SEC Form 10-Q filed by Organogenesis Holdings Inc.

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2024

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-37906

ORGANOGENESIS HOLDINGS INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	98-1329150
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
85 Dan Road
Canton, MA	02021
(Address of principal executive offices)	(Zip Code)

 

(781) 575-0775

(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		Trading Symbol(s)		Name of each exchange on which registered
Class A Common Stock, $0.0001 par value		ORGO		Nasdaq Capital Market

 

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		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 April 30, 2024 was 132,572,465.

 

 

 

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Organogenesis Holdings Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2024

Table of Contents

 

		Page
PART I. FINANCIAL INFORMATION		4
Item 1.	Unaudited Condensed Consolidated Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
PART II. OTHER INFORMATION		28
Item 1.	Legal Proceedings	28
Item 1A	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
SIGNATURES		31

 

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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, clinical development and commercialization of our product candidates, 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, 2023. 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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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)

 

		March 31,				December 31,
		2024				2023
Assets
Current assets:
Cash and cash equivalents		$	88,626			$	103,840
Restricted cash			720				498
Accounts receivable, net			96,148				81,999
Inventories, net			27,694				28,253
Prepaid expenses and other current assets			13,979				10,454
Total current assets			227,167				225,044
Property and equipment, net			114,245				116,228
Intangible assets, net			14,970				15,871
Goodwill			28,772				28,772
Operating lease right-of-use assets, net			38,616				40,118
Deferred tax asset, net			28,002				28,002
Other assets			6,709				5,990
Total assets		$	458,481			$	460,025
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of term loan		$	5,489			$	5,486
Current portion of finance lease obligations			1,103				1,081
Current portion of operating lease obligations - related party			8,543				8,413
Current portion of operating lease obligations			4,675				4,731
Accounts payable			23,230				30,724
Accrued expenses and other current liabilities			39,759				30,074
Total current liabilities			82,799				80,509
Term loan, net of current portion			59,371				60,745
Finance lease obligations, net of current portion			1,604				1,888
Operating lease obligations, net of current portion - related party			11,052				11,954
Operating lease obligations, net of current portion			24,383				25,053
Other liabilities			1,242				1,213
Total liabilities			180,451				181,362
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued			—				—
Common stock, $0.0001 par value; 400,000,000 shares authorized; 133,267,888 and 132,044,944 shares issued; 132,539,340 and 131,316,396 shares outstanding at March 31, 2024 and December 31, 2023, respectively.			13				13
Additional paid-in capital			321,088				319,621
Accumulated deficit			(43,071	)			(40,971	)
Total stockholders’ equity			278,030				278,663
Total liabilities and stockholders’ equity		$	458,481			$	460,025

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ORGANOGENESIS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(amounts in thousands, except share and per share data)

 

		Three Months Ended March 31,
		2024				2023
Net revenue		$	109,976			$	107,642
Cost of goods sold			28,696				26,607
Gross profit			81,280				81,035
Operating expenses:
Selling, general and administrative			72,322				73,834
Research and development			12,810				11,202
Total operating expenses			85,132				85,036
Loss from operations			(3,852	)			(4,001	)
Other expense, net:
Interest expense, net			(514	)			(649	)
Other income, net			23				23
Total other expense, net			(491	)			(626	)
Net loss before income taxes			(4,343	)			(4,627	)
Income tax benefit			2,243				1,658
Net loss and comprehensive loss		$	(2,100	)		$	(2,969	)
Net loss, per share:
Basic and diluted		$	(0.02	)		$	(0.02	)
Weighted-average common shares outstanding
Basic and diluted			131,861,772				131,083,841

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ORGANOGENESIS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(amounts in thousands, except share data)

 

