ORGANOGENESIS HOLDINGS INC. 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
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 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 ("VLUs") and diabetic foot ulcers ("DFUs"); Dermagraft for the
treatment of DFUs (manufacturing currently suspended pending transition to
In the Surgical & Sports Medicine market, we focus on products that support the healing of musculoskeletal injuries, including degenerative conditions such as osteoarthritis and tendonitis. We are leveraging our regenerative medicine capabilities in this attractive, adjacent market. Our Surgical & Sports Medicine products include NuShield for surgical application in targeted soft tissue repairs; and Affinity, Novachor, PuraPly AM and PuraPly MZ for management of open wounds in the surgical setting. We currently sell these products through independent agencies and our growing direct sales force.
For the nine months ended
COVID-19 pandemic
The emergence of the coronavirus (COVID-19) around the world, and particularly
in
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Company's liquidity position, communicate with and monitor the actions of our customers and suppliers, and review our near-term financial performance as we manage the Company through this period of continued uncertainty.
End of Enforcement Grace Period for ReNu and NuCel
On
Dermagraft
As part of our long-term plan to consolidate manufacturing operations in
Components of Our 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
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. We expect our cost of goods sold to increase due primarily to the anticipated increase in sales volumes driven by the expansion of our sales force and sales territories, expansion of our product portfolio offerings, and the number of healthcare facilities that offer our products.
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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 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. Our research and development expenses also include expenses for clinical trials. 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.
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.
Loss on the extinguishment of debt-In
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. Based on a consideration of the
factors discussed above, we have determined that our net
We account for uncertainty in income taxes recognized in the 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 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.
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Results of Operations
The following table sets forth, for the periods indicated, our results of
operations:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Net revenue $ 116,859 $ 113,753 $ 335,377 $ 339,501
Cost of goods sold 26,177 26,167 77,909 81,602
Gross profit 90,682 87,586 257,468 257,899
Operating expenses:
Selling, general and administrative 79,328 62,369 215,515 182,950
Research and development 9,575 8,953 28,367 22,482
Total operating expenses 88,903 71,322 243,882 205,432
Income from operations 1,779 16,264 13,586 52,467
Other expense, net: - - - -
Interest expense (572 ) (1,482 ) (2,039 ) (6,383 )
Loss on extinguishment of debt - (1,883 ) - (1,883 )
Other expense, net 5 (19 ) (19 ) (4 )
Total other expense, net (567 ) (3,384 ) (2,058 ) (8,270 )
Net income before income taxes 1,212 12,880 11,528 44,197
Income tax expense (997 ) (303 ) (3,482 ) (990 )
Net income $ 215 $ 12,577 $ 8,046 $ 43,207
EBITDA and Adjusted EBITDA
Our management uses financial measures that are not in accordance with generally
accepted accounting principles in
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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(Unaudited) (in thousands)
Net income $ 215 $ 12,577 $ 8,046 $ 43,207
Interest expense, net 572 1,482 2,039 6,383
Income tax expense 997 303 3,482 990
Depreciation 1,456 1,937 4,331 4,010
Amortization 1,220 1,240 3,662 3,726
EBITDA 4,460 17,539 21,560 58,316
Stock-based compensation expense 1,702 1,041 4,697 2,781
Recovery of certain notes receivable - - - (179 )
from related parties (1)
Change in fair value of Earnout (2) - (927 ) - (3,985 )
Restructuring charge (3) 611 1,010 1,518 2,876
Loss on extinguishment of debt (4) - 1,883 - 1,883
Write-off of certain assets (5) 4,200 1,104 4,200 1,104
Facility construction project pause (6) 632 632
Settlement fee (7) - - 2,600 -
Adjusted EBITDA $ 11,605 $ 21,650 $ 35,207 $ 62,796
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Table of Contents (1) Amount reflects the collection of certain notes receivable from related parties previously reserved. See Note "19. Related Party Transactions". (2) Amounts reflect the change in the fair value of the Earnout liability in connection with the CPN acquisition. See Note "3. Acquisition". (3) Amounts reflect employee retention and benefits as well as other exit costs associated with the Company's restructuring activities. See Note "12. Restructuring". (4) Amounts reflect the loss recognized on the extinguishment of the 2019 Credit Agreement upon repayment. See Note "13. Long-Term Debt Obligations". (5) Amount in 2021 reflects the write-off of certain design and consulting fees previously capitalized related to the construction in progress in one of the Company'sCanton, Massachusetts facilities. Amount in 2022 reflects the disposal of certain equipment related to the same facility. See Note "9. Property and Equipment, Net". (6) Amounts reflect the cancellation fees incurred in connection with the Company's decision to pause one of its manufacturing facility construction projects. (7) Amount reflects the fee the Company agreed to pay to a GPO to settle previously disputed GPO fees. See Note "4. Product and Geographic Sales".
