Organogenesis (ORGO) - 2020 Q4 - Annual Report

PART I Business Organogenesis develops, manufactures, and commercializes regenerative medicine products for Advanced Wound Care and Surgical & Sports Medicine, achieving $338.3 million in 2020 revenue - Organogenesis operates in two primary markets: Advanced Wound Care and Surgical & Sports Medicine, offering a portfolio of regenerative medicine products[17] Fiscal Year 2020 Financial Highlights | Metric | Value (in millions USD) | | :--- | :--- | | Revenue | $338.3 | | Operating Expenses | $223.6 | - The company's strategy includes driving deeper penetration in the Advanced Wound Care market, expanding into the Surgical & Sports Medicine market, launching new pipeline products, and expanding its sales force[26] Industry Overview The company operates in the $14.9 billion Advanced Wound Care and Surgical & Sports Medicine markets, driven by an aging population and comorbidities - The total addressable market for the company's products in Advanced Wound Care and Surgical & Sports Medicine was estimated at $14.9 billion in 2018[29] - The skin substitute market, a key segment for Organogenesis, is significantly underpenetrated, with less than 5% of the 3.3 million difficult-to-heal wounds in the U.S. being treated with skin substitutes annually[44] - The immediate addressable Surgical & Sports Medicine market for the company's products is estimated at approximately $6.1 billion, with an expected CAGR of 8%, driven by an increase in spinal fusions, bone reconstruction, and musculoskeletal injuries[49] Our Products The company offers a comprehensive product suite for Advanced Wound Care and Surgical & Sports Medicine, including bioengineered therapies and amniotic tissues Advanced Wound Care Product Portfolio | Product | Description | Regulatory Pathway | Clinical Application | | :--- | :--- | :--- | :--- | | Affinity | Fresh amniotic membrane wound covering | 361 HCT/P | Chronic and acute wounds | | Apligraf | Bioengineered living cell therapy | PMA | VLUs; DFUs | | Dermagraft | Bioengineered product with living human fibroblasts | PMA | DFUs | | NuShield | Dehydrated placental tissue wound covering | 361 HCT/P | Chronic and acute wounds | | PuraPly AM | Antimicrobial barrier with purified native collagen matrix | 510(k) | Chronic and acute wounds | - The company plans to suspend manufacturing of Dermagraft in Q4 2021 and sales in Q1 2022 to consolidate manufacturing in Massachusetts, expecting substantial long-term cost savings without a material impact on net revenue[66] Surgical & Sports Medicine Product Portfolio | Product | Description | Regulatory Pathway | Clinical Application | | :--- | :--- | :--- | :--- | | Affinity | Fresh amniotic membrane barrier | 361 HCT/P | Barrier membrane for soft tissue repair | | NuCel | Cellular suspension from amniotic fluid/tissue | 361 HCT/P* | Orthopedic surgical procedures (e.g., bony fusion) | | NuShield | Dehydrated placental tissue barrier | 361 HCT/P | Barrier membrane for soft tissue repair | | PuraPly AM | Purified native collagen matrix with PHMB | 510(k) | Antimicrobial barrier for open surgical wounds | | ReNu | Cryopreserved suspension of amniotic fluid cells/tissue | 361 HCT/P* | Chronic inflammatory conditions (e.g., knee osteoarthritis) | *May require BLA approval per recent FDA guidance Clinical Studies and Product Pipeline The company conducts clinical studies to validate product efficacy and value, with a pipeline including PuraForce, PuraPly XT, Novachor, and TransCyte - The company has six ongoing studies for its Advanced Wound Care and Surgical & Sports Medicine products to generate clinical data, which is expected to enhance sales and reimbursement dynamics[76] - A pivotal Phase 3 study for ReNu is underway to evaluate its efficacy in treating Knee Osteoarthritis, with completion estimated for Q5 2023[79] - The product pipeline includes the planned re-introduction of TransCyte, a PMA-approved product for deep second- and third-degree burns, with a full commercial launch targeted for late 2023[114] Commercial Infrastructure, Manufacturing, and Reimbursement The company leverages a direct sales force and independent agencies, manages in-house and outsourced manufacturing, and relies on complex third-party reimbursement - As of December 31, 2020, the company's commercial team consisted of approximately 300 direct sales representatives and 175 independent agencies[116] - Production of the Affinity product was suspended in Q1 2019 due to supplier issues and resumed commercial-scale production in Q2 2020 after identifying an alternate supplier[124] - PuraPly AM and PuraPly's Medicare pass-through payment status expired on September 30, 2020, with payment now bundled into the application procedure rate as of October 1, 2020[131][136] Government Regulation The company's