Organogenesis (ORGO) - 2021 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to inherent risks and uncertainties, based on management's current expectations - This report contains forward-looking statements related to future operations, business strategies, financing plans, growth opportunities, market opportunities, and competitive effects, which are subject to inherent risks and uncertainties[12] - Factors that could cause actual results to differ materially are listed under 'Risk Factors' in this Form 10-Q and the Annual Report on Form 10-K, with no obligation to update these statements unless required by law[12] PART I. FINANCIAL INFORMATION This part presents the company's unaudited consolidated financial statements and management's analysis of financial condition Item 1. Unaudited Consolidated Financial Statements This section presents Organogenesis Holdings Inc.'s unaudited consolidated financial statements and detailed notes for periods ended June 30, 2021 Consolidated Balance Sheets This section provides a snapshot of the company's financial position at specific dates, detailing assets, liabilities, and equity Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Assets | | | | Total current assets | $201,763 | $174,344 | | Property and equipment, net | $69,739 | $60,068 | | Intangible assets, net | $28,136 | $30,622 | | Goodwill | $28,772 | $28,772 | | Total assets | $355,564 | $294,494 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $84,545 | $68,217 | | Total liabilities | $176,642 | $148,410 | | Total stockholders' equity | $178,922 | $146,084 | | Total liabilities and stockholders' equity | $355,564 | $294,494 | Consolidated Statements of Operations This section presents the company's financial performance over specific periods, including revenue, expenses, and net income or loss Consolidated Statements of Operations Highlights (Amounts in thousands, except per share data) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenue | $123,196 | $68,960 | $225,748 | $130,692 | | Gross profit | $93,256 | $48,918 | $170,313 | $91,857 | | Total operating expenses | $69,669 | $51,170 | $134,110 | $109,193 | | Income (loss) from operations | $23,587 | $(2,252) | $36,203 | $(17,336) | | Net income (loss) | $20,687 | $(5,166) | $30,630 | $(21,479) | | Basic EPS | $0.16 | $(0.05) | $0.24 | $(0.21) | | Diluted EPS | $0.15 | $(0.05) | $0.23 | $(0.21) | Consolidated Statements of Stockholders' Equity This section details changes in the company's equity over time, including net income, stock option exercises, and reclassifications Stockholders' Equity Changes (Amounts in thousands) | Item | Three and Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------------- | | Balance as of December 31, 2020 (as adjusted) | $146,084 | | Exercise of stock options | $1,205 | | Vesting of RSUs, net of shares surrendered to pay taxes | $(737) | | Stock-based compensation expense | $1,740 | | Net income | $30,630 | | Balance as of June 30, 2021 | $178,922 | - The company reclassified $2,299 thousand from additional paid-in capital to accumulated deficit as of December 31, 2020, due to a revision in accounting for Private Warrants, classifying them as liabilities[19][40] Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows Highlights (Amounts in thousands) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $16,180 | $(26,618) | | Net cash used in investing activities | $(9,290) | $(6,118) | | Net cash used in (provided by) financing activities | $(1,389) | $13,120 | | Change in cash and restricted cash | $5,501 | $(19,616) | | Cash and restricted cash, end of period | $90,307 | $40,754 | Notes to Consolidated Financial Statements This section provides detailed explanations and additional information supporting the consolidated financial statements 1. Nature of the Business and Basis of Presentation Organogenesis, a regenerative medicine company, maintains sufficient liquidity, with the 2018 Avista Merger accounted for as a reverse merger, and no material COVID-19 impact through Q2 2021 - Organogenesis Holdings Inc. is a leading regenerative medicine company focused on Advanced Wound Care and Surgical & Sports Medicine markets, serving hospitals, wound care centers, government facilities, ASCs, and physician offices[25] - The COVID-19 pandemic has not materially adversely affected the company's financial results or business operations through Q2 2021, but its future impact remains uncertain[26] - The 2018 Avista Merger was accounted for as a reverse merger, with Organogenesis Inc. treated as the acquired company for accounting purposes, resulting in its operations prior to the merger being reflected[29] Liquidity and Financial Condition (Amounts in thousands) | Metric | June 30, 2021 | | :-------------------------------- | :------------ | | Accumulated deficit | $(120,129) | | Working capital | $117,218 | | Net income (six months ended) | $30,630 | | Cash from operations (six months ended) | $16,180 | | Cash | $89,790 | | Available revolving borrowings | Up to $30,000 | 2. Summary of Significant Accounting Policies Interim financial statements follow GAAP and SEC rules, with no material accounting policy changes except early ASC 842 adoption and Private Warrants reclassification - The company early adopted ASC 842 (Leases) on January 1, 2021, recognizing an operating lease liability of $15,935 thousand and a right-of-use asset of $13,525 thousand, without recasting prior periods[41] - Following SEC guidance, the company reevaluated and reclassified $2,299 thousand from additional paid-in capital to accumulated deficit as of December 31, 2020, to account for Private Warrants as liabilities at fair value[39][40] - The company is assessing the impact of ASU 2016-13 (Credit Losses) and related updates, which will be adopted on January 1, 2023[42] 3. Acquisition On September 17, 2020, Organogenesis acquired CPN Biosciences, LLC, for an aggregate consideration of $19.0 million, including cash, common stock, and a contingent Earnout liability. The Earnout liability, initially $3,782 thousand, decreased to $927 thousand by June 30, 2021, due to an updated market assessment for CPN's legacy products - The company acquired CPN Biosciences, LLC on September 17, 2020, for $19.0 million, comprising cash, common stock, and a contingent Earnout liability[44][131] Earnout Liability Fair Value (Amounts in thousands) | Date | Earnout Liability | | :---------------- | :---------------- | | Acquisition Date | $3,782 | | December 31, 2020 | $3,985 | | June 30, 2021 | $927 | - The Earnout liability decreased significantly due to an updated assessment of the near-term market for CPN's product portfolio[50] 4. Product and