and liabilities included an increase in accounts receivable of $6.5 million, an increase in inventory of $3.4 million, an increase in prepaid expenses and other current assets of $1.8 million, a decrease in operating leases liabilities of $3.5 million, and a decrease in accrued expenses and other current liabilities of $1.7 million, partially offset by an increase in accounts payable of $2.7 million.
Investing Activities
During the six months ended June 30, 2023, we used $15.1 million of cash in investing activities consisting exclusively of capital expenditures.
During the six months ended June 30, 2022, we used $12.8 million of cash in investing activities consisting exclusively of capital expenditures.
Financing Activities
During the six months ended June 30, 2023, net cash used in financing activities was $2.3 million. This consisted of the payment of term loan of $1.9 million, payment of the finance lease obligations and the stock awards activities of $0.4 million.
During the six months ended June 30, 2022, net cash used in financing activities was $0.4 million. This consisted primarily of the payment of term loan and finance lease obligations of $1.1 million and the payment of $0.6 million related to the CPN deferred acquisition consideration, partially offset by the net receipts of $1.4 million in connection with the stock awards activities.
Indebtedness
2021 Credit Agreement
In August 2021, we and our subsidiaries entered into a credit agreement with SVB and several other lenders, which we refer to as the 2021 Credit Agreement. The 2021 Credit Agreement, as amended, provides for a term loan facility not to exceed $75.0 million (the “Term Loan Facility”) and a revolving credit facility not to exceed $125.0 million (the “Revolving Facility”).
Advances made under the 2021 Credit Agreement may be either SOFR Loans or ABR Loans, at our option. For SOFR Loans, the interest rate is a per annum interest rate equal to the Adjusted Term SOFR plus an Applicable Margin between 2.00% to 3.25% based on the Total Net Leverage Ratio. For ABR Loans, the interest rate is equal to (1) the highest of (a) the Wall Street Journal Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) the Adjusted Term SOFR rate plus 1.0%, plus (2) an Applicable Margin between 1.00% to 2.25% based on the Total Net Leverage Ratio.
The 2021 Credit Agreement requires us to make consecutive quarterly installment payments equal to the following: (a) from September 30, 2021 through and including June 30, 2022, $0.5 million; (b) from September 30, 2022 through and including June 30, 2023, $0.9 million; (c) from September 30, 2023 through and including June 30, 2025, $1.4 million and (d) from September 30, 2025
29
Table of Contents
and the last day of each quarter thereafter until August 6, 2026 (the “Term Loan Maturity Date”), $1.9 million. The remaining principal balance of $50.6 million is also due on the Term Loan Maturity Date. We may prepay the Term Loan Facility. Once repaid, amounts borrowed under the Term Loan Facility may not be re-borrowed.
We must pay in arrears, on the first day of each quarter prior to August 6, 2026 (the “Revolving Termination Date”) and on the Revolving Termination Date, a fee for our non-use of available funds (the “Commitment Fee”). The Commitment Fee rate is between 0.25% to 0.45% based on the Total Net Leverage Ratio. We may elect to reduce or terminate the Revolving Facility in its entirety at any time by repaying all outstanding principal and unpaid accrued interest.
Under the 2021 Credit Agreement, we are required to comply with certain financial covenants including the Consolidated Fixed Charge Coverage Ratio and Consolidated Total Net Leverage Ratio, tested quarterly. In addition, we are also required to make representations and warranties and comply with certain non-financial covenants that are customary in loan agreements of this type, including restrictions on the payment of dividends, repurchase of stock, incurrence of indebtedness, dispositions and acquisitions.
As of June 30, 2023, we were in compliance with the covenants under the 2021 Credit Agreement. We had outstanding borrowings of $69.4 million under our Term Loan Facility and no borrowings outstanding under our Revolving Facility with $125 million available for future revolving borrowings, respectively.