		Three Months Ended March 31, 2024
										Additional
		Common Stock								Paid-in				Accumulated				Total
		Shares				Amount				Capital				Deficit				Stockholders’ Equity
Balance as of December 31, 2023			131,316,396			$	13			$	319,621			$	(40,971	)		$	278,663
Exercise of stock options			152,250				—				180				—				180
Vesting of RSUs, net of shares surrendered to pay taxes			1,070,694				—				(1,120	)			—				(1,120	)
Stock-based compensation expense			—				—				2,407				—				2,407
Net loss			—				—				—				(2,100	)			(2,100	)
Balance as of March 31, 2024			132,539,340			$	13			$	321,088			$	(43,071	)		$	278,030

 

 

		Three Months Ended March 31, 2023
										Additional
		Common Stock								Paid-in				Accumulated				Total
		Shares				Amount				Capital				Deficit				Stockholders’ Equity
Balance as of December 31, 2022			130,919,129			$	13			$	310,957			$	(45,301	)		$	265,669
Cumulative-effect adjustment from adoption of ASU 2016-13, net of tax (Note 2)			—				—				—				(615	)			(615	)
Vesting of RSUs, net of shares surrendered to pay taxes			307,258				—				(298	)			—				(298	)
Stock-based compensation expense			—				—				1,914				—				1,914
Net loss			—				—				—				(2,969	)			(2,969	)
Balance as of March 31, 2023			131,226,387			$	13			$	312,573			$	(48,885	)		$	263,701

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ORGANOGENESIS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

		Three Months Ended March 31,
		2024				2023
Cash flows from operating activities:
Net loss		$	(2,100	)		$	(2,969	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			3,072				2,694
Amortization of intangible assets			901				1,230
Reduction in the carrying value of right-of-use assets			2,203				1,939
Non-cash interest expense			105				107
Deferred interest expense			122				122
Provision recorded for credit losses			968				243
Loss on disposal of property and equipment			347				63
Adjustment for excess and obsolete inventories			2,515				1,407
Stock-based compensation			2,407				1,914
Changes in operating assets and liabilities:
Accounts receivable			(15,117	)			(3,429	)
Inventories			(4,670	)			(2,163	)
Prepaid expenses and other current assets and other assets			(4,315	)			(4,774	)
Operating leases			(2,199	)			(2,122	)
Accounts payable			(4,391	)			(1,390	)
Accrued expenses and other current liabilities			9,962				2,029
Other liabilities			28				22
Net cash used in operating activities			(10,162	)			(5,077	)
Cash flows from investing activities:
Purchases of property and equipment			(2,222	)			(7,562	)
Net cash used in investing activities			(2,222	)			(7,562	)
Cash flows from financing activities:
Payments of term loan under the 2021 Credit Agreement			(1,406	)			(938	)
Payments of withholding taxes in connection with RSUs vesting			(1,120	)			(298	)
Proceeds from the exercise of stock options			180				-
Principal repayments of finance lease obligations			(262	)			-
Net cash used in financing activities			(2,608	)			(1,236	)
Change in cash, cash equivalents and restricted cash			(14,992	)			(13,875	)
Cash, cash equivalents, and restricted cash, beginning of period			104,338				103,290
Cash, cash equivalents, and restricted cash, end of period		$	89,346			$	89,415
Supplemental disclosure of cash flow information:
Cash paid for interest		$	1,375			$	1,271
Cash paid for income taxes		$	35			$	128
Supplemental disclosure of non-cash investing and financing activities:
Cumulative effect adjustment for adoption of ASU No. 2016-13 (Note 2)		$	—			$	615
Purchases of property and equipment included in accounts payable and accrued expenses		$	786			$	1,986
Right-of-use assets obtained through operating lease obligations		$	701			$	1,586

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ORGANOGENESIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

For all periods presented, net revenue generated outside the United States represented less than 1% of total net revenue.

 

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 March 31, 2024 and 2023, the Company charged $2,515 and $1,407, respectively, for inventory excess and obsolescence to cost of goods sold within the condensed consolidated statements of operations and comprehensive loss.

 

Depreciation expense was $3,072 and $2,694 for the three months ended March 31, 2024 and 2023, respectively. Construction in progress primarily represents the ongoing ERP system implementation and the unfinished construction work on a purchased building located on the Company’s Canton, Massachusetts campus and improvements at the Company’s leased facilities in Canton and Norwood, Massachusetts.