Geographic Sales Organogenesis generates revenue from Advanced Wound Care and Surgical & Sports Medicine products, recognizing revenue when customers gain control of products, net of returns, discounts, and GPO rebates. For the three and six months ended June 30, 2021, both product categories showed significant revenue growth compared to the prior year, with minimal revenue from outside the United States - Revenue is recognized when customers obtain control of products, net of reserves for returns, discounts, and GPO rebates[46] Revenue by Product Category (Amounts in thousands) | Product Category | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Advanced Wound Care | $111,436 | $59,731 | $202,144 | $111,019 | | Surgical & Sports Medicine | $11,760 | $9,229 | $23,604 | $19,673 | | Total net revenue | $123,196 | $68,960 | $225,748 | $130,692 | - Net revenue generated outside the United States represented less than 1% of total net revenue for all periods presented[47] 5. Fair Value of Financial Assets and Liabilities The company's financial liabilities measured at fair value on a recurring basis primarily consist of the Earnout liability from the CPN acquisition, classified as Level 3. The fair value of this liability decreased from $3,985 thousand at December 31, 2020, to $927 thousand at June 30, 2021, reflecting an updated market assessment Fair Value Measurements of Liabilities (Amounts in thousands) | Liability | June 30, 2021 (Level 3) | December 31, 2020 (Level 3) | | :---------------- | :---------------------- | :-------------------------- | | Earnout liability | $927 | $3,985 | | Total | $927 | $3,985 | - The Earnout liability is a Level 3 measurement, estimated using a Monte Carlo simulation model based on forecasted revenues and volatilities[50] - The change in fair value of the Earnout liability for the six months ended June 30, 2021, was a decrease of $3,058 thousand[50] 6. Accounts Receivable, Net Accounts receivable, net, increased to $76,767 thousand at June 30, 2021, from $56,804 thousand at December 31, 2020. The allowance for sales returns and doubtful accounts also increased, with additions of $2,158 thousand for the six months ended June 30, 2021 Accounts Receivable, Net (Amounts in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Accounts receivable | $83,880 | $61,792 | | Less — allowance for sales returns and doubtful accounts | $(7,113) | $(4,988) | | Accounts receivable, net | $76,767 | $56,804 | Allowance for Sales Returns and Doubtful Accounts (Amounts in thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Balance at beginning of period | $4,988 | $3,049 | | Additions | $2,158 | $970 | | Write-offs | $(33) | $(91) | | Balance at end of period | $7,113 | $3,928 | 7. Inventories Inventories, net of reserves, remained relatively stable at $28,106 thousand at June 30, 2021, compared to $27,799 thousand at December 31, 2020. The company recorded $4,678 thousand in charges for inventory excess and obsolescence for the six months ended June 30, 2021 Inventories, Net (Amounts in thousands) | Category | June 30, 2021 | December 31, 2020 | | :---------------- | :------------ | :---------------- | | Raw materials | $10,075 | $10,144 | | Work in process | $1,305 | $1,732 | | Finished goods | $16,419 | $16,230 | | Total | $27,799 | $28,106 | Inventory Excess and Obsolescence Charges (Amounts in thousands) | Period | Charge | | :----------------------------- | :------- | | Three months ended June 30, 2021 | $2,388 | | Six months ended June 30, 2021 | $4,678 | 8. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets increased to $6,583 thousand at June 30, 2021, from $4,935 thousand at December 31, 2020, driven by increases in conferences and marketing expenses, deposits, and other prepaid items Prepaid Expenses and Other Current Assets (Amounts in thousands) | Category | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Subscriptions | $2,211 | $2,013 | | Conferences and marketing expenses | $921 | $63 | | Deposits | $1,796 | $1,438 | | Reimbursement of offering expenses | $— | $1,009 | | Other | $1,655 | $412 | | Total | $6,583 | $4,935 | 9. Property and Equipment, Net Property and equipment, net, increased to $69,739 thousand at June 30, 2021, from $60,068 thousand at December 31, 2020, primarily due to ongoing construction in progress and leasehold improvements. Depreciation expense for the six months ended June 30, 2021, was $2,073 thousand Property and Equipment, Net (Amounts in thousands) | Category | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Leasehold improvements | $48,503 | $39,574 | | Furniture, computers and equipment | $50,221 | $48,236 | | Accumulated depreciation and amortization | $(71,593) | $(69,521) | | Construction in progress | $42,608 | $41,779 | | Total | $69,739 | $60,068 | Depreciation Expense (Amounts in thousands) | Period | Depreciation Expense | | :----------------------------- | :------------------- | | Three months ended June 30, 2021 | $1,063 | | Six months ended June 30, 2021 | $2,073 | 10. Goodwill and Intangible Assets Goodwill remained constant at $28,772 thousand. Identifiable intangible assets, net, decreased to $28,136 thousand at June 30, 2021, from $30,622 thousand at December 31, 2020, primarily due to amortization. Amortization expense for the six months ended June 30, 2021, was $2,486 thousand - Goodwill remained unchanged at $28,772 thousand as of June 30, 2021, and December 31, 2020[57] Identifiable Intangible Assets, Net (Amounts in thousands) | Category | June 30, 2021 Net Book Value | December 31, 2020 Net Book Value | | :-------------------- | :--------------------------- | :--------------------------- | | Developed technology | $16,600 | $18,290 | | Trade names and trademarks | $1,024 | $1,174 | | Customer relationships | $9,844 | $10,378 | | Non-compete agreements | $668 | $780 | | Total | $28,136 | $30,622 | Amortization of Intangible Assets (Amounts in thousands) | Period | Amortization Expense | | :----------------------------- | :------------------- | | Three months ended June 30, 2021 | $1,243 | | Six months ended June 30, 2021 | $2,486 | 11. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities increased to $26,618 thousand at June 30, 2021, from $23,973 thousand at December 31, 2020, primarily due to higher personnel costs Accrued Expenses and Other Current Liabilities (Amounts in thousands) | Category | June 30, 2021 | December 31, 2020 | | :-------------------- | :------------ | :---------------- | | Personnel costs | $22,024 | $18,943 | | Royalties | $2,718 | $2,971 | | Other | $1,876 | $2,059 | | Total | $26,618 | $23,973 | 12. Restructuring In October 2020, the company initiated a restructuring plan to consolidate manufacturing operations in Massachusetts, expecting a total charge of approximately $7.0 million. For the six months ended June 30, 2021, a pre-tax charge of $1,866 thousand was incurred, primarily for employee retention benefits. The restructuring liability stood at $2,410 thousand as of June 30, 2021 - The company committed to a restructuring plan in October 2020 to consolidate manufacturing operations, with an estimated total charge of $7.0 million ($4.5 million for employee retention, $2.5 million for facility closures)[61] Restructuring Charges and Liability (Amounts in thousands) | Metric | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :----------------------------- | | Pre-tax charge | $939 | $1,866 | | Restructuring liability (June 30, 2021) | | $2,410 | Restructuring Liability Roll-Forward (Amounts in thousands) | Category | Employee | Facility | | :-------------------------- | :------- | :------- | | Balance as of December 31, 2020 | $618 | $— | | Expenses (six months) | $1,763 | $103 | | Payments (six months) | $— | $(74) | | Balance as of June 30, 2021 | $2,381 | $29 | 13. Long-Term Debt Obligations The company's long-term debt includes a $10,000 thousand line of credit and a $60,000 thousand term loan under the 2019 Credit Agreement. As of June 30, 2021, the term loan, net of current portion and debt costs, was $37,290 thousand. The company was in compliance with financial covenants and had $30,000 thousand available under the revolving facility. A new credit agreement was entered into on August 6, 2021, terminating the 2019 agreement Long-Term Debt Obligations (Amounts in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Line of credit | $10,000 | $10,000 | | Term loan (gross) | $60,000 | $60,000 | | Term loan, net of debt discount, debt issuance cost and current maturities | $37,290 | $43,044 | - The 2019 Credit Agreement included a $60,000 thousand Term Loan Facility and a $40,000 thousand Revolving Credit Facility[65][66] - As of June 30, 2021, the company had $60,000 thousand outstanding on the Term Loan Facility and $10,000 thousand on the Revolving Facility, with up to $30,000 thousand available for future revolving borrowings[71] - The company was in compliance with all financial covenants under the 2019 Credit Agreement as of June 30, 2021[183] - On August 6, 2021, the company terminated the 2019 Credit Agreement and entered into a new credit agreement with a term loan facility not to exceed $75,000 thousand and a revolving credit facility not to exceed $125,000 thousand, both maturing on August 6, 2026[120][183] 14. Stockholders' Equity As of June 30, 2021, Organogenesis had 129,011,789 shares of Class A common stock issued and 128,283,241 shares outstanding. The company reserved 13,499,895 shares for future issuance, including for outstanding options and restricted stock units Common Stock and Shares Reserved for Issuance | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Authorized Class A common stock | 400,000,000 | 400,000,000 | | Issued Class A common stock | 129,011,789 | 128,460,381 | | Outstanding Class A common stock | 128,283,241 | 127,731,833 | | Shares reserved for outstanding options | 7,070,008 | 6,425,040 | | Shares reserved for outstanding restricted stock units | 787,023 | 806,048 | | Shares reserved for future grants | 5,642,864 | 6,832,649 | | Total shares reserved for future issuance | 13,499,895 | 14,063,737 | 15. Stock-Based Compensation The company operates under the 2018 Plan for long-term incentives, with 9,198,996 shares authorized, and the legacy 2003 Plan, under which no new awards are made. Stock-based compensation expense for the six months ended June 30, 2021, was $1,740 thousand. The total unrecognized compensation cost for unvested RSUs and stock options was $3,891 thousand and $4,676 thousand, respectively, as of June 30, 2021 - The 2018 Plan authorizes 9,198,996 shares of Class A common stock for various awards to employees, officers, directors, and consultants[76] - No additional awards can be made under the 2003 Plan since the Avista Merger on December 10, 2018[78] Stock-Based Compensation Expense (Amounts in thousands) | Period | Stock-Based Compensation Expense | | :----------------------------- | :------------------------------- | | Three months ended June 30, 2021 | $1,042 | | Six months ended June 30, 2021 | $1,740 | Restricted Stock Unit (RSU) Activity | Metric | Number of Shares (June 30, 2021) | | :-------------------------------- | :------------------------------- | | Unvested at December 31, 2020 | 806,048 | | Granted | 290,027 | | Vested | (252,743) | | Canceled/Forfeited | (56,309) | | Unvested at June 30, 2021 | 787,023 | | Unrecognized compensation cost | $3,891 (weighted average remaining recognition period: 3.16 years) | Stock Option Activity | Metric | Number of Shares (June 30, 2021) | | :-------------------------------- | :------------------------------- | | Outstanding as of December 31, 2020 | 6,620,318 | | Granted | 1,037,099 | | Exercised | (558,785) | | Canceled / forfeited | (28,624) | | Outstanding as of June 30, 2021 | 7,070,008 | | Options exercisable as of June 30, 2021 | 4,709,080 | | Unrecognized stock compensation expense | $4,676 (weighted average period: 3.27 years) | 16. Net Income (Loss) per Share (EPS) Basic EPS is calculated by dividing net income (loss) by the weighted-average shares outstanding, while diluted EPS includes the dilutive effect of equity awards. For the six months ended June 30, 2021, basic EPS was $0.24 and diluted EPS was $0.23, reflecting net income. In contrast, for the same period in 2020, the company reported a net loss, making all potentially dilutive securities anti-dilutive Net Income (Loss) per Share (EPS) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income (loss) | $20,687 | $(5,166) | $30,630 | $(21,479) | | Weighted average common shares outstanding — basic | 128,235,224 | 104,714,725 | 128,053,654 | 104,600,825 | | Dilutive effect of restricted stock units | 508,015 | — | 517,837 | — | | Dilutive effect of options | 5,245,174 | — | 5,149,700 | — | | Weighted-average common shares outstanding — diluted | 133,988,413 | 104,714,725 | 133,721,191 | 104,600,825 | | Earnings (loss) per share—basic | $0.16 | $(0.05) | $0.24 | $(0.21) | | Earnings (loss) per share—diluted | $0.15 | $(0.05) | $0.23 | $(0.21) | - For periods with a net loss (e.g., three and six months ended June 30, 2020), potentially dilutive securities are excluded from diluted EPS calculation as they are anti-dilutive[90] 17. Leases The company leases real estate, equipment, and vehicles under noncancelable operating and finance leases. Upon adoption of ASC 842 