Comparison of Three and Nine Months Ended
Revenue
Three Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Advanced Wound Care $ 109,514 $ 107,341 $ 2,173 2 %
Surgical & Sports Medicine 7,345 6,412 933 15 %
Net revenue $ 116,859 $ 113,753 $ 3,106 3 %
Nine Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Advanced Wound Care $ 313,395 $ 309,485 $ 3,910 1 %
Surgical & Sports Medicine 21,982 30,016 (8,034 ) (27 %)
Net revenue $ 335,377 $ 339,501 $ (4,124 ) (1 %)
Net revenue from our Advanced Wound Care products in the three and nine months
ended
Net revenue from our Surgical & Sports Medicine products increased by
Included within net revenue is PuraPly revenue of
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Cost of goods sold and gross profit
Three Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Cost of goods sold $ 26,177 $ 26,167 $ 10 0 %
Gross profit $ 90,682 $ 87,586 $ 3,096 4 %
Nine Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Cost of goods sold $ 77,909 $ 81,602 $ (3,693 ) (5 %)
Gross profit $ 257,468 $ 257,899 $ (431 ) (0 %)
Cost of goods sold in the three months ended
Gross profit increased by
Research and Development Expenses
Three Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Research and development $ 9,575 $ 8,953 $ 622 7 %
Nine Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Research and development $ 28,367 $ 22,482 $ 5,885 26 %
Research and development expenses increased by
Selling, General and Administrative Expenses
Three Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Selling, general and administrative
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Nine Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Selling, general and administrative
Selling, general and administrative expenses increased by
Selling, general and administrative expenses increased by
Other Expense, net
Three Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Interest expense, net $ (572 ) $ (1,482 ) $ 910 (61 %)
Loss on extinguishment of debt - (1,883 ) 1,883 (100 %)
Other income (expense), net 5 (19 ) 24 (126 %)
Total other expense, net $ (567 ) $ (3,384 ) $ 2,817 (83 %)
Nine Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Interest expense, net $ (2,039 ) $ (6,383 ) $ 4,344 (68 %)
Loss on extinguishment of debt - (1,883 ) 1,883 (100 %)
Other expense, net (19 ) (4 ) (15 ) 375 %
Total other expense, net $ (2,058 ) $ (8,270 ) $ 6,212 (75 %)
Other expense, net, decreased by
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Income Tax Expense
Three Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Income tax expense $ (997 ) $ (303 ) $ (694 ) 229 %
Nine Months Ended
September 30, Change
2022 2021 $ %
(in thousands, except for percentages)
Income tax expense $ (3,482 ) $ (990 ) $ (2,492 ) 252 %
Income tax expense increased by
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
We continue to closely monitor ongoing developments in connection with the COVID-19 pandemic, which may negatively affect our commercial prospects, cash position and access to capital in fiscal 2022 or beyond. 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.
Cash Flows
The following table summarizes our cash flows for each of the periods presented:
Nine Months Ended
September 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 17,059 $ 44,030
Net cash used in investing activities (23,242 ) (25,993 )
Net cash used in financing activities (324 ) (119 )
Net change in cash, cash equivalents, and restricted cash
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During the nine months ended
During the nine months ended
Investing Activities
During the nine months ended
During the nine months ended
Financing Activities
During the nine months ended
During the nine months ended
Indebtedness
2021 Credit Agreement
In
Advances made under the 2021 Credit Agreement may be either Eurodollar Loans or ABR Loans, at our option. For Eurodollar Loans, the interest rate is a per annum interest rate equal to LIBOR 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 LIBOR 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
We must pay in arrears, on the first day of each quarter prior to
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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
2019 Credit Agreement
In
In
Critical Accounting Policies and Significant Judgments and Estimates
Our unaudited consolidated financial statements have been prepared in accordance
with GAAP. The preparation of our unaudited 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 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 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 consolidated statements of operations, liquidity and financial condition.
See also our Annual Report on Form 10-K for the fiscal year ended
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
Recently Issued Accounting Pronouncements
We have reviewed all recently issued standards as disclosed in Note "2. Summary of Significant Accounting Policies" to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
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