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The accrued but unpaid lease obligations and the interest accrual on these obligations are related to the buildings in Canton, Massachusetts. See Note 13, Leases.

 

 

 

 

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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, 2023, filed with the SEC, on February 29, 2024. 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

We are 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, and cardiovascular and peripheral vascular disease. 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 surgery 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 (VLUs) and diabetic foot ulcers (DFUs); Dermagraft for the treatment of DFUs (manufacturing and distribution currently suspended pending transition to a new manufacturing facility or engagement of a third-party manufacturer); PuraPly AM and PuraPly XT as antimicrobial barriers and native, cross-linked ECM scaffolds for a broad variety of wound types; and Affinity, Novachor, NuShield, and CYGNUS placental allografts to address a variety of wound sizes and types as a protective barrier and ECM scaffold. 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 AM, PuraPly MZ, and PuraPly SX for management of open wounds in the surgical setting. We currently sell these products through independent agencies and our direct sales force.

In May 2024, we announced that our Phase 3 randomized control trial evaluating the safety and efficacy of ReNu, a cryopreserved amniotic suspension allograft (ASA) for the management of symptoms associated with knee osteoarthritis (OA), achieved its primary endpoint upon the analysis of positive top line data. ReNu demonstrated a statistically significant reduction in knee OA pain at six months post-treatment compared with the control group. A complete analysis of the data from the Phase 3 clinical trial is expected later in May 2024.

Dermagraft

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.

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Local Coverage Determinations

In August 2023, three Medicare Administrative Contractors (MACs) issued local coverage determinations (LCDs) eliminating coverage for DFUs and VLUs for over 130 products, including five of our commercially marketed products. The LCDs were scheduled to take effect on September 17, 2023, and subsequently delayed to October 1, 2023. Given the potential adverse impact these LCDs could have on patients and on our business, we worked with our advisors to convince the MACs to withdraw the LCDs and incurred legal expenses and compensation expenses related to retention for impacted sales employees. On September 28, 2023, the three MACs withdrew the LCDs. Notwithstanding the ultimate withdrawal of the LCDs, we believe that some of our customers elected to purchase covered products from our competitors, reducing our revenue for the third and fourth quarters of the year ended December 31, 2023.

Similarly, on April 25, 2024, seven MACs published proposed LCDs for skin substitute grafts/cellular and tissue-based products (CTPs) for the treatment of DFUs and VLUs in the Medicare population, that classify five of our commercially marketed product lines as “non-covered.” We are engaging with the MACs to provide clinical evidence for these non-covered products demonstrating their efficacy for the treatment of DFUs and VLUs, however there is no guarantee that the MACs will agree to cover these products in the final LCDs.

License And Manufacturing Agreement

In November 2023, we entered into a trademark license and manufacturing agreement with Vivex Biologics, Inc. (Vivex) to sell its CYGNUS Dual (Dual) and CYGNUS Matrix (Matrix) products, with the option to license its VIA Matrix (VIA) products. We paid an upfront licensing fee to Vivex to sell Dual and Matrix, and also agreed to pay a fixed milestone payment for Dual in the event that its average selling price (ASP) is published by certain government agencies for a specified period of time, for which we previously accrued because we determined that payment would be probable in December 2024. In March 2024, we exercised the option to license VIA.

In addition, the Company is required to pay a low double-digit royalty and a high single-digit royalty on the Net Sales of Dual and Matrix, respectively, during the royalty term, as defined in the agreement with Vivex. The royalty term is commensurate with the initial term of the contract and will continue for each subsequent renewal period. The initial term of the agreement expires on December 31, 2026 and can be renewed for up to five additional one-year terms.

We paid $5.0 million in upfront licensing fees and accrued $2.5 million for the milestone payment in the fourth quarter of 2023, and paid an additional $2.5 million licensing fee for the VIA option in April 2024.

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 March 31, 2024, we had approximately 250 direct sales representatives and approximately 157 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 Group Purchasing Organization (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.

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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 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.