on January 1, 2021, the company recognized operating lease ROU assets of $13,525 thousand and liabilities of $15,935 thousand. Lease costs for the six months ended June 30, 2021, totaled $8,142 thousand. Significant finance lease obligations to related parties, including accrued but unpaid amounts, are subordinated to the 2019 Credit Agreement - The company leases real estate, equipment, and vehicles, with lease terms extending through 2031 for real estate[91][92][93] Lease Cost Components (Amounts in thousands) | Lease Type | Classification | Six Months Ended June 30, 2021 | | :-------------------- | :------------- | :----------------------------- | | Finance lease cost | COGS and SG&A, Interest Expense | $1,264 | | Operating lease cost | COGS, R&D, SG&A | $3,015 | | Short-term lease cost | COGS, R&D, SG&A | $1,414 | | Variable lease cost | COGS, R&D, SG&A | $2,449 | | Total lease cost | | $8,142 | Supplemental Balance Sheet Information Related to Finance Leases (Amounts in thousands) | Metric | June 30, 2021 | | :-------------------------------- | :------------ | | Property and equipment, net | $7,411 | | Current portion of finance lease obligations | $4,134 | | Finance lease long-term obligations | $9,553 | | Total finance lease liabilities | $13,687 | - As of June 30, 2021, the company owed $10,336 thousand in accrued but unpaid lease obligations to affiliates, which are subordinated to the 2019 Credit Agreement and will not be paid until 2024[101] 18. Commitments and Contingencies The company has royalty commitments for licensed products, incurring $2,355 thousand in royalty expense for the six months ended June 30, 2021. Legal proceedings are not expected to have a material adverse effect, with $150 thousand accrued for pending lawsuits. A gain of $1,295 thousand was recorded in 2020 from the settlement of a deferred acquisition consideration dispute related to the NuTech Medical acquisition Royalty Expense (Amounts in thousands) | Period | Royalty Expense | | :----------------------------- | :-------------- | | Three months ended June 30, 2021 | $1,134 | | Six months ended June 30, 2021 | $2,355 | - The company accrued $150 thousand for certain pending lawsuits as of June 30, 2021, and December 31, 2020, and believes the ultimate resolution of legal claims will not materially affect its financial position[111] - A gain of $1,295 thousand was recorded for the six months ended June 30, 2020, due to the settlement of a deferred acquisition consideration dispute and a legacy lawsuit related to the NuTech Medical acquisition[112] 19. Related Party Transactions Related party transactions include finance and operating lease obligations to affiliates. Additionally, a former executive repaid outstanding Employer Loans totaling $434 thousand during the three months ended March 31, 2021, resulting in a $179 thousand recovery of previously reserved receivables - Finance lease obligations and an operating lease with affiliates are considered related party transactions[114] - A former executive repaid $434 thousand in outstanding principal balance of Employer Loans (Liquidity Loans and Option Loans) during Q1 2021[115] - The repayment of related party receivables resulted in a $179 thousand recovery recorded within selling, general and administrative expenses for the six months ended June 30, 2021[115] 20. Taxes The company is primarily subject to U.S. taxation and maintains a full valuation allowance against its U.S. deferred tax assets due to cumulative losses. Income tax expense for the six months ended June 30, 2021, was $687 thousand, mainly related to cash taxes in certain states and Switzerland, where its subsidiary operates profitably - The company maintains a full valuation allowance against its U.S. deferred tax assets due to a history of cumulative losses, indicating it is more likely than not that these assets will not be utilized[117][118] Income Tax Expense (Amounts in thousands) | Period | Income Tax Expense | | :----------------------------- | :----------------- | | Six months ended June 30, 2021 | $687 | | Six months ended June 30, 2020 | $62 | - Income tax expense primarily relates to cash taxes in certain states where net operating losses are exhausted or limited, and foreign taxes in Switzerland[117] 21. Subsequent Events On August 6, 2021, the company entered into a new credit agreement, providing for a term loan facility up to $75,000 thousand and a revolving credit facility up to $125,000 thousand, both maturing on August 6, 2026. Concurrently, the 2019 Credit Agreement was terminated, with all amounts due, including principal, accrued interest, final payment, and prepayment premium, being paid off - On August 6, 2021, the company entered into a new credit agreement, replacing the 2019 Credit Agreement[120] - The new credit agreement includes a term loan facility not exceeding $75,000 thousand and a revolving credit facility not exceeding $125,000 thousand, both maturing on August 6, 2026[120] - All amounts due under the 2019 Credit Agreement, including principal, accrued interest, Final Payment, and Prepayment Premium, were paid off upon its termination[120] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results, covering revenue growth, COVID-19 impact, CPN acquisition, regulatory changes for ReNu/NuCel, and key accounting policies Overview Organogenesis is a leading regenerative medicine company focused on Advanced Wound Care and Surgical & Sports Medicine markets, aiming to improve patient outcomes and lower care costs. The company leverages clinical data and FDA approvals for a competitive advantage and has a robust product pipeline. For the six months ended June 30, 2021, it reported significant net revenue and net income, a turnaround from a net loss in the prior year, but still carries an accumulated deficit - Organogenesis is a leading regenerative medicine company with a comprehensive portfolio of products in Advanced Wound Care and Surgical & Sports Medicine markets, supported by clinical studies and FDA approvals[123][124] - The company's mission is to provide integrated healing solutions that substantially improve medical outcomes and patient lives while lowering overall care costs[123] Key Financial Performance (Six Months Ended June 30, Amounts in millions) | Metric | 2021 | 2020 | | :---------------- | :--- | :--- | | Net revenue | $225.7 | $130.7 | | Net income (loss) | $30.6 | $(21.5) | | Accumulated deficit (as of June 30, 2021) | $(120.1) | | COVID-19 pandemic The COVID-19 pandemic has not materially impacted the company's financial results or operations through Q2 2021, but the future impact remains uncertain. The company continues to monitor the