[Cautionary Note Regarding Forward-Looking Statements](index=3&type=section&id=CAUTIONARY%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) 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](index=12&type=chunk) - 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](index=12&type=chunk) [PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the company's unaudited consolidated financial statements and management's analysis of financial condition [Item 1. Unaudited Consolidated Financial Statements](index=5&type=section&id=Item%201.%20Unaudited%20Consolidated%20Financial%20Statements) This section presents Organogenesis Holdings Inc.'s unaudited consolidated financial statements and detailed notes for periods ended June 30, 2021 [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) 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](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) 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](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) 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](index=19&type=chunk)[40](index=40&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) 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](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations and additional information supporting the consolidated financial statements [1. Nature of the Business and Basis of Presentation](index=9&type=section&id=1.%20Nature%20of%20the%20Business%20and%20Basis%20of%20Presentation) 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](index=25&type=chunk) - 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](index=26&type=chunk) - 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](index=29&type=chunk) 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](index=10&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) 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](index=41&type=chunk) - 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](index=39&type=chunk)[40](index=40&type=chunk) - The company is assessing the impact of ASU 2016-13 (Credit Losses) and related updates, which will be adopted on January 1, 2023[42](index=42&type=chunk) [3. Acquisition](index=12&type=section&id=3.%20Acquisition) 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](index=44&type=chunk)[131](index=131&type=chunk) 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](index=50&type=chunk) [4. Product and Geographic Sales](index=12&type=section&id=4.%20Product%20and%20Geographic%20Sales) 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](index=46&type=chunk) 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](index=47&type=chunk) [5. Fair Value of Financial Assets and Liabilities](index=12&type=section&id=5.%20Fair%20Value%20of%20Financial%20Assets%20and%20Liabilities) 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](index=50&type=chunk) - 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](index=50&type=chunk) [6. Accounts Receivable, Net](index=13&type=section&id=6.%20Accounts%20Receivable,%20Net) 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](index=14&type=section&id=7.%20Inventories) 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](index=14&type=section&id=8.%20Prepaid%20Expenses%20and%20Other%20Current%20Assets) 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](index=15&type=section&id=9.%20Property%20and%20Equipment,%20Net) 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](index=15&type=section&id=10.%20Goodwill%20and%20Intangible%20Assets) 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](index=57&type=chunk) 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](index=16&type=section&id=11.%20Accrued%20Expenses%20and%20Other%20Current%20Liabilities) 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](index=16&type=section&id=12.%20Restructuring) 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](index=61&type=chunk) 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](index=16&type=section&id=13.%20Long-Term%20Debt%20Obligations) 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](index=65&type=chunk)[66](index=66&type=chunk) - 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](index=71&type=chunk) - The company was in compliance with all financial covenants under the 2019 Credit Agreement as of June 30, 2021[183](index=183&type=chunk) - 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](index=120&type=chunk)[183](index=183&type=chunk) [14. Stockholders' Equity](index=18&type=section&id=14.%20Stockholders'%20Equity) 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](index=18&type=section&id=15.%20Stock-Based%20Compensation) 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](index=76&type=chunk) - No additional awards can be made under the 2003 Plan since the Avista Merger on December 10, 2018[78](index=78&type=chunk) 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)](index=19&type=section&id=16.%20Net%20Income%20(Loss)%20per%20Share%20(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](index=90&type=chunk) [17. Leases](index=21&type=section&id=17.%20Leases) 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](index=91&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk) 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](index=101&type=chunk) [18. Commitments and Contingencies](index=24&type=section&id=18.%20Commitments%20and%20Contingencies) 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](index=111&type=chunk) - 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](index=112&type=chunk) [19. Related Party Transactions](index=25&type=section&id=19.%20Related%20Party%20Transactions) 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](index=114&type=chunk) - A former executive repaid **$434 thousand** in outstanding principal balance of Employer Loans (Liquidity Loans and Option Loans) during Q1 2021[115](index=115&type=chunk) - 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](index=115&type=chunk) [20. Taxes](index=25&type=section&id=20.%20Taxes) 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](index=117&type=chunk)[118](index=118&type=chunk) 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](index=117&type=chunk) [21. Subsequent Events](index=25&type=section&id=21.%20Subsequent%20Events) 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](index=120&type=chunk) - 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](index=120&type=chunk) - All amounts due under the 2019 Credit Agreement, including principal, accrued interest, Final Payment, and Prepayment Premium, were paid off upon its termination[120](index=120&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) 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](index=26&type=section&id=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](index=123&type=chunk)[124](index=124&type=chunk) - The company's mission is to provide integrated healing solutions that substantially improve medical outcomes and patient lives while lowering overall care costs[123](index=123&type=chunk) 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](index=27&type=section&id=COVID-19%20pandemic) 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](index=130&type=chunk) - 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](index=130&type=chunk) [CPN Acquisition](index=27&type=section&id=CPN%20Acquisition) 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](index=131&type=chunk) - Revenue and expenses of CPN since the acquisition date were not material to the consolidated financial statements[131](index=131&type=chunk) [End of Enforcement Grace Period for ReNu and NuCel](index=27&type=section&id=End%20of%20Enforcement%20Grace%20Period%20for%20ReNu%20and%20NuCel) 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](index=132&type=chunk) - The company ceased commercial distribution of ReNu and NuCel after May 31, 2021[132](index=132&type=chunk) - 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](index=132&type=chunk) [Components of Our Consolidated Results of Operations](index=27&type=section&id=Components%20of%20Our%20Consolidated%20Results%20of%20Operations) 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](index=27&type=section&id=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](index=134&type=chunk) - Revenue is recorded net of reserves for returns, discounts, and Group Purchasing Organization (GPO) rebates[136](index=136&type=chunk) - 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](index=138&type=chunk) [Cost of goods sold, gross profit and gross profit margin](index=28&type=section&id=Cost%20of%20goods%20sold,%20gross%20profit%20and%20gross%20profit%20margin) 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](index=139&type=chunk) - 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](index=140&type=chunk) [Selling, general and administrative expenses](index=28&type=section&id=Selling,%20general%20and%20administrative%20expenses) 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](index=141&type=chunk) - These expenses are expected to increase due to investments in market development and geographic expansion of sales forces to drive continued revenue growth[141](index=141&type=chunk) [Research and development expenses](index=28&type=section&id=Research%20and%20development%20expenses) 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](index=142&type=chunk) - 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](index=143&type=chunk) [Other expense, net](index=29&type=section&id=Other%20expense,%20net) 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](index=144&type=chunk) - 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](index=145&type=chunk) [Income taxes](index=29&type=section&id=Income%20taxes) 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](index=146&type=chunk) - 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](index=147&type=chunk) - 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](index=147&type=chunk) [Results of Operations](index=30&type=section&id=Results%20of%20Operations) 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](index=30&type=section&id=EBITDA%20and%20Adjusted%20EBITDA) 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](index=151&type=chunk) 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 | $(10,668) | [Comparison of the Three and Six Months Ended June 30, 2021 and 2020](index=31&type=section&id=Comparison%20of%20the%20Three%20and%20Six%20Months%20Ended%20June%2030,%202021%20and%202020) The company demonstrated strong financial performance for the three and six months ended June 30, 2021, with significant revenue growth across both Advanced Wound Care and Surgical & Sports Medicine segments. Gross profit margins improved, and while operating expenses increased due to strategic investments, the company transitioned from an operating loss to a substantial operating income [Revenue](index=31&type=section&id=Revenue) Net revenue increased