Other expense, net

Other expense, net consists primarily of interest expense, which is 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. We maintain the position that our net U.S. deferred tax assets did not require a valuation allowance as of March 31, 2024 and December 31, 2023.

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.

 

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Results of Operations

The following table sets forth, for the periods indicated, our results of operations:

 

 

`		Three Months Ended March 31,
		2024				2023
		(Unaudited, in thousands)
Net revenue		$	109,976			$	107,642
Cost of goods sold			28,696				26,607
Gross profit			81,280				81,035
Operating expenses:
Selling, general and administrative			72,322				73,834
Research and development			12,810				11,202
Total operating expenses			85,132				85,036
Loss from operations			(3,852	)			(4,001	)
Other expense, net:
Interest expense			(514	)			(649	)
Other income, net			23				23
Total other expense, net			(491	)			(626	)
Net loss before income taxes			(4,343	)			(4,627	)
Income tax benefit			2,243				1,658
Net loss		$	(2,100	)		$	(2,969	)

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 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 loss to non-GAAP EBITDA and non-GAAP Adjusted EBITDA for each of the periods presented:

 

`		Three Months Ended March 31,
		2024				2023
		(Unaudited, in thousands)
Net loss		$	(2,100	)		$	(2,969	)
Interest expense, net			514				649
Income tax benefit			(2,243	)			(1,658	)
Depreciation			3,072				2,694
Amortization			901				1,230
EBITDA			144				(54	)
Stock-based compensation expense			2,407				1,914
Restructuring charge (1)			—				1,908
Adjusted EBITDA		$	2,551			$	3,768

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Comparison of Three Months Ended March 31, 2024 and 2023

Revenue

 

		Three Months Ended March 31,								Change
		2024				2023				$				%
		(in thousands, except for percentages)
Advanced Wound Care		$	103,864			$	100,917			$	2,947				3	%
Surgical & Sports Medicine			6,112				6,725				(613	)			(9	%)
Net revenue		$	109,976			$	107,642			$	2,334				2	%

Net revenue from our Advanced Wound Care products increased by $2.9 million, or 3%, to $103.9 million in the three months ended March 31, 2024, from $100.9 million in the three months ended March 31, 2023. The increase in Advanced Wound Care net revenue was primarily attributable to an increase in product sales of certain of our products to our existing and new customers.

Net revenue from our Surgical & Sports Medicine products decreased by $0.6 million, or 9% to $6.1 million in the three months ended March 31, 2024 from $6.7 million in the three months ended March 31, 2023. The decrease in Surgical & Sports Medicine net revenue was primarily due to a decrease in certain customer buying patterns.

Cost of goods sold and gross profit

 

		Three Months Ended March 31,								Change
		2024				2023				$				%
		(in thousands, except for percentages)
Cost of goods sold		$	28,696			$	26,607			$	2,089				8	%
Gross profit		$	81,280			$	81,035			$	245				0	%

Cost of goods sold increased by $2.1 million, or 8%, to $28.7 million in the three months ended March 31, 2024, from $26.6 million in the three months ended March 31, 2023. The increase in cost of goods sold in the three months ended March 31, 2024 was primarily due to an increase in sales volume as well as a shift in product mix.

Gross profit increased by $0.2 million to $81.3 million in the three months ended March 31, 2024 from $81.0 million in the three months ended March 31, 2023. Gross profit remained consistent from the three months ended March 31, 2023 to the three months ended March 31, 2024, but decreased as a percentage of revenue, due to a shift in product mix.

Research and Development Expenses

 

		Three Months Ended March 31,								Change
		2024				2023				$				%
		(in thousands, except for percentages)
Research and development		$	12,810			$	11,202			$	1,608				14	%

Research and development expenses increased by $1.6 million, or 14%, to $12.8 million in the three months ended March 31, 2024 from $11.2 million in the three months ended March 31, 2023. The increase in research and development expenses was primarily due to expenses associated with clinical research and trials, primarily related to ReNu, and support of Biologics License Application (BLA) efforts.