Critical Accounting Policies and Significant Judgments and Estimates
Our unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of our unaudited condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, and the disclosure at the date of the unaudited condensed consolidated financial statements, as well as revenue and expenses recorded during the reporting periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our unaudited condensed consolidated financial statements, which, in turn, could materially change our results from those reported. Management evaluates its estimates, assumptions and judgments on an ongoing basis. Historically, our critical accounting estimates have not differed materially from actual results. However, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our condensed consolidated statements of operations, liquidity and financial condition. See also our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, for information about these accounting policies as well as a description of our other significant accounting policies.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Recently Issued Accounting Pronouncements
We have reviewed all recently issued standards as disclosed in Note “2. Summary of Significant Accounting Policies” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the six months ended June 30, 2023, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
30
Table of Contents
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its principal executive officer and principal financial officer, evaluated the effectiveness of its disclosure controls and procedures as of June 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on their evaluation, our management, including our principal executive officer and principal financial officer, concluded that, as of June 30, 2023, our disclosure controls and procedures were ineffective because, as disclosed in the Company’s Annual Report for the fiscal year ended December 31, 2022, our management team identified the following material weakness in our internal control over financial reporting: we did not design and maintain effective controls (i) to properly identify and assess significant non-routine transactions and (ii) over information technology general controls and proper segregation of duties to support the proper initiation and recording of transactions and the resulting impact on business process controls and applications that rely on such data.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.
Management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria established in the SEC guidance on conducting such assessments as of the end of the period covered by this report. Management conducted the assessment based on certain criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. As a result of this assessment, management concluded that, as of June 30, 2023, our internal control over financial reporting was not effective based on those criteria. Although management has made notable progress in remediating this material weakness, management concluded that the material weakness described above continued to exist as of June 30, 2023.
Plans for Remediation of Material Weakness
Management has taken actions to remediate the deficiencies in its internal controls over financial reporting and implemented additional processes and controls designed to address the underlying causes associated with the above-mentioned material weakness. Management is committed to finalizing the remediation of the material weakness. Management’s internal control remediation efforts include the following:
31
Table of Contents
As management continues to evaluate and work to improve our internal control over financial reporting, management may determine it is necessary to take additional measures to address the material weaknesses. However, we believe the above actions will be effective in remediating the material weaknesses and we will continue to devote significant time and attention to these remediation efforts. Until the controls have been operating for a sufficient period of time and management has concluded, through testing, that these controls are executed consistently and operating effectively, the material weaknesses described above will continue to exist.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than those described above related to remediation efforts. However, as the implementation of the new ERP system continues and our remediation efforts continue, we will change our processes and procedures, which in turn, could result in changes to our internal control over financial reporting. As such changes occur, we will evaluate quarterly whether such changes materially affect our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
On December 10, 2021, a class action complaint captioned Somogyi v. Organogenesis Holdings Inc., et al. was filed on behalf of a putative class of all purchasers of our securities against us and our Chief Executive Officer and Chief Financial Officer in the United States District Court for the Eastern District of New York. The court appointed Donald Martin as lead plaintiff. Mr. Martin filed an amended complaint on October 24, 2022 that brings claims on behalf of a purported class of all purchasers of our securities from August 10, 2020 through August 9, 2022 and alleges violations of federal securities law in connection with alleged false and misleading statements with respect to, among other matters, revenue, sales growth and ability to compete in connection with our Affinity and PuraPly XT products. The amended complaint alleges violations of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks unquantified damages as well as attorneys’ fees, expert fees and other costs. The action is in the early stages of litigation. We believe the claims are without merit and intend to vigorously contest them. On March 13, 2023, we filed our motion to dismiss the litigation for failure to state a claim upon which relief can be granted. Briefing was completed on May 30, 2023 and the motion to dismiss is currently pending with the Court.
We are not a party to any other material legal proceedings. From time to time, we may become involved in litigation or other legal proceedings relating to claims arising from the ordinary course of business. These matters may include intellectual property, employment and other general claims. With respect to our outstanding legal matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.
Item 1A. Risk Factors
Investing in our Class A common stock involves a high degree of risk. Our Annual Report on Form 10-K for the year ended December 31, 2022, includes a detailed discussion of our risk factors under the heading “Part I, Item 1A—Risk Factors.” Except as set forth below, there have been no material changes from such risk factors during the quarter ended June 30, 2023. You should consider carefully the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, and all other information contained in or incorporated by reference in this Quarterly Report on Form 10-Q before making an investment decision. If any of the risks discussed in the Annual Report on Form 10-K for the year ended December 31, 2022, or herein actually occur, they may materially harm our business, financial condition, operating results, cash flows or growth prospects. As a result, the market price of our Class A common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties that are not yet identified or that we think are immaterial may also materially harm our business, financial condition, operating results, cash flows or growth prospects and could result in a complete loss of your investment.