products are subject to extensive FDA regulation across various pathways, including 510(k), PMA, BLA, and HCT/P, alongside anti-kickback and false claims laws - The company's products are regulated through multiple FDA pathways: 510(k) clearance (PuraPly), PMA approval (Apligraf, Dermagraft), and potentially BLA approval[153][154] - Certain products like Affinity and NuShield are regulated as Section 361 HCT/Ps, exempting them from premarket review, though the FDA could challenge this classification[161] - In January 2021, ReNu received the Regenerative Medicine Advanced Therapy (RMAT) designation from the FDA for the management of symptoms associated with knee osteoarthritis[171] - The company is subject to federal and state fraud and abuse laws, including the Anti-Kickback Statute, with a previous Dermagraft owner settling False Claims Act allegations for $350 million related to kickbacks[179] Risk Factors The company faces significant risks from fluctuating results, internal control weaknesses, intense competition, regulatory reclassification of products, supply chain issues, and substantial indebtedness - The company has identified a material weakness in its internal control over financial reporting due to a lack of formal accounting policies, procedures, and controls, persisting as of December 31, 2020[192][196][199] - A key risk is the potential for the FDA to determine that HCT/P products like Affinity, NuCel, and ReNu do not qualify for regulation solely under Section 361 of the PHSA, which would require costly BLA or PMA approvals and could force a suspension of sales[192][260] - The company is dependent on a limited group of suppliers, as evidenced by the over one-year suspension of Affinity production due to sole supplier issues, impacting revenue[209][212] - The company is a "controlled company" under Nasdaq rules, exempting it from certain corporate governance requirements due to majority voting power held by "Controlling Entities"[192][331] Properties The company operates from leased facilities, including its Canton, MA headquarters and other sites in Massachusetts, California, and Alabama, with some leases expiring soon - The main corporate headquarters in Canton, MA, is leased from entities controlled by individuals who also control a majority of the company's voting stock[373] - The company is consolidating its La Jolla, CA operations, with the current lease expiring at the end of 2021, and has entered into a new 10-year lease for a smaller facility in San Diego, CA[375] Legal Proceedings The company is not currently involved in any material legal proceedings, with no expected material adverse effects from ordinary course litigation - The company reports no material legal proceedings as of the filing date[377] PART II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on Nasdaq under ORGO, with no cash dividends paid or planned due to credit agreement restrictions - The company's Class A Common Stock trades on the NASDAQ Capital Market under the ticker ORGO[380] - The company has never paid cash dividends and does not anticipate doing so in the foreseeable future, partly due to restrictions in its 2019 Credit Agreement[381] Management's Discussion and Analysis of Financial Condition and Results of Operations The company achieved $338.3 million in 2020 net revenue, a 30% increase, turning a $40.5 million net loss into a $17.9 million net income Financial Performance (2018-2020) | Metric (in millions USD) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Revenue | $338.3 | $261.0 | $193.4 | | Gross Profit | $251.0 | $185.0 | $124.6 | | Gross Margin | 74% | 71% | 64% | | Income (Loss) from Operations | $27.4 | $(29.5) | $(51.6) | | Net Income (Loss) | $17.9 | $(40.5) | $(64.8) | | Adjusted EBITDA | $36.9 | $(18.2) | $(36.2) | - The 30% year-over-year revenue growth in 2020 was driven by a 33% increase in the Advanced Wound Care segment and a 9% increase in the Surgical & Sports Medicine segment[420][421] - The company's PuraPly products had Medicare pass-through reimbursement status from October 1, 2018, through September 30, 2020, with its expiration potentially impacting future revenue[403] Liquidity and Capital Resources As of December 31, 2020, the company held $84.4 million in cash, with $84.8 million in total debt, and generated $6.8 million in operating cash flow Cash and Debt Position (Year-End) | (in thousands USD) | 2020 | 2019 | | :--- | :--- | :--- | | Cash | $84,394 | $60,174 | | Total Debt | $84,771 | $100,606 | Cash Flow Summary (Year Ended Dec 31) | (in thousands USD) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $6,801 | $(33,528) | | Net cash used in investing activities | $(24,833) | $(6,234) | | Net cash from financing activities | $42,468 | $78,727 | - The company's 2019 Credit Agreement requires compliance with financial