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Selling, General and Administrative Expenses

 

		Three Months Ended March 31,								Change
		2024				2023				$				%
		(in thousands, except for percentages)
Selling, general and administrative		$	72,322			$	73,834			$	(1,512	)			(2	%)

Selling, general and administrative expenses decreased by $1.5 million, or 2%, to $72.3 million in the three months ended March 31, 2024 from $73.8 million in the three months ended March 31, 2023. The decrease in selling, general and administrative expenses was primarily due to a $5.2 million reduction in headcount-related expenses, including $1.9 million in severance expense incurred in the three months ended March 31, 2023 and not repeated in the three months ended March 31, 2024; partially offset by $3.5 million in royalty expense.

Other Expense, net

Other expense, net, decreased by $0.1 million, or 17%, to $0.5 million in the three months ended March 31, 2024 from $0.6 million in the three months ended March 31, 2023. Other expense, net is comprised primarily of interest expense, and the decrease is due to the decreased debt balance under the 2021 Credit Agreement.

Income Tax Benefit

 

		Three Months Ended March 31,								Change
		2024				2023				$				%
		(in thousands, except for percentages)
Income tax benefit		$	2,243			$	1,658			$	585				35	%

Income tax benefit increased by $0.6 million, or 35%, to $2.2 million in the three months ended March 31, 2024 from $1.7 million in the three months ended March 31, 2023. The change in the income tax benefit is primarily attributable to a higher estimated effective tax rate for the twelve months ended December 31, 2024 resulting from a reduction in expected pre-tax income in 2024 compared to 2023.

Liquidity and Capital Resources

As of March 31, 2024, we had working capital of $144.4 million, which included $88.6 million in cash and cash equivalents. We also have $125.0 million available for future revolving borrowings under our Revolving Facility (see Note 10, Long-Term Debt Obligations to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). We expect that our cash on hand and other components of working capital as of March 31, 2024, 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.

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.

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Cash Flows

The following table summarizes our cash flows for each of the periods presented:

 

		Three Months Ended March 31,
		2024				2023
		(in thousands)
Net cash used in operating activities		$	(10,162	)		$	(5,077	)
Net cash used in investing activities			(2,222	)			(7,562	)
Net cash used in financing activities			(2,608	)			(1,236	)
Net change in cash, cash equivalents, and restricted cash		$	(14,992	)		$	(13,875	)

 

Operating Activities

During the three months ended March 31, 2024, net cash used in operating activities was $10.2 million, resulting from our net loss of $2.1 million and non-cash charges of $12.6 million, partially offset by net cash used in connection with changes in our operating assets and liabilities of $20.7 million. Net cash used in changes in our operating assets and liabilities included an increase in inventory of $4.7 million, an increase in prepaid expenses and other current assets of $4.3 million, an increase in accounts receivable of $15.1 million, a decrease in operating lease liabilities of $2.2 million, and a decrease in accounts payable of $4.4 million, partially offset by an increase in accrued expenses and other liabilities of $12.3 million.

During the three months ended March 31, 2023, net cash used in operating activities was $5.1 million, resulting from our net loss of $3.0 million and net cash used in connection with changes in our operating assets and liabilities of $11.8 million, partially offset by non-cash charges of $9.7 million. Net cash used in changes in our operating assets and liabilities included an increase in accounts receivable of $3.4 million, an increase in inventory of $2.2 million, an increase in prepaid expenses and other current assets of $4.8 million, a decrease in operating leases liabilities of $2.1 million, and a decrease in accounts payable of $1.4 million, partially offset by an increase in accrued expenses and other liabilities of $2.1 million.

 

Investing Activities

During the three months ended March 31, 2024, we used $2.2 million of cash in investing activities consisting exclusively of capital expenditures.

During the three months ended March 31, 2023, we used $7.6 million of cash in investing activities consisting exclusively of capital expenditures.

 

Financing Activities

During the three months ended March 31, 2024, net cash used in financing activities was $2.6 million. This consisted of the payment of term loan of $1.4 million, principal payments on finance lease obligations of $0.2 million, and net cash payments associated with our stock awards activities of $1.1 million.