significantly for both the three and six months ended June 30, 2021, driven by expanded sales forces, increased customer adoption, and growth in the amniotic product portfolio. Advanced Wound Care revenue grew by 87% and 82% for the three and six-month periods, respectively, while Surgical & Sports Medicine revenue increased by 27% and 20%. PuraPly revenue also continued to increase despite the expiration of pass-through status Net Revenue Growth by Product Category (Amounts in thousands) | Product Category | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change ($) | 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 | $95,056 | 73% | - The increase in Advanced Wound Care net revenue was primarily due to an expanded sales force, increased sales to existing and new customers, and increased adoption of the amniotic product portfolio[157](index=157&type=chunk) - PuraPly revenue continued to increase in the three and six months ended June 30, 2021, despite exiting pass-through status, driven by expanded sales forces, increased customer sales, and adoption of recently launched line extensions[159](index=159&type=chunk) [Cost of goods sold, gross profit and gross profit margin](index=32&type=section&id=Cost%20of%20goods%20sold,%20gross%20profit%20and%20gross%20profit%20margin) Cost of goods sold increased by 49% and 43% for the three and six months ended June 30, 2021, respectively, primarily due to higher unit volumes and increased manufacturing headcount. Gross profit saw substantial increases of 91% and 85% for the respective periods, with gross profit margins improving to 76% and 75%, driven by increased sales volume and a shift towards higher gross margin products Cost of Goods Sold, Gross Profit, and Gross Profit Margin (Amounts in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change ($) | 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 | $78,456 | 85% | | Gross profit % | 75% | 70% | | | - The increase in cost of goods sold was primarily due to increased unit volumes and additional manufacturing and quality control headcount[160](index=160&type=chunk) - The increase in gross profit resulted primarily from increased sales volume and a shift in product mix to higher gross margin products[161](index=161&type=chunk) [Research and Development Expenses](index=32&type=section&id=Research%20and%20Development%20Expenses) Research and development expenses increased by 57% and 34% for the three and six months ended June 30, 2021, respectively. This rise was mainly due to increased headcount for existing products, higher product costs for pipeline products, and increased clinical study and regulatory approval costs Research and Development Expenses (Amounts in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change ($) | 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 | $3,451 | 34% | | R&D as a percentage of net revenue | 6% | 8% | | | - The increase in R&D expenses was primarily due to increased headcount for existing products, higher product costs for pipeline products not yet commercialized, and increased clinical study and regulatory approval costs[163](index=163&type=chunk) [Selling, General and Administrative Expenses](index=33&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) Selling, general and administrative expenses increased by 34% and 22% for the three and six months ended June 30, 2021, respectively. These increases were primarily driven by additional headcount in the direct sales force, higher sales commissions, increased travel and marketing programs, restructuring costs, and higher legal and consulting fees. These increases were partially offset by a decrease in the CPN Earnout fair value adjustment Selling, General and Administrative Expenses (Amounts in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change ($) | 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](index=164&type=chunk)[165](index=165&type=chunk) - 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](index=164&type=chunk)[165](index=165&type=chunk) [Other Expense, net](index=34&type=section&id=Other%20Expense,%20net) 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](index=167&type=chunk) - 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](index=168&type=chunk) [Liquidity and Capital Resources](index=34&type=section&id=Liquidity%20and%20Capital%20Resources) 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](index=35&type=section&id=Cash%20Flows) 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](index=35&type=section&id=Operating%20Activities) 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](index=174&type=chunk) - 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](index=175&type=chunk) [Investing Activities](index=35&type=section&id=Investing%20Activities) 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](index=176&type=chunk) - 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](index=176&type=chunk) [Financing Activities](index=35&type=section&id=Financing%20Activities) 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](index=177&type=chunk) - 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](index=178&type=chunk) [Indebtedness](index=35&type=section&id=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](index=181&type=chunk) - 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](index=183&type=chunk) - The 2019 Credit Agreement was terminated on August 6, 2021, and replaced by a new credit agreement[183](index=183&type=chunk) [Contractual Obligations and Commitments](index=36&type=section&id=Contractual%20Obligations%20and%20Commitments) 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](index=184&type=chunk) [Critical Accounting Policies and Significant Judgments and Estimates](index=36&type=section&id=Critical%20Accounting%20Policies%20and%20Significant%20Judgments%20and%20Estimates) 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](index=185&type=chunk) - 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](index=185&type=chunk) [Emerging Growth Company Status](index=37&type=section&id=Emerging%20Growth%20Company%20Status) 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](index=187&type=chunk) - 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](index=187&type=chunk) [Off-Balance Sheet Arrangements](index=37&type=section&id=Off-Balance%20Sheet%20Arrangements) 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](index=188&type=chunk) [Recently Issued Accounting Pronouncements](index=37&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) 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](index=189&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) 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](index=190&type=chunk) [Item 4. Controls and Procedures](index=37&type=section&id=Item%204.%20Controls%20and%20Procedures) 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](index=37&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) 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](index=196&type=chunk) - 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](index=195&type=chunk) - Specific deficiencies include inadequate formalized policies for reviews over account reconciliations and journal entries, and insufficient controls for proper segregation of duties[195](index=195&type=chunk) [Plans for Remediation of Material Weakness](index=38&type=section&id=Plans%20for%20Remediation%20of%20Material%20Weakness) 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](index=197&type=chunk) - 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](index=198&type=chunk)[201](index=201&type=chunk) - An outside firm is engaged to assist management with performing sufficient testing to validate the operating effectiveness of certain controls over financial reporting[198](index=198&type=chunk)[201](index=201&type=chunk) [Changes in Internal Control Over Financial Reporting](index=38&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) 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](index=200&type=chunk) - The ongoing implementation of a new ERP system will result in changes to processes and procedures, which will be evaluated qu

Organogenesis Holdings Inc. (NASDAQ:ORGO) Q1 2021 Earnings Conference Call May 10, 2021 5:00 PM ET Company Participants Gary Gillheeney - President and CEO David Francisco - Chief Financial Officer Conference Call Participants Matt Miksic - Credit Suisse Ryan Zimmerman - BTIG Richard Newitter - SVB Leerink Steven Lichtman - Oppenheimer Operator Good afternoon, ladies and gentlemen, and welcome to the First Quarter 2021 Earnings Conference Call for Organogenesis Holdings, Inc. [Operator Instructions] Please ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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, 2021 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 inc ...

Financial Data and Key Metrics Changes - The company reported total revenue growth of 43% year-over-year in Q4 2020, with net revenue of $106.8 million compared to $74.6 million in Q4 2019 [28] - Gross profit for Q4 2020 was $81.3 million, a 50% increase from $54.3 million in the previous year, resulting in a gross margin of 76% [32][39] - Operating income for Q4 2020 was $21.8 million, compared to an operating loss of $1.8 million in Q4 2019, reflecting a significant improvement in operating margin to 20% [35][39] - Net income for Q4 2020 was $18.5 million or $0.16 per share, compared to a net loss of $4.4 million or $0.04 per share in the prior year [36] - Adjusted EBITDA for Q4 2020 was $24.9 million, a substantial increase from $0.8 million in Q4 2019 [37] Business Line Data and Key Metrics Changes - Advanced Wound Care products revenue grew by 48% year-over-year to $93.6 million in Q4 2020 [29] - Surgical & Sports Medicine products revenue increased by 17% year-over-year to $13.2 million in Q4 2020 [29] - PuraPly products sales rose by 13% year-over-year to $45.3 million in Q4 2020, despite anticipated pricing headwinds [30][12] Market Data and Key Metrics Changes - The company ended 2020 with approximately 300 direct sales representatives, a 13% increase from 265 at the end of 2019 [10][31] - The company expects net revenue for 2021 to be between $390 million and $405 million, representing a year-over-year increase of approximately 15% to 20% [41] Company Strategy and Development Direction - The company has focused on expanding its sales force and product reach, which has contributed to its strong revenue performance [9][10] - The acquisition of CPN Bioscience is aimed at enhancing access to physician offices and accelerating growth opportunities in that channel [16] - The company plans to leverage its RMAT designation for ReNu to expedite the review process with the FDA [25][26] Management's Comments on Operating Environment and Future Outlook - Management noted that while there are challenges due to COVID-19, the company has seen pockets of strength and improving trends in certain areas [18][20] - The company is optimistic about achieving profitability milestones ahead of previously stated targets, with a focus on strategic growth initiatives [22][23] - Management expects to report GAAP net income and positive adjusted EBITDA for the full fiscal year of 2021 [48] Other Important Information - The company raised approximately $60 million in net proceeds from a public offering of common stock, which was used to pay down $29 million of line of credit borrowings [23] - The company anticipates gross margins of approximately 75% for 2021, with total GAAP operating expenses expected to increase by approximately 22% year-over-year [49] Q&A Session Summary Question: Growth in Physician's Office - Management indicated that they do not provide direct guidance on sales channels but expect strong growth in the office channel, particularly with the acquisition of CPN [53][55] Question: EBITDA Expectations - Management noted that while they do not break down EBITDA by quarter, they expect continued strong growth and significant investments in commercial resources [56][58] Question: PuraPly Guidance - Management acknowledged the challenges due to reimbursement changes but expects unit growth to offset ASP declines, maintaining that flat to slightly down performance is acceptable [66] Question: FDA Enforcement Discretion - Management clarified that they will not remove products from the market unless directed by the FDA and are seeking clarity on the enforcement of regulatory criteria [68][72] Question: ReNu Market Opportunity - Management estimates the market for ReNu to be about $2.4 billion and believes they can capture a significant share upon approval and reimbursement [91][92] Question: Amnion Business Competitiveness - Management reported that amnion technology is expanding and that their product Affinity remains unique in the market, with strong efficacy reported [96] Question: NovaCor Expectations - Management expects to launch NovaCor at the end of the year, with significant revenue impact anticipated in 2022 [100]

PART I [Business](index=4&type=section&id=Item%201.%20Business) 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](index=17&type=chunk) 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](index=26&type=chunk) [Industry Overview](index=7&type=section&id=Item%201.%20Business-Industry%20Overview) 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](index=29&type=chunk) - 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](index=44&type=chunk) - 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](index=49&type=chunk) [Our Products](index=11&type=section&id=Item%201.%20Business-Our%20Products) 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](index=66&type=chunk) 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](index=15&type=section&id=Item%201.%20Business-Clinical%20Studies%20and%20Product%20Pipeline) 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](index=76&type=chunk) - A pivotal Phase 3 study for ReNu is underway to evaluate its efficacy in treating Knee Osteoarthritis, with completion estimated for Q5 2023[79](index=79&type=chunk) - 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](index=114&type=chunk) [Commercial Infrastructure, Manufacturing, and Reimbursement](index=24&type=section&id=Item%201.%20Business-Commercial%20Infrastructure%2C%20Manufacturing%2C%20and%20Reimbursement) 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](index=116&type=chunk) - 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](index=124&type=chunk) - 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](index=131&type=chunk)[136](index=136&type=chunk) [Government Regulation](index=29&type=section&id=Item%201.%20Business-Government%20Regulation) 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](index=153&type=chunk)[154](index=154&type=chunk) - 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](index=161&type=chunk) - 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](index=171&type=chunk) - 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](index=179&type=chunk) [Risk Factors](index=35&type=section&id=Item%201A.%20Risk%20Factors) 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](index=192&type=chunk)[196](index=196&type=chunk)[199](index=199&type=chunk) - 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](index=192&type=chunk)[260](index=260&type=chunk) - 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](index=209&type=chunk)[212](index=212&type=chunk) - 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](index=192&type=chunk)[331](index=331&type=chunk) [Properties](index=71&type=section&id=Item%202.%20Properties) 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](index=373&type=chunk) - 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](index=375&type=chunk) [Legal Proceedings](index=71&type=section&id=Item%203.%20Legal%20Proceedings) 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](index=377&type=chunk) PART II [Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=72&type=section&id=Item%205.%20Market%20For%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) 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](index=380&type=chunk) - 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](index=381&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=73&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) 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](index=420&type=chunk)[421](index=421&type=chunk) - 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](index=403&type=chunk) [Liquidity and Capital Resources](index=82&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations-Liquidity%20and%20Capital%20Resources) 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](index=459&type=chunk)[460](index=460&type=chunk) [Critical Accounting Policies](index=85&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations-Critical%20Accounting%20Policies) 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](index=469&type=chunk) - Goodwill is tested for impairment annually at the consolidated level, with no impairments recorded in 2020, 2019, or 2018[473](index=473&type=chunk)[477](index=477&type=chunk) - 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](index=481&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=88&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) 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](index=490&type=chunk) - 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](index=491&type=chunk) [Financial Statements and Supplementary Data](index=88&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) 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](index=112&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data-Note%203.%20Acquisition) 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](index=612&type=chunk) [Note 11. Restructuring](index=116&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data-Note%2011.%20Restructuring) 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](index=630&type=chunk) - 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](index=630&type=chunk) [Note 13. Long-Term Debt Obligations](index=117&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data-Note%2013.%20Long-Term%20Debt%20Obligations) 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](index=638&type=chunk) [Note 14. Stockholders' Equity](index=118&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data-Note%2014.%20Stockholders%27%20Equity) 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](index=661&type=chunk)[663](index=663&type=chunk) - 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](index=656&type=chunk)[658](index=658&type=chunk) [Controls and Procedures](index=89&type=section&id=Item%209A.%20Controls%20and%20Procedures) 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](index=494&type=chunk) - 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](index=497&type=chunk) - Remediation efforts include implementing a new company-wide **ERP** system, anticipated to go live in the first half of 2021[503](index=503&type=chunk) PART III [Directors, Executive Officers, Corporate Governance, Compensation, and Related Transactions](index=91&type=section&id=Items%2010-14) 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](index=505&type=chunk)[506](index=506&type=chunk)[507](index=507&type=chunk)[508](index=508&type=chunk)[509](index=509&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=92&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) 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](index=512&type=chunk)[513](index=513&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q3 2020 was $128 million, a 57% increase from $64.3 million in Q3 2019, exceeding preliminary revenue expectations [20][9] - Gross profit for Q3 2020 was $77.8 million, up 72% from $45.1 million in Q3 2019, with a gross profit margin of 77% compared to 70% in the prior year [24][20] - Operating income for Q3 2020 was $23 million, compared to an operating loss of $8.3 million in Q3 2019, marking a significant turnaround [28][20] - Net income for Q3 2020 was $20.9 million or $0.19 per share, compared to a net loss of $10.7 million or $0.12 per share in Q3 2019 [31][20] Business Line Data and Key Metrics Changes - Revenue from Advanced Wound Care products was $90 million in Q3 2020, a 66% increase from $54.3 million in Q3 2019, representing 89% of total revenue [20][21] - Revenue from Surgical & Sports Medicine products was $10.8 million, a 9% increase from $10 million in Q3 2019, accounting for 11% of total revenue [21][20] - Revenue from PuraPly products was $40.9 million, a 29% increase from $31.8 million in Q3 2019, representing approximately 41% of total revenue [22][20] Market Data and Key Metrics Changes - The company reported strong demand in the office channel for Advanced Wound Care products, contributing to the overall revenue growth [11][12] - The acquisition of CPN Biosciences is expected to enhance the company's access to physician offices and broaden its product offerings [14][59] Company Strategy and Development Direction - The company reaffirmed its financial guidance for 2020, expecting total revenue growth of 19% to 20% year-over-year, with positive net income and adjusted EBITDA [16][42] - The strategic focus includes expanding the sales force and leveraging a comprehensive product portfolio to address patient needs [10][17] - The acquisition of CPN Biosciences is seen as a long-term growth opportunity, enhancing the company's office strategy [15][59] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding the recovery from COVID-19, noting that the growth in the first nine months of 2020 was a result of strong execution and a differentiated product portfolio [17][18] - The company expects continued performance improvement driven by its growth and profitability strategy [18][16] Other Important Information - The company had $36.5 million in cash and $114.7 million in debt obligations as of September 30, 2020, compared to $60.2 million in cash and $100.6 million in debt obligations at the end of 2019 [38][39] - The acquisition of CPN Biosciences involved a total consideration of $19 million, which included cash and stock [33][34] Q&A Session Summary Question: Impact of rising COVID cases on office channel strategy - Management noted no decline in sales in the office setting despite rising COVID cases, although there was a slight decline in access to outpatient Wound Care Centers [54] Question: Trends in PuraPly revenue post pass-through expiration - Management observed no decline in PuraPly revenue in Q3, which was encouraging, and noted positive trends with new sizes and office growth strategy [56] Question: Rationale for CPN Biosciences acquisition - The acquisition is primarily about gaining access to additional accounts and enhancing product offerings, allowing for better customer engagement [59] Question: Long-term margin performance expectations - Management expressed confidence that the positive margin trends experienced in Q3 would continue, although specific guidance on margins by product was not provided [62] Question: Timing of NovaCor launch - The expected launch for NovaCor is projected for Q4 2021, contingent on the manufacturing capacity for Affinity [71]