covenants, including minimum revenue thresholds, with which the company was in compliance as of December 31, 2020[459][460] Critical Accounting Policies Critical accounting policies involve significant judgments in revenue recognition, asset valuation, goodwill impairment, income taxes, and contingent earnout liabilities - Revenue is recognized when a customer obtains control of the product, net of estimated reserves for returns, discounts, and GPO rebates based on historical experience[469] - Goodwill is tested for impairment annually at the consolidated level, with no impairments recorded in 2020, 2019, or 2018[473][477] - Due to a three-year cumulative loss position through December 31, 2020, the company maintains a full valuation allowance against its net deferred tax assets[481] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations on its $70.0 million variable-rate debt and minimal foreign currency exchange variability - The company is exposed to interest rate risk from $70.0 million in variable-rate borrowings under its 2019 Credit Agreement as of December 31, 2020[490] - Foreign currency risk is deemed not material as most business is conducted in the U.S. and the Swiss subsidiary uses the U.S. dollar as its functional currency[491] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018-2020, including balance sheets, statements of operations, equity, and cash flows Note 3. Acquisition On September 17, 2020, the company acquired CPN Biosciences for $19.0 million, recognizing $13.6 million in intangible assets and $3.2 million in goodwill CPN Biosciences Acquisition Consideration (Sept 17, 2020) | Consideration Component | Value (in thousands USD) | | :--- | :--- | | Cash | $6,427 | | Class A Common Stock | $8,815 | | Contingent Consideration (Earnout) | $3,782 | | Total Consideration | $19,024 | - The acquisition resulted in $3.2 million of goodwill and $13.6 million of intangible assets, primarily customer relationships ($10.7 million) and developed technologies ($2.1 million)[612] Note 11. Restructuring In October 2020, the company initiated a restructuring to consolidate manufacturing, expecting a $5.5 million charge by year-end 2021 - The company began a restructuring plan in Q4 2020 to consolidate California manufacturing into Massachusetts, expecting to complete it by year-end 2021[630] - The total expected restructuring charge is approximately $5.5 million, with $4.5 million for employee retention benefits and $1.0 million for facility closures[630] Note 13. Long-Term Debt Obligations The company's primary debt is the 2019 Credit Agreement, with $70.0 million outstanding as of December 31, 2020, including a term loan and revolving facility Outstanding Debt as of Dec 31, 2020 | Facility | Outstanding Principal (in thousands USD) | | :--- | :--- | | Line of credit (Revolving Facility) | $10,000 | | Term loan | $60,000 | | Total | $70,000 | - The Term Loan Facility requires interest-only payments through February 2021, followed by 36 equal monthly principal and interest installments, maturing on March 1, 2024[638] Note 14. Stockholders' Equity As of December 31, 2020, the company had 127.7 million Class A common shares outstanding, following a $64.7 million public offering in November 2020 - In November 2020, the company raised gross proceeds of $64.7 million through a public offering of 19.9 million shares of Class A common stock[661][663] - During Q3 2019, the company exchanged all outstanding public and private placement warrants for approximately 3.3 million shares of Class A common stock, eliminating all warrants[656][658] Controls and Procedures Management concluded that disclosure controls were ineffective as of December 31, 2020, due to a material weakness in internal control over financial reporting - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020[494] - A material weakness in internal control over financial reporting persists, related to the lack of formal accounting policies, procedures, and controls, including proper segregation of duties[497] - Remediation efforts include implementing a new company-wide ERP system, anticipated to go live in the first half of 2021[503] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Related Transactions Information for Items 10-14, covering governance, compensation, and related transactions, is incorporated by reference from the forthcoming Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's forthcoming Proxy Statement[505][506][507][508][509] PART IV Exhibits and Financial Statement Schedules This section provides an index of all exhibits filed with the Form 10-K, including financial statements, material agreements, and corporate governance documents - This section provides an index of all exhibits filed with the Form 10-K, including material agreements and corporate governance documents[512][513]