situation, implement safety measures, and evaluate its liquidity and financial performance - The COVID-19 pandemic has not materially adversely affected the company's financial results and business operations through the second quarter ended June 30, 2021[130] - The company is unable to predict the future impact of COVID-19 due to numerous uncertainties and is closely monitoring the evolving situation, implementing measures for employee safety, customer support, and business continuity[130] CPN Acquisition On September 17, 2020, Organogenesis acquired CPN Biosciences, LLC, for an aggregate consideration of $19.0 million, including cash, common stock, and a contingent Earnout. The results of CPN's operations have been included in the consolidated financial statements since the acquisition date, though revenue and expenses from CPN have not been material - The company acquired CPN Biosciences, LLC on September 17, 2020, for $19.0 million, consisting of $6.4 million in cash, $8.8 million in common stock, and a $3.8 million contingent Earnout[131] - Revenue and expenses of CPN since the acquisition date were not material to the consolidated financial statements[131] End of Enforcement Grace Period for ReNu and NuCel The FDA's enforcement grace period for certain HCT/Ps ended on May 31, 2021, leading Organogenesis to cease commercial distribution of its ReNu and NuCel products. The company will focus on clinical development of ReNu for knee osteoarthritis and other applications to support a Biologics License Application, while discontinuing clinical development of NuCel - The FDA's enforcement grace period for certain Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps) ended on May 31, 2021, leading to the regulation of ReNu and NuCel products under Section 351[132] - The company ceased commercial distribution of ReNu and NuCel after May 31, 2021[132] - Organogenesis will focus on clinical development of ReNu for knee osteoarthritis and other tissue regeneration applications to support FDA approval of a Biologics License Application, discontinuing NuCel's clinical development[132] Components of Our Consolidated Results of Operations This section outlines key components influencing consolidated results, including revenue, cost of goods sold, gross profit, operating expenses, other income/expense, and income taxes Revenue Revenue is derived from Advanced Wound Care and Surgical & Sports Medicine products, primarily sold through direct sales representatives and third-party agencies, respectively. Revenue is recognized net of returns, discounts, and GPO rebates. Factors like product mix, pricing, and regulatory actions, including changes in Medicare pass-through status for PuraPly products, significantly affect reported revenue - Net revenue is derived from Advanced Wound Care and Surgical & Sports Medicine products, sold through direct sales representatives and third-party agencies, respectively[134] - Revenue is recorded net of reserves for returns, discounts, and Group Purchasing Organization (GPO) rebates[136] - The pass-through status for PuraPly and PuraPly AM products expired on September 30, 2020, transitioning them to a bundled payment structure; however, the company has not observed a decrease in PuraPly revenue due to recently launched line extensions[138] Cost of goods sold, gross profit and gross profit margin Cost of goods sold includes personnel, testing, quality assurance, raw materials, manufacturing, and facility costs, expected to increase with sales volumes. Gross profit and gross profit margin are influenced by sales mix, pricing, manufacturing efficiency, and material costs, with regulatory actions potentially decreasing them - Cost of goods sold includes personnel, product testing, quality assurance, raw materials, manufacturing, and facility costs, and is expected to increase with sales volumes[139] - Gross profit and gross profit margin are affected by product and geographic sales mix, realized pricing, manufacturing efficiency, and material costs, with regulatory actions and pricing pressures potentially decreasing these margins[140] Selling, general and administrative expenses Selling, general and administrative expenses encompass personnel costs for sales, marketing, and administrative functions, commissions, insurance, professional fees, depreciation, amortization, bad debt, royalties, and information systems costs. These expenses are generally expected to increase due to investments in market development and sales force expansion to support revenue growth - Selling, general and administrative expenses include personnel costs for sales, marketing, and administrative staff, sales commissions, incentive compensation, insurance, professional fees, depreciation, amortization, bad debt, royalties, and information systems costs[141] - These expenses are expected to increase due to investments in market development and geographic expansion of sales forces to drive continued revenue growth[141] Research and development expenses Research and development expenses include personnel costs, manufacturing process improvements, product enhancements, and investments in the product pipeline and clinical trials. These costs are expensed as incurred and are expected to increase with ongoing clinical trials, regulatory approvals, personnel additions, and manufacturing process enhancements - Research and development expenses cover personnel, manufacturing process improvements, product enhancements, product and platform development, and clinical trials[142] - These expenses are expensed as incurred and are expected to increase due to continued clinical trials, efforts to obtain regulatory approvals, and expansion of personnel and manufacturing processes[143] Other expense, net Other expense, net, primarily consists of interest expense on outstanding indebtedness, including amortization of debt discount and issuance costs. It also includes non-recurring items such as the gain on settlement of deferred acquisition consideration, which contributed to a $1.3 million gain in February 2020 - Interest expense, net, includes interest on outstanding indebtedness and amortization of debt discount and issuance costs[144] - A gain of $1.3 million was recognized in February 2020 from the settlement of deferred acquisition consideration related to the NuTech Medical acquisition[145] Income taxes The company uses an asset and liability approach for income taxes, with deferred income taxes reflecting temporary differences. A full valuation allowance is maintained against U.S. deferred tax assets due to cumulative losses, meaning the U.S. provision for income taxes primarily relates to current tax expense not offset by state net operating losses. A foreign provision for income taxes is recorded for its Swiss subsidiary - The company accounts for income taxes using an asset and liability approach, with deferred income taxes reflecting temporary differences[146] - A full valuation allowance is maintained against U.S. deferred tax assets due to cumulative losses, indicating that these assets are not likely to be realized[147] - The U.S. provision for income taxes primarily relates to current tax expense not offset by state net operating losses, and a foreign provision is recorded for the Swiss subsidiary[147] Results of Operations The company experienced significant financial improvement for the three and six months ended June 30, 2021, compared to 2020, with substantial increases in net revenue, gross profit, and a shift from net loss to net income. This growth was driven by expanded sales forces, increased customer adoption, and a favorable product mix. Operating expenses also increased due to headcount, marketing, and R&D investments EBITDA and Adjusted EBITDA Management uses non-GAAP financial measures like EBITDA and Adjusted EBITDA to evaluate operating performance and trends. For the six months ended June 30, 2021, Adjusted EBITDA was $41,146 thousand, a significant improvement from a negative $10,668 thousand in the prior year, after adjusting for items like stock-based compensation, changes in Earnout fair value, and restructuring charges - Management uses non-GAAP financial measures, including EBITDA and Adjusted EBITDA, to evaluate operating performance and trends, believing they provide useful information by excluding certain items[151] EBITDA and Adjusted EBITDA Reconciliation (Amounts in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $20,687 | $(5,166) | $30,630 | $(21,479) | | EBITDA | $25,911 | $(520) | $40,777 | $(12,569) | | Stock-based compensation expense | $1,042 | $469 | $1,740 | $678 | | Change in fair value of Earnout | $(2,762) | $— | $(3,058) | $— | | Restructuring charge | $939 | $— | $1,866 | $— | | Adjusted EBITDA | $25,130 | $274 | $41,146 | $(10,668) | Comparison of the Three and Six Months Ended June 30, 2021 and 2020 The company demonstrated strong financial performance for the three and six months ended June 30, 2021, with significant revenue growth across both Advanced Wound Care and Surgical & Sports Medicine segments. Gross profit margins improved, and while operating expenses increased due to strategic investments, the company transitioned from an operating loss to a substantial operating income Revenue Net revenue increased significantly for both the three and six months ended June 30, 2021, driven by expanded sales forces, increased customer adoption, and growth in the amniotic product portfolio. Advanced Wound Care revenue grew by 87% and 82% for the three and six-month periods, respectively, while Surgical & Sports Medicine revenue increased by 27% and 20%. PuraPly revenue also continued to increase despite the expiration of pass-through status Net Revenue Growth by Product Category (Amounts in thousands) | Product Category | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change ($) | Change (%) | | :----------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Advanced Wound Care | $111,436 | $59,731 | $51,705 | 87% | | Surgical & Sports Medicine | $11,760 | $9,229 | $2,531 | 27% | | Net revenue | $123,196 | $68,960 | $54,236 | 79% | | Product Category | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Change ($) | Change (%) | | :----------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Advanced Wound Care | $202,144 | $111,019 | $91,125 | 82% | | Surgical & Sports Medicine | $23,604 | $19,673 | $3,931 | 20% | | Net revenue | $225,748 | $130,692 | $95,056 | 73% | - The increase in Advanced Wound Care net revenue was primarily due to an expanded sales force, increased sales to existing and new customers, and increased adoption of the amniotic product portfolio[157] - PuraPly revenue continued to increase in the three and six months ended June 30, 2021, despite exiting pass-through status, driven by expanded sales forces, increased customer sales, and adoption of recently launched line extensions[159] Cost of goods sold, gross profit and gross profit margin Cost of goods sold increased by 49% and 43% for the three and six months ended June 30, 2021, respectively, primarily due to higher unit volumes and increased manufacturing headcount. Gross profit saw substantial increases of 91% and 85% for the respective periods, with gross profit margins improving to 76% and 75%, driven by increased sales volume and a shift towards higher gross margin products Cost of Goods Sold, Gross Profit, and Gross Profit Margin (Amounts in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change ($) | Change (%) | | :-------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Cost of goods sold | $29,940 | $20,042 | $9,898 | 49% | | Gross profit | $93,256 | $48,918 | $44,338 | 91% | | Gross profit % | 76% | 71% | | | | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Change ($) | Change (%) | | :-------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Cost of goods sold | $55,435 | $38,835 | $16,600 | 43% | | Gross profit | $170,313 | $91,857 | $78,456 | 85% | | Gross profit % | 75% | 70% | | | - The increase in cost of goods sold was primarily due to increased unit volumes and additional manufacturing and quality control headcount[160] - The increase in gross profit resulted primarily from increased sales volume and a shift in product mix to higher gross margin products[161] Research and Development Expenses Research and development expenses increased by 57% and 34% for the three and six months ended June 30, 2021, respectively. This rise was mainly due to increased headcount for existing products, higher product costs for pipeline products, and increased clinical study and regulatory approval costs Research and Development Expenses (Amounts in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change ($) | Change (%) | | :-------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Research and development | $7,320 | $4,668 | $2,652 | 57% | | R&D as a percentage of net revenue | 6% | 7% | | | | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Change ($) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Research and development | $13,529 | $10,078 | $3,451 | 34% | | R&D as a percentage of net revenue | 6% | 8% | | | - The increase in R&D expenses was primarily due to increased headcount for existing products, higher product costs for pipeline products not yet commercialized, and increased clinical study and regulatory approval costs[163] Selling, General