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures [Item 1. Unaudited Consolidated Financial Statements](index=4&type=section&id=Item%201.%20Unaudited%20Consolidated%20Financial%20Statements) This section presents the company's unaudited consolidated financial statements, including balance sheets, statements of operations, statements of redeemable common stock and stockholders' equity, and cash flows, along with detailed notes explaining the nature of the business, significant accounting policies, recent acquisition, product sales, fair value measurements, and other financial details [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total assets | $246,428 | $220,687 | | Total liabilities | $180,954 | $165,104 | | Total stockholders' equity | $65,474 | $55,583 | | Cash | $36,512 | $60,174 | | Accounts receivable, net | $56,915 | $39,359 | | Inventory | $29,882 | $22,918 | | Current portion of term loan | $11,667 | $— | | Line of credit | $39,353 | $33,484 | | Term loan, net of current portion | $47,999 | $49,634 | [Consolidated Statements of Operations](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) This section outlines the company's financial performance over specific periods, including revenue, expenses, and net income or loss Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net revenue | $100,799 | $64,265 | $231,491 | $186,336 | | Gross profit | $77,835 | $45,134 | $169,692 | $130,779 | | Net income (loss) | $20,934 | $(10,741) | $(545) | $(36,056) | | Basic EPS | $0.20 | $(0.12) | $(0.01) | $(0.40) | | Diluted EPS | $0.19 | $(0.12) | $(0.01) | $(0.40) | [Consolidated Statements of Redeemable Common Stock and Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Redeemable%20Common%20Stock%20and%20Stockholders'%20Equity) This section details changes in the company's equity, including common stock, net income, and stock-based compensation Consolidated Statements of Redeemable Common Stock and Stockholders' Equity (in thousands) | Metric | As of Sep 30, 2020 (in thousands) | As of Sep 30, 2019 (in thousands) | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Total Stockholders' Equity | $65,474 | $12,808 | | Net income (Q3 2020) | $20,934 | $(10,741) | | Stock issued for acquisition | $7,986 | $— | | Stock-based compensation | $486 | $242 | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (Nine Months Ended Sep 30) | 2020 (in thousands) | 2019 (in thousands) | | :-------------------------------------------- | :------------------ | :------------------ | | Net cash used in operating activities | $(19,475) | $(27,127) | | Net cash used in investing activities | $(16,354) | $(2,776) | | Net cash provided by financing activities | $12,345 | $31,657 | | Change in cash and restricted cash | $(23,484) | $1,754 | | Cash and restricted cash, end of period | $36,886 | $23,159 | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations and additional information supporting the consolidated financial statements [1. Nature of the Business and Basis of Presentation](index=9&type=section&id=1.%20Nature%20of%20the%20Business%20and%20Basis%20of%20Presentation) This note describes the company's core business, its market focus, and the accounting principles applied in preparing the financial statements - Organogenesis Holdings Inc. is a leading regenerative medicine company focused on Advanced Wound Care and Surgical & Sports Medicine markets[24](index=24&type=chunk) - The COVID-19 pandemic has not materially adversely affected the company's financial results through Q3 2020, but future impacts are uncertain[25](index=25&type=chunk) - The Avista Merger was accounted for as a reverse merger, with Organogenesis Inc. treated as the accounting acquirer[28](index=28&type=chunk) - As of September 30, 2020, the company had an accumulated deficit of **$171,552k** and used **$19,475k** cash in operations for the nine months ended September 30, 2020[30](index=30&type=chunk) [2. Summary of Significant Accounting Policies](index=10&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the key accounting policies and standards adopted by the company, including those for emerging growth companies - The company, as an emerging growth company, has elected to use the extended transition period for complying with new or revised financial accounting standards[37](index=37&type=chunk) - The company will adopt ASU 2016-02 (Leases) on January 1, 2021, expecting to recognize all leases with terms over twelve months on the balance sheet[37](index=37&type=chunk) - The adoption of ASU 2016-13 (Credit Losses) on January 1, 2023, is not expected to have a material impact on the consolidated financial statements[39](index=39&type=chunk) [3. Acquisition](index=12&type=section&id=3.%20Acquisition) This note details the acquisition of CPN Biosciences, LLC, including consideration, purchase price allocation, and resulting goodwill - On September 17, 2020, the company acquired certain assets and assumed certain liabilities of CPN Biosciences, LLC for an aggregate consideration of **$19,024k**[40](index=40&type=chunk)[41](index=41&type=chunk) - The consideration included **$6,427k** in cash, **2,151,438** shares of Class A common stock (fair value **$8,815k**), and a contingent Earnout Liability of **$3,782k**[41](index=41&type=chunk) - The preliminary purchase price allocation resulted in **$3,377k** of goodwill, primarily attributed to expected synergies and future growth, and **$13,570k** of intangible assets[45](index=45&type=chunk)[46](index=46&type=chunk) [4. Product and Geographic Sales](index=13&type=section&id=4.%20Product%20and%20Geographic%20Sales) This note breaks down net revenue by product category and geographic region for the reported periods Product and Geographic Sales (in thousands) | Product Category | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Advanced Wound Care | $89,990 | $54,310 | $201,009 | $157,365 | | Surgical & Sports Medicine | $10,809 | $9,955 | $30,482 | $28,971 | | **Total net revenue** | **$100,799** | **$64,265** | **$231,491** | **$186,336** | | Net PuraPly revenue | $40,945 | $31,755 | $101,969 | $86,893 | - Net revenue generated outside the United States represented **less than 1%** of total net revenue for all periods presented[51](index=51&type=chunk) [5. Fair Value of Financial Assets and Liabilities](index=14&type=section&id=5.%20Fair%20Value%20of%20Financial%20Assets%20and%20Liabilities) This note details the fair value measurements of financial instruments, including the Earnout Liability and its valuation methodology Fair Value of Financial Assets and Liabilities (in thousands) | Liability | Fair Value as of Sep 30, 2020 (in thousands) | | :-------------- | :----------------------------------------- | | Earnout Liability | $3,782 | - The Earnout Liability is classified as a Level 3 measurement, with fair value estimated using a Monte Carlo simulation model based on unobservable inputs[54](index=54&type=chunk) [6. Accounts Receivable, Net](index=14&type=section&id=6.%20Accounts%20Receivable,%20Net) This note provides details on accounts receivable, net of allowances for sales returns and doubtful accounts Accounts Receivable, Net (in thousands) | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Accounts receivable, net | $56,915 | $39,359 | | Allowance for sales returns and doubtful accounts | $5,125 | $3,049 | Allowance Activity (in thousands) | Allowance Activity (Additions (reductions)) | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Additions (reductions) | $1,589 | $(56) | $2,559 | $(29) | [7. Inventories](index=15&type=section&id=7.%20Inventories) This note details the composition of inventories by category and the charges for excess and obsolescence Inventory Composition (in thousands) | Inventory Category | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :----------------- | :-------------------------- | :-------------------------- | | Raw materials | $9,676 | $9,178 | | Work in process | $1,499 | $781 | | Finished goods | $18,707 | $12,959 | | **Total inventories** | **$29,882** | **$22,918** | Inventory Excess and Obsolescence Charge (in thousands) | Inventory Excess and Obsolescence Charge | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Charge to cost of goods sold | $315 | $286 | $2,024 | $809 | [8. Property and Equipment, Net](index=15&type=section&id=8.%20Property%20and%20Equipment,%20Net) This note presents the breakdown of property and equipment, net of accumulated depreciation, and related depreciation expenses Property and Equipment, Net (in thousands) | Property and Equipment Category | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :------------------------------ | :-------------------------- | :-------------------------- | | Leasehold improvements | $39,169 | $36,344 | | Furniture, computers and equipment | $47,798 | $46,430 | | Accumulated depreciation and amortization | $(68,559) | $(65,812) | | Construction in progress | $37,529 | $30,222 | | **Total property and equipment, net** | **$55,937** | **$47,184** | Depreciation Expense (in thousands) | Depreciation Expense | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Depreciation expense | $956 | $792 | $2,749 | $2,553 | [9. Goodwill and Intangible Assets](index=15&type=section&id=9.