During the three months ended March 31, 2023, net cash used in financing activities was $1.2 million. This consisted of the payment of term loan and 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. On March 31, 2024, the applicable interest rate for outstanding borrowings is 7.64%.

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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 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 March 31, 2024, we were in compliance with the covenants under the 2021 Credit Agreement. We had outstanding borrowings of $65.2 million under our Term Loan Facility and no borrowings outstanding under our Revolving Facility with $125.0 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 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 and comprehensive loss, liquidity and financial condition. See also our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, 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 three months ended March 31, 2024, 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, 2023.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2024. 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 that evaluation, our management, including our principal executive officer and principal financial officer, concluded that, as of March 31, 2024, our disclosure controls and procedures were ineffective because, as disclosed in the Company’s Annual Report for the fiscal year ended December 31, 2023, we did not design and maintain effective controls 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.

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 (COSO framework). Although it has made progress in remediating the remaining material weakness, as a result of its assessment, management concluded that as of March 31, 2024, our internal control over financial reporting was ineffective based on the criteria of the COSO framework, and the continued existence of the material weakness described above.

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:

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 weakness. However, we believe the above actions will be effective in remediating the remaining material weakness 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 weakness 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 March 31, 2024 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 of the remaining material weakness. 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

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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). The Court appointed Donald Martin as lead plaintiff. Mr. Martin filed an amended complaint on October 24, 2022 that brought claims on behalf of a purported class of all purchasers of our securities from August 10, 2020 through August 9, 2022 and alleged 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 alleged violations of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and sought unquantified damages as well as attorneys’ fees, expert fees and other costs. On March 13, 2023, we filed our motion to dismiss the litigation for failure to state a claim upon which relief can be granted, and briefing was completed on May 30, 2023. On March 29, 2024, the Court granted, with prejudice, the Company’s motion to dismiss all claims asserted and the plaintiffs did not appeal the Court’s determination.

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, 2023, 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 March 31, 2024. You should consider carefully the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2023, 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, 2023, 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.

Seven MACs recently published new proposed LCDs, for skin substitute grafts/CTPs for the treatment of DFUs and VLUs in the Medicare population that list certain of our products as non-covered. If the final LCDs include this non-coverage determination, it could, at least in the near term, have a material adverse effect on utilization of these products, our business and our revenue.

On April 25, 2024, seven MACs (CGS, WPS, NGS, Palmetto, Novitas, First Coast Services, and Noridian) published new proposed LCDs for skin substitute grafts/CTPs for the treatment of DFUs and VLUs in the Medicare population. While our Affinity, Apligraf and Dermagraft products remain covered, the LCDs classify our PuraPly, Novachor, TransCyte, NuShield and CYGNUS products as “non-covered.” If the final LCDs do not include coverage for these products, it would present a significant amount of uncertainty, at least in the near term, regarding future revenue for these products. Although we are engaging with the MACs to provide clinical evidence for these non-covered products demonstrating their efficacy for the treatment of DFUs and VLUs, there is no guarantee that the MACs will agree to cover these products in the final LCDs. If these products are not covered in the final LCDs, it could, at least in the near term, materially and adversely impact utilization of these products, our business and our revenue.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

Not Applicable.

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Item 6. Exhibits

 

Exhibit number		Description
3.1		Certificate of Incorporation of Organogenesis Holdings Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-3/A (File No. 333-233621) filed with the SEC on September 16, 2019)
3.2		Certificate of Amendment of Certificate of Incorporation of Organogenesis Holdings Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-37906) filed with the SEC on June 27, 2022)
3.3		Bylaws of Organogenesis Holdings Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-3/A (File No. 333-233621) filed with the SEC on September 16, 2019)
31.1†		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2†		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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
101.INS†		Inline XBRL Instance Document XBRL
101.SCH†		Inline XBRL Taxonomy Extension Schema Document
101.CAL†		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF†		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE†		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104†		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: May 9, 2024		Organogenesis Holdings Inc.
		(Registrant)
		/s/ David Francisco
		David Francisco
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

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