and Administrative Expenses Selling, general and administrative expenses increased by 34% and 22% for the three and six months ended June 30, 2021, respectively. These increases were primarily driven by additional headcount in the direct sales force, higher sales commissions, increased travel and marketing programs, restructuring costs, and higher legal and consulting fees. These increases were partially offset by a decrease in the CPN Earnout fair value adjustment Selling, General and Administrative Expenses (Amounts in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change ($) | Change (%) | | :-------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Selling, general and administrative | $62,349 | $46,502 | $15,847 | 34% | | SG&A as a percentage of net revenue | 51% | 67% | | | | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Change ($) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Selling, general and administrative | $120,581 | $99,115 | $21,466 | 22% | | SG&A as a percentage of net revenue | 53% | 76% | | | - Key drivers for the increase in SG&A expenses include additional headcount in the direct sales force, increased sales commissions, higher travel and marketing programs, restructuring costs, and increased legal and consulting fees[164][165] - These increases were partially offset by a decrease resulting from the CPN Earnout fair value adjustment and a decrease in the cancellation fee incurred in Q1 2020[164][165] Other Expense, net Total other expense, net, decreased by $0.5 million for the three months ended June 30, 2021, primarily due to reduced interest expense. However, for the six months ended June 30, 2021, it increased by $0.8 million, mainly because of the absence of the $1.3 million gain on settlement of deferred acquisition consideration recognized in the prior year Other Expense, Net (Amounts in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change ($) | Change (%) | | :-------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Interest expense, net | $(2,431) | $(2,912) | $481 | (17%) | | Other income (expense), net | $18 | $25 | $(7) | (28%) | | Total other expense, net | $(2,413) | $(2,887) | $474 | (16%) | | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Change ($) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Interest expense, net | $(4,901) | $(5,422) | $521 | (10%) | | Gain on settlement of deferred acquisition consideration | $— | $1,295 | $(1,295) | (100%) | | Other income, net | $15 | $46 | $(31) | (67%) | | Total other expense, net | $(4,886) | $(4,081) | $(805) | 20% | - The decrease in total other expense, net, for the three-month period was primarily due to reduced interest expense from lower borrowings[167] - The increase in total other expense, net, for the six-month period was mainly due to the absence of the $1.3 million gain on settlement of deferred acquisition consideration recognized in the prior year[168] Liquidity and Capital Resources The company's liquidity is supported by $89.8 million in cash and $117.2 million in working capital as of June 30, 2021, along with available revolving borrowings. Management expects these resources, combined with cash flows from product sales, to be sufficient for operating expenses, capital expenditures, and debt service for at least the next 12 months. Primary cash uses include working capital, capital expenditures, and debt service, with potential for future equity or debt financings Cash Flows For the six months ended June 30, 2021, net cash provided by operating activities was $16.2 million, a significant improvement from a net cash used of $26.6 million in the prior year. Investing activities used $9.3 million, primarily for capital expenditures. Financing activities used $1.4 million, mainly for lease obligations and deferred acquisition consideration payments, offset by stock option exercises Operating Activities Net cash provided by operating activities was $16.2 million for the six months ended June 30, 2021, driven by net income and non-cash charges, partially offset by increased accounts receivable, inventory, and prepaid expenses. This contrasts with $26.6 million net cash used in operating activities for the same period in 2020, which was due to a net loss and increases in operating assets - Net cash provided by operating activities was $16.2 million for the six months ended June 30, 2021, resulting from net income of $30.6 million and non-cash charges of $14.1 million, partially offset by $28.5 million used in changes in operating assets and liabilities[174] - Net cash used in operating activities was $26.6 million for the six months ended June 30, 2020, due to a net loss of $21.5 million and $12.0 million used in changes in operating assets and liabilities[175] Investing Activities Net cash used in investing activities was $9.3 million for the six months ended June 30, 2021, solely for capital expenditures. This compares to $6.1 million used in the prior year, which also included capital expenditures, partially offset by notes receivable repayment - Net cash used in investing activities was $9.3 million for the six months ended June 30, 2021, consisting entirely of capital expenditures[176] - For the six months ended June 30, 2020, $6.1 million was used in investing activities, primarily for capital expenditures, partially offset by $0.3 million from notes receivable repayment[176] Financing Activities Net cash used in financing activities was $1.4 million for the six months ended June 30, 2021, primarily due to payments for finance lease obligations, deferred acquisition consideration, and withholding taxes for stock-based awards, partially offset by proceeds from stock option exercises. In contrast, the prior year saw $13.1 million provided by financing activities, mainly from credit agreement proceeds - Net cash used in financing activities was $1.4 million for the six months ended June 30, 2021, primarily due to payments of finance lease obligations ($1.4 million), deferred acquisition consideration ($0.5 million), and withholding taxes for RSUs ($0.7 million), partially offset by $1.2 million from stock option exercises[177] - Net cash provided by financing activities was $13.1 million for the six months ended June 30, 2020, mainly from $15.9 million in proceeds from the 2019 Credit Agreement and $0.9 million from stock option exercises, partially offset by lease and deferred acquisition consideration payments[178] Indebtedness The company's indebtedness under the 2019 Credit Agreement included a $40.0 million revolving credit facility and a $60.0 million term loan. As of June 30, 2021, the company had $10.0 million outstanding on the revolving facility and $60.0 million on the term loan, and was in compliance with all financial covenants. This agreement was terminated on August 6, 2021, and replaced by a new credit agreement - The 2019 Credit Agreement provided for a $40.0 million Revolving Facility and a $60.0 million Term Loan Facility[181] - As of June 30, 2021, the company had outstanding borrowings of $10.0 million under the Revolving Facility and $60.0 million under the Term Loan Facility, and was in compliance with all financial covenants[183] - The 2019 Credit Agreement was terminated on August 6, 2021, and replaced by a new credit agreement[183] Contractual Obligations and Commitments There have been no material changes to the company's contractual obligations and commitments as of June 30, 2021, compared to those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes to contractual obligations and commitments as of June 30, 2021, compared to the Annual Report on Form 10-K for December 31, 2020[184] Critical Accounting Policies and Significant Judgments and Estimates The preparation of consolidated financial statements requires management to make estimates, assumptions, and judgments that affect reported amounts. These are based on historical experience and other reasonable factors, and while historically not materially different from actual results, changes could impact financial statements. Management continuously evaluates these estimates - The preparation of consolidated financial statements requires management to make estimates, assumptions, and judgments that affect reported amounts of assets, liabilities, revenue, and expenses[185] - Management bases its estimates on historical experience and other reasonable factors, and while historically not materially different from actual results, changes in assumptions could materially affect financial statements[185] Emerging Growth Company Status The company is an "emerging growth company" under the JOBS Act, allowing it to take advantage of certain exemptions from reporting requirements, including an extended transition period for new accounting standards. It elected to use this extended period and will cease to be an emerging growth company by December 31, 2021, or earlier if certain revenue, market value, or debt thresholds are met - The company is an 'emerging growth company' and has elected to use the extended transition period for complying with new or revised accounting standards, such as ASU 2016-02 (Leases)[187] - The company will cease to be an emerging growth company by December 31, 2021, or earlier if it exceeds $1.07 billion in annual revenue, $700.0 million in market value of non-affiliate held stock, or $1.0 billion in non-convertible debt over three years[187] Off-Balance Sheet Arrangements The company did not have any off-balance sheet arrangements during the periods presented, nor does it currently have any, as defined by SEC rules and regulations - The company did not have, and does not currently have, any off-balance sheet arrangements as defined by SEC rules and regulations[188] Recently Issued Accounting Pronouncements The company has reviewed all recently issued accounting standards as disclosed in Note 2 to its consolidated financial statements - The company has reviewed all recently issued accounting standards as disclosed in Note 2 to its consolidated financial statements[189] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a "smaller reporting company," Organogenesis is not required to provide quantitative and qualitative disclosures about market risk under Item 305(e) of Regulation S-K - As a 'smaller reporting company,' Organogenesis is exempt from providing quantitative and qualitative disclosures about market risk[190] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures as of June 30, 2021, and concluded they were not effective due to a material weakness in internal control over financial reporting. This weakness stems from inadequate formal accounting, business operations, and IT policies, procedures, and controls. The company is actively remediating these deficiencies, including implementing a new ERP system and designing more effective controls Evaluation of Disclosure Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2021, due to a material weakness in internal control over financial reporting. This weakness involves insufficient formal policies and controls for accounting, business operations, and IT, specifically regarding account reconciliations, journal entries, and segregation of duties - Management concluded that disclosure controls and procedures were not effective as of June 30, 2021, due to a material weakness in internal control over financial reporting[196] - The material weakness identified relates to the lack of designed and maintained formal accounting, business operations, and Information Technology policies, procedures, and controls to ensure complete, accurate, and timely financial accounting, reporting, and disclosures[195] - Specific deficiencies include inadequate formalized policies for reviews over account reconciliations and journal entries, and insufficient controls for proper segregation of duties[195] Plans for Remediation of Material Weakness Management is committed to remediating the identified material weakness in internal controls during 2021. Remediation efforts include implementing a new ERP system, designing and implementing more effective controls, completing risk assessment activities, designing controls for key report accuracy, and developing a monitoring protocol. An outside firm is assisting with control testing - Management is committed to finalizing the remediation of the material weakness during 2021[197] - Remediation efforts include implementing a new company-wide ERP system (expected to go live in H1 2022), designing and implementing more effective controls, completing risk assessment activities, designing controls for completeness and accuracy of key reports, and developing a monitoring protocol[198][201] - An outside firm is engaged to assist management with performing sufficient testing to validate the operating effectiveness of certain controls over financial reporting[198][201] Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2021, other than those related to remediation efforts. However, the ongoing implementation of a new ERP system will lead to process and procedure changes, which will be evaluated quarterly for their impact on internal controls - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2021, other than those related to remediation efforts[200] - The ongoing implementation of a new ERP system will result in changes to processes and procedures, which will be evaluated qu