%20Goodwill%20and%20Intangible%20Assets) This note provides information on goodwill and identifiable intangible assets, including additions from acquisitions and amortization expenses Goodwill and Intangible Assets (in thousands) | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Goodwill | $28,916 | $25,539 | | Identifiable intangible assets, net | $31,849 | $20,797 | - The company recorded **$3,377k** of goodwill and **$13,570k** of intangible assets from the CPN acquisition on September 17, 2020[59](index=59&type=chunk) Amortization of Intangible Assets (in thousands) | Amortization of Intangible Assets | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Amortization expense | $885 | $1,529 | $2,518 | $4,526 | [10. Accrued Expenses and Other Current Liabilities](index=16&type=section&id=10.%20Accrued%20Expenses%20and%20Other%20Current%20Liabilities) This note details the composition of accrued expenses and other current liabilities, including personnel costs Accrued Expenses and Other Current Liabilities (in thousands) | Liability Category | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :------------------------------- | :-------------------------- | :-------------------------- | | Accrued personnel costs | $21,158 | $17,640 | | Other | $4,974 | $5,810 | | **Total accrued expenses and other current liabilities** | **$26,132** | **$23,450** | [11. Long-Term Debt Obligations](index=16&type=section&id=11.%20Long-Term%20Debt%20Obligations) This note outlines the company's long-term debt, including term loans, lines of credit, interest rates, and future payment schedules Long-Term Debt Obligations (in thousands) | Debt Category | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :-------------------------------------------------- | :-------------------------- | :-------------------------- | | Line of credit | $39,353 | $33,484 | | Term loan | $60,000 | $50,000 | | Less debt discount and debt issuance cost | $(334) | $(366) | | Less current maturities | $(11,667) | $— | | **Term loan, net of debt discount, debt issuance cost and current maturities** | **$47,999** | **$49,634** | - The Term Loan Facility interest rate was **9.25%** and the Revolving Facility interest rate was **5.50%** as of September 30, 2020[67](index=67&type=chunk)[69](index=69&type=chunk) - The company was in compliance with the financial covenants under the 2019 Credit Agreement as of September 30, 2020[73](index=73&type=chunk) Future Payments of 2019 Credit Agreement (as of Sep 30, 2020) (in thousands) | Future Payments of 2019 Credit Agreement (as of Sep 30, 2020) | Amount (in thousands) | | :------------------------------------------------ | :-------------------- | | 2020 (remaining) | $— | | 2021 | $16,667 | | 2022 | $20,000 | | 2023 | $20,000 | | 2024 | $42,686 | | **Total** | **$99,353** | [12. Stockholders' Equity](index=18&type=section&id=12.%20Stockholders'%20Equity) This note details the components of stockholders' equity, including common stock issued and shares reserved for future issuance - As of September 30, 2020, **108,185,702** shares of Class A common stock were issued[79](index=79&type=chunk) Shares Reserved for Future Issuance | Shares Reserved for Future Issuance | Sep 30, 2020 | Dec 31, 2019 | | :---------------------------------- | :----------- | :----------- | | For outstanding options | 6,788,655 | 6,503,646 | | For outstanding restricted stock units | 819,248 | — | | For future grants | 6,819,449 | 9,008,996 | | **Total shares reserved** | **14,427,352** | **15,512,642** | - In Q3 2019, the company issued **3,334,658** shares of common stock through warrant exchange and exercise transactions, resulting in a non-cash deemed dividend of **$0.6 million**[84](index=84&type=chunk)[85](index=85&type=chunk) [13. Stock-Based Compensation](index=19&type=section&id=13.%20Stock-Based%20Compensation) This note provides details on stock-based compensation expense, including grants of restricted stock units and stock options Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total expense | $486 | $242 | $1,164 | $700 | - **873,595** time-based restricted stock units were granted in the nine months ended September 30, 2020, with **$1,977k** in total unrecognized compensation cost[95](index=95&type=chunk)[96](index=96&type=chunk) - **1,553,723** stock options were granted in the nine months ended September 30, 2020, with **$1,598k** in total unrecognized stock compensation expense[98](index=98&type=chunk)[100](index=100&type=chunk) [14. Net Income (Loss) per Share (EPS)](index=21&type=section&id=14.%20Net%20Income%20(Loss)%20per%20Share%20(EPS)) This note presents basic and diluted earnings per share calculations and the weighted-average common shares outstanding Net Income (Loss) per Share (EPS) | EPS Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic EPS | $0.20 | $(0.12) | $(0.01) | $(0.40) | | Diluted EPS | $0.19 | $(0.12) | $(0.01) | $(0.40) | | Weighted-average common shares outstanding—basic | 105,040,035 | 92,276,858 | 104,748,297 | 91,182,233 | | Weighted-average common shares outstanding—diluted | 108,489,768 | 92,276,858 | 104,748,297 | 91,182,233 | - For periods with a net loss, potentially dilutive securities were excluded from diluted EPS calculation as they had an anti-dilutive effect[104](index=104&type=chunk) [15. Commitments and Contingencies](index=22&type=section&id=15.%20Commitments%20and%20Contingencies) This note discloses information on capital and operating lease obligations, legal proceedings, and the impact of a ransomware attack - Accrued but unpaid capital lease obligations to affiliates totaled **$10,336k** as of September 30, 2020, subordinated to the 2019 Credit Agreement[107](index=107&type=chunk) Future Capital Lease Obligations (in thousands) | Future Capital Lease Obligations | Amount (in thousands) | | :------------------------------- | :-------------------- | | Present value of minimum lease payments | $15,712 | | Less current maturities | $(3,473) | | **Long-term portion** | **$12,239** | Operating Lease Expenses (in thousands) | Operating Lease Expenses | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Operating lease expenses | $1,620 | $1,766 | $4,971 | $4,993 | - The company experienced a ransomware attack in August 2020, which partially impaired IT systems; no material loss is expected, and costs are anticipated to be reimbursed by insurance[120](index=120&type=chunk) - The company settled the NuTech Medical deferred acquisition consideration dispute for **$4,000k**, recording a gain of **$1,295k** in Q1 2020, and settled an assumed legacy lawsuit in October 2020, recording a gain of **$951k** in Q3 2020[123](index=123&type=chunk) [16. Related Party Transactions](index=24&type=section&id=16.%20Related%20Party%20Transactions) This note describes transactions with related parties, including outstanding loans to a former executive and recovery of receivables - As of September 30, 2020, Liquidity Loans and Option Loans to a former executive were outstanding with aggregate principal balances of **$297k** and **$635k**, respectively[127](index=127&type=chunk) - The company recorded **$1,111k** as a recovery of previously reserved related party receivables in Q3 2020 due to loan repayment and forgiveness[127](index=127&type=chunk) [17. Subsequent Events](index=25&type=section&id=17.%20Subsequent%20Events) This note reports significant events occurring after the balance sheet date, including workforce restructuring and facility consolidation - On October 21, 2020, the company committed to a workforce restructuring and consolidation of La Jolla facilities, expecting a charge of approximately **$5.5 million**, primarily for retention benefits[129](index=129&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, including an overview of its business, detailed analysis of revenue, expenses, and profitability, discussion of liquidity and capital resources, and critical accounting policies. It also addresses the impact of the COVID-19 pandemic and the CPN acquisition [Overview](index=26&type=section&id=Overview) This section provides a high-level summary of the company's business, recent financial performance, and the impact of the COVID-19 pandemic - Organogenesis is a leading regenerative medicine company focused on Advanced Wound Care and Surgical & Sports Medicine markets, offering a comprehensive portfolio of FDA-approved products[131](index=131&type=chunk)[132](index=132&type=chunk) Key Financial Metrics (Nine Months Ended Sep 30) (in millions) | Metric (Nine Months Ended Sep 30) | 2020 (in millions) | 2019 (in millions) | | :-------------------------------- | :----------------- | :----------------- | | Net revenue | $231.5 | $186.3 | | Net loss | $(0.5) | $(36.1) | - The COVID-19 pandemic has not materially adversely affected financial results through Q3 2020, but future impacts on demand, sales, staffing, manufacturing, supply chain, and financial covenants are uncertain and pose significant risks[139](index=139&type=chunk) [CPN Acquisition](index=27&type=section&id=CPN%20Acquisition) This section summarizes the acquisition of CPN Biosciences, LLC, including the consideration and its financial impact - On September 17, 2020, the company acquired CPN Biosciences, LLC for **$19.0 million**, consisting of cash, common stock, and contingent consideration[140](index=140&type=chunk) - CPN's results of operations have been included in consolidated financial statements since the acquisition date, with revenue and expenses not material[140](index=140&type=chunk) [Components of Our Consolidated Results of Operations](index=27&type=section&id=Components%20of%20Our%20Consolidated%20Results%20of%20Operations) This section analyzes the key components influencing the company's financial performance, including revenue, cost of goods sold, and operating expenses [Revenue](index=27&type=section&id=Revenue) This section discusses the sources of net revenue and anticipated changes due to payment structure transitions - Net revenue is derived from Advanced Wound Care and Surgical & Sports Medicine products, sold primarily through direct sales representatives and third-party agencies[142](index=142&type=chunk) - PuraPly products transitioned to a bundled payment structure after September 30, 2020, which is expected to decrease net revenue from these products[145](index=145&type=chunk) [Cost of goods sold, gross profit and gross profit margin](index=28&type=section&id=Cost%20of%20goods%20sold,%20gross%20profit%20and%20gross%20profit%20margin) This section defines the components of cost of goods sold and factors influencing gross profit and margin - Cost of goods sold includes personnel, product testing, quality assurance, raw materials, manufacturing, and facility costs, increasing with sales units[146](index=146&type=chunk) - Gross profit and margin are influenced by product/geographic sales mix, pricing, manufacturing efficiency, material costs, and regulatory actions[147](index=147&type=chunk) [Selling, general and administrative expenses](index=28&type=section&id=Selling,%20general%20and%20administrative%20expenses) This section details the components of SG&A expenses and expectations for future increases due to market development - SG&A expenses include personnel costs, sales commissions, professional fees, depreciation, amortization, bad debt, royalties, and IT costs[148](index=148&type=chunk) - SG&A expenses are expected to increase due to investments in market development and expansion of sales forces[148](index=148&type=chunk) [Research and development expenses](index=28&type=section&id=Research%20and%20development%20expenses) This section describes the nature of R&D expenses and the factors driving their expected increase - R&D expenses cover personnel, manufacturing process improvements, product enhancements, pipeline development, and clinical trials[149](index=149&type=chunk) - R&D expenses are generally expected to increase with ongoing clinical trials, regulatory pathway progression, and new product development[149](index=149&type=chunk) [Other expense, net](index=29&type=section&id=Other%20expense,%20net) This section explains the components of other expense, net, including interest, debt extinguishment, and acquisition settlement gains - Other expense, net, includes interest expense, loss on extinguishment of debt, and gain on settlement of deferred acquisition consideration[151](index=151&type=chunk)[152](index=152&type=chunk)[153](index=153&type=chunk) - A **$1.9 million** loss on debt extinguishment was recognized in 9M 2019 from the termination of the ML Agreement[152](index=152&type=chunk) - Gains of **$1.3 million** (Q1 2020) and **$1.0 million** (Q3 2020) were recognized from the settlement of the NuTech Medical deferred acquisition consideration dispute and an assumed legacy lawsuit[153](index=153&type=chunk) [Income taxes](index=29&type=section&id=Income%20taxes) This section describes the company's approach to income taxes, including the use of valuation allowances against deferred tax assets - The company uses an asset and liability approach for income taxes and provides valuation allowances when necessary[154](index=154&type=chunk) - A valuation allowance is necessary against the full amount of net U.S. deferred tax assets due to a three-year cumulative loss position[155](index=155&type=chunk) [Results of Operations](index=30&type=section&id=Results%20of%20Operations) This section provides a detailed comparative analysis of the company's financial performance for the reported periods [EBITDA and Adjusted EBITDA](index=30&type=section&id=EBITDA%20and%20Adjusted%20EBITDA) This section presents the reconciliation of net income (loss) to EBITDA and Adjusted EBITDA, key non-GAAP financial measures EBITDA and Adjusted EBITDA (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net income (loss) | $20,934 | $(10,741) | $(545) | $(36,056) | | EBITDA | $25,816 | $(5,945) | $13,247 | $(22,477) | | Adjusted EBITDA | $24,601 | $(4,787) | $11,983 | $(18,999) | [Comparison of the Three and Nine Months Ended September 30, 2020 and 2019](index=31&type=section&id=Comparison%20of%20the%20Three%20and%20Nine%20Months%20Ended%20September%2030,%202020%20and%202019) This section offers a detailed comparative analysis of financial performance metrics for the three and nine months ended September 30, 2020 and 2019 [Revenue](index=31&type=section&id=Revenue_Comparison) This section compares net revenue by product category for the three and nine months ended September 30, 2020 and 2019 Revenue by Product Category (Three Months Ended Sep 30) (in thousands) | Product Category | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change ($) | Change (%) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------- | :--------- | | Advanced Wound Care | $89,990 | $54,310 | $35,680 | 66% | | Surgical & Sports Medicine | $10,809 | $9,955 | $854 | 9% | | **Net revenue** | **$100,799** | **$64,265** | **$36,534** | **57%** | Revenue by Product Category (Nine Months Ended Sep 30) (in thousands) | Product Category | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Change ($) | Change (%) | | :----------------------- | :-------------------------------------------- | :-------------------------------------------- | :--------- | :--------- | | Advanced Wound Care | $201,009 | $157,365 | $43,644 | 28% | | Surgical & Sports Medicine | $30,482 | $28,971 | $1,511 | 5% | | **Net revenue** | **$231,491** | **$186,336** | **$45,155** | **24%** | - PuraPly revenue increased to **$40.9 million** in Q3 2020 (from **$31.8 million** in Q3 2019) and **$102.0 million** in 9M 2020 (from **$86.9 million** in 9M 2019) due to expanded sales forces and increased sales[166](index=166&type=chunk) [Cost of goods sold, gross profit and gross profit margin](index=32&type=section&id=Cost%20of%20goods%20sold,%20gross%20profit%20and%20gross%20profit%20margin_Comparison) This section compares cost of goods sold, gross profit, and gross profit margin for the three and nine months ended September 30, 2020 and 2019 Cost of Goods Sold, Gross Profit, and Margin (Three Months Ended Sep 30) (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change ($) | Change (%) | | :--------------- | :--------------------------------------------- | :--------------------------------------------- | :--------- | :--------- | | Cost of goods sold | $22,964 | $19,131 | $3,833 | 20% | | Gross profit | $77,835 | $45,134 | $32,701 | 72% | | Gross profit % | 77% | 70% | | | Cost of Goods Sold, Gross Profit, and Margin (Nine Months Ended Sep 30) (in thousands) | Metric | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Change ($) | Change (%) | | :--------------- | :-------------------------------------------- | :-------------------------------------------- | :--------- | :--------- | | Cost of goods sold | $61,799 | $55,557 | $6,242 | 11% | | Gross profit | $169,692 | $130,779 | $38,913 | 30% | | Gross profit % | 73% | 70% | | | - The increase in gross profit was primarily due to increased sales volume and a shift in product mix to higher gross margin products[168](index=168&type=chunk) [Research and Development Expenses](index=32&type=section&id=Research%20and%20Development%20Expenses_Comparison) This section compares research and development expenses for the three and nine months ended September 30, 2020 and 2019 Research and Development Expenses (Three Months Ended Sep 30) (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change ($) | Change (%) | | :------------------------ | :--------------------------------------------- | :--------------------------------------------- | :--------- | :--------- | | Research and development | $3,709 | $3,924 | $(215) | (5%) | | % of net revenue | 4% | 6% | | | Research and Development Expenses (Nine Months Ended Sep 30) (in thousands) | Metric | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Change ($) | Change (%) | | :------------------------ | :-------------------------------------------- | :-------------------------------------------- | :--------- | :--------- | | Research and development | $13,787 | $11,159 | $2,628 | 24% | | % of net revenue | 6% | 6% | | | - The Q3 2020 decrease was primarily due to delayed enrollment in trials and limited clinical spending due to COVID-19, while the 9M 2020 increase was driven by process development costs, headcount, and pipeline product costs[170](index=170&type=chunk) [Selling, General and Administrative Expenses](index=33&type=section&id=Selling,%20General%20and%20Administrative%20Expenses_Comparison) This section compares selling, general, and administrative expenses for the three and nine months ended September 30, 2020 and 2019 Selling, General and Administrative Expenses (Three Months Ended Sep 30) (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change ($) | Change (%) | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------- | :--------- | | Selling, general and administrative | $51,146 | $49,475 | $1,671 | 3% | | % of net revenue | 51% | 77% | | | Selling, General and Administrative Expenses (Nine Months Ended Sep 30) (in thousands) | Metric | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Change ($) | Change (%) | | :---------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :--------- | :--------- | | Selling, general and administrative | $150,261 | $147,325 | $2,936 | 2% | | % of net revenue | 65% | 79% | | | - Q3 2020 increase was driven by headcount and sales commissions, partially offset by reduced travel/marketing due to COVID-19, lower amortization, legal fees, and bad debt[171](index=171&type=chunk) [Other Expense, net](index=34&type=section&id=Other%20Expense,%20net_Comparison) This section compares other expense, net, including interest and acquisition settlement gains, for the three and nine months ended September 30, 2020 and 2019 Other Expense, Net (Three Months Ended Sep 30) (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change ($) | Change (%) | | :-------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------- | :--------- | | Interest expense, net | $(2,969) | $(2,427) | $(542) | 22% | | Gain on settlement of deferred acquisition consideration | $951 | $— | $951 | 100% | | **Total other expense, net** | **$(1,974)** | **$(2,428)** | **$454** | **(19%)** | Other Expense, Net (Nine Months Ended Sep 30) (in thousands) | Metric | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Change ($) | Change (%) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :--------- | :--------- | | Interest expense, net | $(8,391) | $(6,392) | $(1,999) | 31% | | Loss on the extinguishment of debt | $— | $(1,862) | $1,862 | (100%) | | Gain on settlement of deferred acquisition consideration | $2,246 | $— | $2,246 | 100% | | **Total other expense, net** | **$(6,055)** | **$(8,243)** | **$2,188** | **(27%)** | - The decrease in total other expense, net, for both periods was primarily driven by gains on settlement of deferred acquisition consideration and the non-recurrence of debt extinguishment loss, partially offset by increased interest expense[175](index=175&type=chunk)[176](index=176&type=chunk) [Liquidity and Capital Resources](index=34&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's cash position, working capital, cash flow activities, and debt obligations - As of September 30, 2020, the company had **$36.5 million** in cash and **$62.8 million** in working capital, expected to fund operations for at least 12 months[177](index=177&type=chunk) - Primary uses of cash include working capital, capital expenditures, and debt service payments; additional funds may be sought through equity or debt financings[179](index=179&type=chunk)[180](index=180&type=chunk) - The company is subject to financial covenants under the 2019 Credit Agreement, including Minimum Trailing Twelve Month Consolidated Revenue and Non-PuraPly Revenue, with non-compliance risking debt acceleration[180](index=180&type=chunk) [Cash Flows](index=35&type=section&id=Cash%20Flows) This section analyzes the net cash used in operating, investing, and financing activities for the reported periods Cash Flow Activities (Nine Months Ended Sep 30) (in thousands) | Cash Flow Activity (Nine Months Ended Sep 30) | 2020 (in thousands) | 2019 (in thousands) | | :-------------------------------------------- | :------------------ | :------------------ | | Net cash used in operating activities | $(19,475) | $(27,127) | | Net cash used in investing activities | $(16,354) | $(2,776) | | Net cash provided by financing activities | $12,345 | $31,657 | | **Net change in cash and restricted cash** | **$(23,484)** | **$1,754** | - Net cash used in operating activities for 9M 2020 was **$19.5 million**, primarily from net loss and changes in operating assets and liabilities, partially offset by non-cash charges[182](index=182&type=chunk) - Net cash used in investing activities for 9M 2020 was **$16.4 million**, mainly due to capital expenditures and the CPN acquisition, partially offset by notes receivable repayment[184](index=184&type=chunk) - Net cash provided by financing activities for 9M 2020 was **$12.3 million**, primarily from the 2019 Credit Agreement and stock option exercises, offset by capital lease and deferred acquisition consideration payments[185](index=185&type=chunk) [Indebtedness](index=36&type=section&id=Indebtedness) This section details the company's credit facilities, term loans, and compliance with financial covenants - The 2019 Credit Agreement provides for a **$40.0 million** revolving credit facility and a **$60.0 million** term loan facility, fully funded by March 2020[188](index=188&type=chunk) - The company is required to comply with Minimum Trailing Twelve Month Consolidated Revenue and Non-PuraPly Revenue covenants, and was in compliance as of September 30, 2020[189](index=189&type=chunk)[190](index=190&type=chunk) - Outstanding borrowings under the Revolving Facility and Term Loan Facility were **$39.4 million** and **$60.0 million**, respectively, as of September 30, 2020[190](index=190&type=chunk) [Contractual Obligations and Commitments](index=37&type=section&id=Contractual%20Obligations%20and%20Commitments) This section confirms no material changes to contractual obligations and commitments since the prior annual report - There have been no material changes to contractual obligations and commitments as of September 30, 2020, from those disclosed in the Annual Report on Form 10-K for 2019[194](index=194&type=chunk) [Critical Accounting Policies and Significant Judgments and Estimates](index=37&type=section&id=Critical%20Accounting%20Policies%20and%20Significant%20Judgments%20and%20Estimates) This section highlights the reliance on significant estimates and judgments in financial reporting and potential impacts of assumption changes - The preparation of financial statements requires significant estimates, assumptions, and judgments, which are evaluated on an ongoing basis[195](index=195&type=chunk) - Changes in assumptions, especially given COVID-19 risks, could materially affect consolidated statements of operations, liquidity, and financial condition[195](index=195&type=chunk) [Emerging Growth Company Status](index=37&type=section&id=Emerging%20Growth%20Company%20Status) This section notes the company's status as an "emerging growth company" and its use of related exemptions - The company is an "emerging growth company" and utilizes exemptions, including an extended transition period for new accounting standards, which may affect comparability[196](index=196&type=chunk) [Off-Balance Sheet Arrangements](index=37&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of any off-balance sheet arrangements during the reported periods - The company did not have any off-balance sheet arrangements during the periods presented or currently[197](index=197&type=chunk) [Recently Issued Accounting Pronouncements](index=37&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) This section refers to Note 2 for disclosures regarding recently issued accounting standards - All recently issued accounting standards have been reviewed and are disclosed in Note 2 to the consolidated financial statements[198](index=198&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Organogenesis Holdings Inc. is not required to provide quantitative and qualitative disclosures about market risk - The company is a "smaller reporting company" and is not required to provide quantitative and qualitative disclosures about market risk[199](index=199&type=chunk) [Item 4. Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details management's evaluation of disclosure controls and procedures, identifies material weaknesses in internal control over financial reporting, outlines remediation plans, and reports on changes in internal control [Evaluation of Disclosure Controls and Procedures](index=38&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section presents management's assessment of the effectiveness of disclosure controls and procedures - Management evaluated the effectiveness of disclosure controls and procedures as of September 30, 2020[200](index=200&type=chunk) - It was concluded that internal control over financial reporting and disclosure controls were not effective as of December 31, 2019, and September 30, 2020, due to identified material weaknesses[203](index=203&type=chunk) [Material Weaknesses on Internal Control over Financial Reporting](index=38&type=section&id=Material%20Weaknesses%20on%20Internal%20Control%20over%20Financial%20Reporting) This section identifies specific material weaknesses in the company's internal control over financial reporting - A material weakness existed in the design and maintenance of formal accounting, business operations, and Information Technology policies, procedures, and controls[203](index=203&type=chunk) - Specific deficiencies included a lack of formalized policies for reviews over account reconciliations, journal entries, and accounting analyses, and inadequate controls for segregation of duties[203](index=203&type=chunk) [Plans for Remediation of Material Weakness](index=38&type=section&id=Plans%20for%20Remediation%20of%20Material%20Weakness) This section outlines the company's strategies and actions to address and remediate identified material weaknesses - Management is implementing a new company-wide enterprise resource planning (ERP) system, expected to go live in the first half of 2021, to enhance systematic controls and segregation of duties[204](index=204&type=chunk) - An outside firm was engaged to assist with enhancing risk assessment, reviewing processes, designing controls for data completeness and accuracy, and developing a monitoring protocol[209](index=209&type=chunk) - Regular reports on remediation progress have been provided to the audit committee[209](index=209&type=chunk) [Changes in Internal Control Over Financial Reporting](index=39&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section reports on any changes in internal control over financial reporting during the period - No material changes in internal control over financial reporting occurred during the period ended September 30, 2020, other than those related to the ongoing remediation plan[207](index=207&type=chunk) [PART II. OTHER INFORMATION](index=38&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and other disclosures [Item 1. Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) This section confirms that the company is not a party to any material legal proceedings and believes that the resolution of general claims would not materially affect its financial position or operations - The company is not a party to any material legal proceedings[208](index=208&type=chunk) - Management believes the ultimate resolution of various claims would not have a material adverse effect on the company's financial position, operating results, or cash flows[208](index=208&type=chunk) [Item 1A Risk Factors](index=40&type=section&id=Item%201A%20Risk%20Factors) This section refers to the Annual Report for detailed risk factors and highlights new or updated risks, including those related to information technology systems, supply chain interruptions, and the potential adverse impacts of the COVID-19 pandemic on manufacturing, sales, and financial covenants - Significant disruptions of IT systems or security breaches, such as the August 2020 ransomware attack, could adversely affect business, results of operations, and financial condition[211](index=211&type=chunk) - Interruptions in product supply or inventory loss, including production issues with Affinity product, may adversely affect business[212](index=212&type=chunk) - The global COVID-19 pandemic could negatively impact manufacturing facilities, supply chain (raw materials, source tissue), sales force effectiveness, and the ability to comply with financial covenants and raise capital[214](index=214&type=chunk)[215](index=215&type=chunk)[216](index=216&type=chunk)[217](index=217&type=chunk)[222](index=222&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=42&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section states that there were no unregistered sales of equity securities or use of proceeds to report - None[223](index=223&type=chunk) [Item 3. Defaults Upon Senior Securities](index=42&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities to report - None[224](index=224&type=chunk) [Item 4. Mine Safety Disclosures](index=42&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the company - Not Applicable[225](index=225&type=chunk) [Item 5. Other Information](index=42&type=section&id=Item%205.%20Other%20Information) This section reports recent changes in the company's board of directors and committee appointments - Albert Erani and Maurice Ades resigned as members of the board of directors effective November 3, 2020[226](index=226&type=chunk) - David Erani and Robert Ades were elected to fill the vacancies on the board of directors[227](index=227&type=chunk) - Art Leibowitz was appointed as a member of the compensation committee[228](index=228&type=chunk) [Item 6. Exhibits](index=43&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q report - Exhibits include the Certificate of Incorporation, Bylaws, Separation Letter Agreement, Certifications of Principal Executive and Financial Officers, and XBRL documents[229](index=229&type=chunk) [SIGNATURES](index=44&type=section&id=SIGNATURES) This section contains the formal attestations and signatures for the quarterly report [Signatures](index=44&type=section&id=SIGNATURES_Details) This section contains the formal signatures for the quarterly report - The report was signed on November 9, 2020, by Henry Hagopian, Interim Chief Financial Officer[232](index=232&type=chunk)[233](index=233&type=chunk)

Organogenesis Holdings, Inc. (NASDAQ:ORGO) Q2 2020 Earnings Conference Call August 10, 2020 5:00 PM ET Company Participants Gary Gillheeney - President, Chief Executive Officer & Director Timothy Cunningham - Chief Financial Officer Conference Call Participants Matthew Miksic - Crédit Suisse Ryan Zimmerman - BTIG Richard Newitter - SVB Leerink Steven Lichtman - Oppenheimer Operator Good afternoon, ladies and gentlemen, and welcome to the Second Quarter 2020 Earnings Conference Call for Organogenesis Holding ...

PART I. FINANCIAL INFORMATION [Item 1. Unaudited Consolidated Financial Statements](index=4&type=section&id=Item%201.%20Unaudited%20Consolidated%20Financial%20Statements) Presents Organogenesis Holdings Inc.'s unaudited consolidated financial statements as of June 30, 2020, detailing balance sheets, operations, cash flows, and accounting notes [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) Details the company's financial position, including assets, liabilities, and stockholders' equity, at June 30, 2020, and December 31, 2019 Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Assets** | | | | Cash | $40,455 | $60,174 | | Accounts receivable, net | $44,024 | $39,359 | | Inventory | $28,562 | $22,918 | | Total current assets | $117,706 | $125,600 | | Total assets | $216,487 | $220,687 | | **Liabilities & Stockholders' Equity** | | | | Total current liabilities | $66,058 | $59,894 | | Total liabilities | $180,737 | $165,104 | | Total stockholders' equity | $35,750 | $55,583 | [Consolidated Statements of Operations](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) Summarizes the company's financial performance, including net revenue, gross profit, and net loss, for the three and six months ended June 30 Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $68,960 | $64,948 | $130,692 | $122,071 | | Gross profit | $48,918 | $45,502 | $91,857 | $85,645 | | Loss from operations | $(2,252) | $(7,319) | $(17,336) | $(19,440) | | Net loss | $(5,166) | $(9,649) | $(21,479) | $(25,315) | | Net loss per share | $(0.05) | $(0.11) | $(0.21) | $(0.28) | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Reports cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2020, and 2019 Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(26,618) | $(21,674) | | Net cash used in investing activities | $(6,118) | $(1,501) | | Net cash provided by financing activities | $13,120 | $21,929 | | Change in cash and restricted cash | $(19,616) | $(1,246) | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Provides detailed explanations of the company's business, COVID-19 impact, liquidity, revenue recognition, debt, stock compensation, and legal matters - The company is a regenerative medicine firm focused on Advanced Wound Care and Surgical & Sports Medicine markets. While the COVID-19 pandemic has not materially adversely affected financial results through Q2 2020, significant risks and uncertainties remain regarding future impact[25](index=25&type=chunk)[26](index=26&type=chunk) - Management believes cash on hand (**$40.5 million**), working capital (**$51.6 million**), and cash flows from sales will be sufficient to fund operations, capital expenditures, and debt service for at least 12 months from the filing date[31](index=31&type=chunk) Revenue by Product Category (in thousands) | Category | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Advanced Wound Care | $59,731 | $111,019 | | Surgical & Sports Medicine | $9,229 | $19,673 | | **Total net revenue** | **$68,960** | **$130,692** | - As of June 30, 2020, the company had outstanding borrowings of **$60.0 million** under its Term Loan Facility and **$39.4 million** under its Revolving Facility. The company was in compliance with all financial covenants[59](index=59&type=chunk)[58](index=58&type=chunk) - In February 2020, the company settled a dispute over a **$5.0 million** deferred acquisition consideration related to the NuTech Medical acquisition for **$4.0 million**, resulting in a gain of **$1.3 million**[99](index=99&type=chunk)[127](index=127&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q2 and H1 2020 financial performance, covering revenue growth, COVID-19 impact, PuraPly reimbursement, liquidity, and debt obligations [Results of Operations](index=25&type=section&id=Results%20of%20Operations) Q2 2020 net revenue grew **6%** to **$69.0 million**, driven by Advanced Wound Care, with stable gross margin and positive Adjusted EBITDA, while operating loss significantly decreased Revenue Comparison (in thousands) | Category | Q2 2020 | Q2 2019 | % Change | H1 2020 | H1 2019 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Advanced Wound Care | $59,731 | $55,211 | 8% | $111,019 | $103,055 | 8% | | Surgical & Sports Medicine | $9,229 | $9,737 | -5% | $19,673 | $19,016 | 3% | | **Total Net Revenue** | **$68,960** | **$64,948** | **6%** | **$130,692** | **$122,071** | **7%** | - PuraPly products, which retain pass-through reimbursement status until September 30, 2020, are expected to see a decrease in net revenue after transitioning to a bundled payment structure, potentially not fully offset by growth in other products[120](index=120&type=chunk) - Selling, general and administrative (SG&A) expenses decreased by **5%** in Q2 2020, primarily due to a **$3.8 million** reduction in travel and marketing programs amid COVID-19 restrictions, partially offset by increased sales force headcount[142](index=142&type=chunk) EBITDA and Adjusted EBITDA Reconciliation (in thousands) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(5,166) | $(9,649) | $(21,479) | $(25,315) | | EBITDA | $(520) | $(5,081) | $(12,569) | $(16,532) | | Adjusted EBITDA | $274 | $(4,847) | $(12,618) | $(14,212) | [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2020, the company held **$40.5 million** in cash and **$51.6 million** in working capital, deemed sufficient for 12 months, and remained compliant with debt covenants - The company's primary sources of capital are product sales, institutional lenders, and proceeds from stock sales; as of June 30, 2020, cash was **$40.5 million** and working capital was **$51.6 million**[148](index=148&type=chunk) Cash Flow Summary - Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(26,618) | $(21,674) | | Net cash used in investing activities | $(6,118) | $(1,501) | | Net cash provided by financing activities | $13,120 | $21,929 | - The company is required to comply with financial covenants under its 2019 Credit Agreement, including Minimum Trailing Twelve Month Consolidated Revenue and Non-PuraPly Revenue, and was in compliance as of June 30, 2020[160](index=160&type=chunk)[161](index=161&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=31&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a "smaller reporting company," Organogenesis is exempt from providing disclosures under this item - The Company is a "smaller reporting company" as defined by SEC rules and is therefore not required to provide the disclosures under this item[170](index=170&type=chunk) [Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were ineffective as of June 30, 2020, due to a material weakness in internal control over financial reporting, with remediation underway - A material weakness in internal control over financial reporting, identified as of December 31, 2019, continued to exist at June 30, 2020[175](index=175&type=chunk) - The weakness stems from a lack of formal accounting policies, procedures, and controls, including inadequate segregation of duties and review controls over financial reporting[175](index=175&type=chunk) - Remediation efforts are in progress, including the implementation of a new ERP system (expected in H2 2020), formalizing policies, and engaging an outside firm to assist with enhancing controls and monitoring[181](index=181&type=chunk)[178](index=178&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently a party to any material legal proceedings, though it may face litigation in the ordinary course of business - The company is not currently a party to any material legal proceedings[180](index=180&type=chunk) [Risk Factors](index=34&type=section&id=Item%201A%20Risk%20Factors) Updates the company's risk factors, emphasizing COVID-19's potential adverse impacts on manufacturing, supply chains, sales force, product demand, and financial covenant compliance - The COVID-19 pandemic poses a significant risk to the company's manufacturing facilities, supply chain for raw materials and source tissue, and the ability of its sales force to meet with healthcare providers[183](index=183&type=chunk)[185](index=185&type=chunk)[187](index=187&type=chunk) - The company may experience unpredictable reductions in product demand if patients are unable to access therapies or if providers prioritize resources to address the pandemic[189](index=189&type=chunk) - The economic impact of COVID-19 could adversely affect the company's ability to meet financial covenants in its 2019 Credit Agreement and could negatively impact its ability to raise additional capital[191](index=191&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=35&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities occurred during the reporting period - None[192](index=192&type=chunk) [Defaults Upon Senior Securities](index=35&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities occurred during the reporting period - None[193](index=193&type=chunk) [Mine Safety Disclosures](index=35&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Not Applicable[194](index=194&type=chunk) [Other Information](index=35&type=section&id=Item%205.%20Other%20Information) No other information is reported for the period - None[195](index=195&type=chunk) [Exhibits](index=36&type=section&id=Item%206.%20Exhibits) Lists exhibits filed with Form 10-Q, including CEO and CFO certifications required by Sarbanes-Oxley Act and XBRL data files - Exhibits filed include Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to Sarbanes-Oxley Act Sections 302 and 906, as well as XBRL data files[197](index=197&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q1 2020 was $61.7 million, an increase of 8% from $57.1 million in Q1 2019 [18] - Gross profit for Q1 2020 was $42.9 million, up 7% from $40.1 million in Q1 2019, with a gross profit margin of 69.6% compared to 70.3% in the prior year [23] - Operating loss for Q1 2020 was $15.1 million, compared to a loss of $12.1 million in Q1 2019, reflecting a 24% increase in losses [30] - Net loss for Q1 2020 was $16.3 million or $0.16 per share, compared to a net loss of $15.7 million or $0.17 per share in Q1 2019 [32] Business Line Data and Key Metrics Changes - Revenue from Advanced Wound Care products was $51.3 million, a 7% increase from $47.8 million in Q1 2019, representing 83% of total revenue [19] - Revenue from Surgical & Sports Medicine products was $10.4 million, a 13% increase from $9.3 million in Q1 2019, representing 17% of total revenue [20] - Revenue from PuraPly products was $32.5 million, a 28% increase from $25.4 million in Q1 2019, accounting for approximately 53% of total revenue [21] Market Data and Key Metrics Changes - Sales through February 2020 were up 13% year-over-year, but sales declined 14% year-over-year in the second half of March due to COVID-19 disruptions [11] - Sales of Surgical & Sports Medicine products declined 52% year-over-year in April, while Advanced Wound Care products saw a 24% decline [13] Company Strategy and Development Direction - The company is focused on long-term growth and market share gain, driven by investments in the commercial team and new product launches [38] - The strategy includes expanding the office presence for PuraPly and adapting to the shift of procedures from outpatient settings to offices [64] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about recovery trends as healthcare facilities begin to reopen, but acknowledged uncertainty regarding the pace of recovery [14] - The company expects to realize $5 million to $6 million in savings in Q2 2020 due to proactive cost-saving measures [29] Other Important Information - The company withdrew its fiscal year 2020 revenue guidance due to uncertainties from the COVID-19 pandemic [36] - As of March 31, 2020, the company had $46.9 million in cash and $110 million in debt obligations [34] Q&A Session Summary Question: Insights on recovery signs across product lines and geographies - Management noted that capacity for Surgical & Sports Medicine has opened up to 80%-82%, with rural hospitals showing better performance [42] - Wound care centers are gradually reopening, with 80% now open and more than half accepting new patients [44] Question: Impact of deferred procedures on product mix - Management indicated that larger and more infected wounds are being observed, leading to expected increases in PuraPly sales [50] Question: Percentage of business related to traumatic wounds - Management stated that 45% of procedures are nonelective, with a reasonable percentage being traumatic, but specific percentages were not disclosed [53] Question: Expectations for backlog recovery - Management anticipates that about 85% of the backlog will be addressed within 4 to 5 months [55] Question: Criteria for allowing sales reps into centers - The criteria depend on regional COVID-19 experiences, with varying rates of access for sales reps [58] Question: Importance of clinical data presentations - Management expressed concern over the inability to present clinical data at conferences due to the pandemic, which may impact brand support [66]