Three Medicare Administrative Contractors, or MACs, recently published local coverage determinations, or LCDs, for skin substitutes/cellular and/or tissue-based products (CTPs) for the treatment of DFUs and Venous Leg Ulcers, or VLUs, in the Medicare population that list our PuraPly, Novachor, TransCyte, Affinity and NuShield products as non-covered effective as of September 17, 2023. This non-coverage determination could have a material adverse effect on utilization of our products, our business, and our revenue.
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On August 3, 2023, three MACs (Novitas, First Coast Services, and CGS) published final LCDs for skin substitutes and CTPs for the treatment of DFUs and VLUs in the Medicare population. While our Apligraf and Dermagraft products remain “covered,” the LCDs classify our PuraPly, Novachor, TransCyte, Affinity and NuShield products as “non-covered” effective as of September 17, 2023. The elimination of coverage for these products by the three MACs presents a significant amount of uncertainty regarding (i) future revenue for these products in the applicable regions and (ii) the potential impact on demand for our products when used for treatment of non-DFU/VLU wounds. Although we believe that our non-covered products were improperly excluded from coverage, and we are engaging with all relevant parties in advance of the effective date of these LCDs, there is no guarantee that the MACs will agree to include our products as “covered” prior to September 17, 2023. If these products are not “covered,” we believe it would likely materially adversely impact utilization of our products, our business, and our revenue.
Uncertainty and adverse changes in the general economic conditions, including recent turmoil in the global banking system, may negatively affect our business, financial condition, stock price and results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. For example, the global financial crisis of 2007-2008 caused extreme volatility and disruptions in the capital and credit markets. If general economic conditions in the United States decline, or if consumers fear that economic conditions will decline, sales of our products may decline. Adverse changes may occur as a result of adverse economic conditions, fluctuating oil prices, supply chain problems, inflation, political instability, declining consumer confidence, a continuation or worsening of the COVID-19 pandemic or another pandemic, unemployment, fluctuations in stock markets, contraction of credit availability, or other factors affecting economic conditions generally. These changes may negatively affect the sales of our existing or development of future products, increase the cost, and decrease the availability of financing, or increase costs associated with producing and distributing our products and potential product candidates.
Moreover, there has been recent turmoil in the global banking system. On March 10, 2023, Silicon Valley Bank (“SVB”), one of our lenders at which we maintained deposit and money market accounts, was closed, followed on March 11, 2023 and May 1, 2023, by Signature Bank and First Republic Bank, respectively, and the FDIC was appointed as receiver for those banks. There have been reports of instability at other banks across the globe including Credit Suisse, which was acquired by UBS. Despite the steps taken to date by U.S. agencies to protect depositors and our current belief that we do not have exposure to loss as a result of SVB’s receivership, the follow-on effects of the events surrounding the SVB, Signature Bank and First Republic Bank failures and pressure on other banks are unknown and could include failures of other financial institutions or significant disruptions to our operations, financial position, and reputation. A severe or prolonged economic downturn, such as the global financial crisis of 2007-2008, could result in a variety of risks to our business, including a decrease in the demand for our products and in our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy also could strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our products. We cannot anticipate all the ways in which the foregoing, and the current economic climate and financial market conditions generally, could adversely impact our business. Furthermore, our stock price may decline due in part to the volatility of the stock market and any general economic downturn.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
During the three months ended June 30, 2023,
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Item 6. Exhibits
Exhibit number |
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Description |
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3.1 |
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3.2 |
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3.3 |
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10.1 |
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31.1† |
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31.2† |
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32.1† |
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101.INS† |
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Inline XBRL Instance Document XBRL |
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101.SCH† |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL† |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF† |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB† |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE† |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104† |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
† Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 9, 2023 |
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Organogenesis Holdings Inc. |
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(Registrant) |
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/s/ David Francisco |
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David Francisco |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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35
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary S. Gillheeney, Sr., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Organogenesis Holdings Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 9, 2023 |
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By: |
/s/ Gary S. Gillheeney, Sr.
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Gary S. Gillheeney, Sr. |
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Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David Francisco, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Organogenesis Holdings Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 9, 2023 |
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By: |
/s/ David Francisco
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David Francisco |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned officers of Organogenesis Holdings Inc. (the “Company”) certifies, to his knowledge and solely for the purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2023, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 9, 2023 |
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By: |
/s/ Gary S. Gillheeney, Sr. |
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Gary S. Gillheeney, Sr. |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Date: August 9, 2023 |
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By: |
/s/ David Francisco |
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David Francisco |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |