Organogenesis (ORGO) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION 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 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 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 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 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 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 This section provides detailed explanations and additional information supporting the consolidated financial statements 1. Nature of the Business and Basis of Presentation 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] - The COVID-19 pandemic has not materially adversely affected the company's financial results through Q3 2020, but future impacts are uncertain[25] - The Avista Merger was accounted for as a reverse merger, with Organogenesis Inc. treated as the accounting acquirer[28] - 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] 2. Summary of Significant Accounting Policies 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] - 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] - 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] 3. Acquisition 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][41] - 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] - 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][46] 4. Product and Geographic Sales 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] 5. Fair Value of Financial Assets and Liabilities 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] 6. Accounts Receivable, Net 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 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 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 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] 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 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 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][69] - The company was in compliance with the financial covenants under the 2019 Credit Agreement as of September 30, 2020[73] 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 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] 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][85] 13. Stock-Based Compensation 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][96] - 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][100] 14. Net Income (Loss) per Share (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] 15. Commitments and Contingencies 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] 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] - 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] 16. Related Party Transactions 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] - The company recorded $1,111k as a recovery of previously reserved related party receivables in Q3 2020 due to loan repayment and forgiveness[127] 17. Subsequent Events 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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][132] 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] CPN Acquisition 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] - CPN's results of operations have been included in consolidated financial statements since the acquisition date, with revenue and expenses not material[140] Components of Our Consolidated Results of Operations This section analyzes the key components influencing the company's financial performance, including revenue, cost of goods sold, and operating expenses 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] - PuraPly products transitioned to a bundled payment structure after September 30, 2020, which is expected to decrease net revenue from these products[145] Cost of goods sold, gross profit and gross profit margin 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] - Gross profit and margin are influenced by product/geographic sales mix, pricing, manufacturing efficiency, material costs, and regulatory actions[147] Selling, general and administrative expenses 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] - SG&A expenses are expected to increase due to investments in market development and expansion of sales forces[148] Research and development expenses 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] - R&D expenses are generally expected to increase with ongoing clinical trials, regulatory pathway progression, and new product development[149] Other expense, net 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][152][153] - A $1.9 million loss on debt extinguishment was recognized in 9M 2019 from the termination of the ML Agreement[152] - 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] Income taxes 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] - 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] Results of Operations This section provides a detailed comparative analysis of the company's financial performance for the reported periods EBITDA and Adjusted EBITDA 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 | $(18,999) | Comparison of the Three and Nine Months Ended September 30, 2020 and 2019 This section offers a detailed comparative analysis of financial performance metrics for the three and nine months ended September 30, 2020 and 2019 Revenue This section compares net revenue by product category for the three and nine months ended September 30, 2020 and 2019 Revenue by Product Category (Three Months Ended Sep 30) (in thousands) | Product Category | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change ($) | 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 $86.9 million in 9M 2019) due to expanded sales forces and increased sales[166] Cost of goods sold, gross profit and gross profit margin This section compares cost of goods sold, gross profit, and gross profit margin for the three and nine months ended September 30, 2020 and 2019 Cost of Goods Sold, Gross Profit, and Margin (Three Months Ended Sep 30) (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change ($) | 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 | $38,913 | 30% | | Gross profit % | 73% | 70% | | | - The increase in gross profit was primarily due to increased sales volume and a shift in product mix to higher gross margin products[168] Research and Development Expenses This section compares research and development expenses for the three and nine months ended September 30, 2020 and 2019 Research and Development Expenses (Three Months Ended Sep 30) (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change ($) | 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 | $2,628 | 24% | | % of net revenue | 6% | 6% | | | - The Q3 2020 decrease was primarily due to delayed enrollment in trials and limited clinical spending due to COVID-19, while the 9M 2020 increase was driven by process development costs, headcount, and pipeline product costs[170] Selling, General and Administrative Expenses This section compares selling, general, and administrative expenses for the three and nine months ended September 30, 2020 and 2019 Selling, General and Administrative Expenses (Three Months Ended Sep 30) (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change ($) | 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 | $2,936 | 2% | | % of net revenue | 65% | 79% | | | - Q3 2020 increase was driven by headcount and sales commissions, partially offset by reduced travel/marketing due to COVID-19, lower amortization, legal fees, and bad debt[171] Other Expense, net This section compares other expense, net, including interest and acquisition settlement gains, for the three and nine months ended September 30, 2020 and 2019 Other Expense, Net (Three Months Ended Sep 30) (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change ($) | 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][176] Liquidity and Capital Resources 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] - Primary uses of cash include working capital, capital expenditures, and debt service payments; additional funds may be sought through equity or debt financings[179][180] - 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] Cash Flows 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] - 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] - 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] 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] - 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][190] - 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] Contractual Obligations and Commitments 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] Critical Accounting Policies and Significant Judgments and Estimates 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] - Changes in assumptions, especially given COVID-19 risks, could materially affect consolidated statements of operations, liquidity, and financial condition[195] Emerging Growth Company Status 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] Off-Balance Sheet Arrangements 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] Recently Issued Accounting Pronouncements 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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 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] - 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] Material Weaknesses on Internal Control over Financial Reporting 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] - 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] Plans for Remediation of Material Weakness 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] - 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] - Regular reports on remediation progress have been provided to the audit committee[209] Changes in Internal Control Over Financial Reporting 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] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and other disclosures Item 1. Legal Proceedings 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] - 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] Item 1A Risk Factors 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] - Interruptions in product supply or inventory loss, including production issues with Affinity product, may adversely affect business[212] - 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][215][216][217][222] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report - None[223] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities to report - None[224] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Not Applicable[225] Item 5. Other Information 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] - David Erani and Robert Ades were elected to fill the vacancies on the board of directors[227] - Art Leibowitz was appointed as a member of the compensation committee[228] Item 6. Exhibits 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] SIGNATURES This section contains the formal attestations and signatures for the quarterly report Signatures 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][233]