UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the Quarterly Period Ended
OR
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(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The number of shares of the registrant’s Class A common stock outstanding as of April 30, 2024 was
Organogenesis Holdings Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2024
Table of Contents
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4 |
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Item 1. |
4 |
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Condensed Consolidated Statements of Operations and Comprehensive Loss |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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31 |
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2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements. These statements may relate to, but are not limited to, expectations of our future results of operations, business strategies and operations, financing plans, potential growth opportunities, clinical development and commercialization of our product candidates, potential market opportunities and the effects of competition, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under “Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “might,” “would,” “continue” or the negative of these terms or other comparable terminology. These forward-looking statements are based on our management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and discussed elsewhere in this Form 10-Q and in “Part I, Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023. These forward-looking statements speak only as of the date of this Form 10-Q. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the U.S. Securities and Exchange Commission (the “SEC”) after the date of this Form 10-Q.
As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” “the Company,” “Organogenesis” and “ORGO” will refer to Organogenesis Holdings Inc. and its subsidiaries.
3
PART I—FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements.
ORGANOGENESIS HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(amounts in thousands, except share and per share data)
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March 31, |
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December 31, |
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2024 |
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2023 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Intangible assets, net |
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Goodwill |
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Operating lease right-of-use assets, net |
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Deferred tax asset, net |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Current portion of term loan |
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$ |
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$ |
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Current portion of finance lease obligations |
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Current portion of operating lease obligations - related party |
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Current portion of operating lease obligations |
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Accounts payable |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Term loan, net of current portion |
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Finance lease obligations, net of current portion |
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Operating lease obligations, net of current portion - related party |
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Operating lease obligations, net of current portion |
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Other liabilities |
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Total liabilities |
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(Note 14) |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ORGANOGENESIS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
(amounts in thousands, except share and per share data)
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Three Months Ended |
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2024 |
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2023 |
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Net revenue |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Research and development |
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Total operating expenses |
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Loss from operations |
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( |
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( |
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Other expense, net: |
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Interest expense, net |
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( |
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( |
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Other income, net |
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Total other expense, net |
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( |
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( |
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Net loss before income taxes |
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( |
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( |
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Income tax benefit |
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Net loss and comprehensive loss |
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$ |
( |
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$ |
( |
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Net loss, per share: |
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Basic and diluted |
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$ |
( |
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$ |
( |
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Weighted-average common shares outstanding |
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Basic and diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ORGANOGENESIS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(amounts in thousands, except share data)
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Three Months Ended March 31, 2024 |
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Additional |
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Common Stock |
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Paid-in |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Deficit |
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Stockholders’ Equity |
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Balance as of December 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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Exercise of stock options |
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— |
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— |
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Vesting of RSUs, net of shares surrendered to pay taxes |
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— |
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( |
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— |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Balance as of March 31, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
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Three Months Ended March 31, 2023 |
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Additional |
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Common Stock |
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Paid-in |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Deficit |
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Stockholders’ Equity |
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Balance as of December 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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Cumulative-effect adjustment from adoption of , net of tax (Note 2) |
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— |
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— |
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— |
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( |
) |
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( |
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Vesting of RSUs, net of shares surrendered to pay taxes |
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— |
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( |
) |
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— |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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( |
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Balance as of March 31, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
ORGANOGENESIS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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Three Months Ended |
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2024 |
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2023 |
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Cash flows from operating activities: |
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Net loss |
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$ |
( |
) |
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$ |
( |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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Amortization of intangible assets |
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Reduction in the carrying value of right-of-use assets |
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Non-cash interest expense |
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Deferred interest expense |
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Provision recorded for credit losses |
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Loss on disposal of property and equipment |
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Adjustment for excess and obsolete inventories |
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Stock-based compensation |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Inventories |
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( |
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( |
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Prepaid expenses and other current assets and other assets |
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( |
) |
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( |
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Operating leases |
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( |
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( |
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Accounts payable |
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( |
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( |
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Accrued expenses and other current liabilities |
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Other liabilities |
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Net cash used in operating activities |
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( |
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( |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Payments of term loan under the 2021 Credit Agreement |
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( |
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( |
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Payments of withholding taxes in connection with RSUs vesting |
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( |
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( |
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Proceeds from the exercise of stock options |
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Principal repayments of finance lease obligations |
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( |
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Net cash used in financing activities |
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( |
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( |
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Change in cash, cash equivalents and restricted cash |
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( |
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( |
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Cash, cash equivalents, and restricted cash, beginning of period |
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Cash, cash equivalents, and restricted cash, end of period |
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$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes |
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$ |
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$ |
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Supplemental disclosure of non-cash investing and financing activities: |
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Cumulative effect adjustment for adoption of ASU No. 2016-13 (Note 2) |
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$ |
— |
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$ |
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Purchases of property and equipment included in accounts payable and accrued expenses |
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$ |
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$ |
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Right-of-use assets obtained through operating lease obligations |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
ORGANOGENESIS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
1. Nature of Business and Basis of Presentation
Organogenesis Holdings Inc. (“ORGO” or the “Company”) is a leading regenerative medicine company focused on the development, manufacture, and commercialization of solutions for the Advanced Wound Care and Surgical & Sports Medicine markets. Several of the existing and pipeline products in the Company’s portfolio have Premarket Application (“PMA”) approval, or Premarket Notification 510(k) clearance from the United States Food and Drug Administration (“FDA”). The Company’s customers include hospitals, wound care centers, government facilities, ambulatory surgery centers (“ASCs”) and physician offices. The Company has
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in the United States (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, for the year ended December 31, 2023, included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2023, which was filed with the SEC on February 29, 2024 (the “Annual Report”). The results for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024, any other interim periods, or any future years or periods.
2. Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2023, and the notes thereto, which are included in the Annual Report. There have been no material changes to the significant accounting policies previously disclosed in the Annual Report.
These unaudited condensed consolidated financial statements include the accounts and results of operations of Organogenesis Holdings Inc. and its wholly-owned subsidiaries, Organogenesis Inc., Organogenesis GmbH (a Switzerland corporation) and Prime Merger Sub, LLC. All intercompany balances and transactions have been eliminated in consolidation.
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed below, the Company does not believe that the adoption of recently issued standards have had or may have a material impact on its condensed consolidated financial statements or disclosures.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported results of operations during the reporting periods. In preparing the condensed consolidated financial statements, the estimates and assumptions that management considers to be significant and that present the greatest amount of uncertainty include: revenue recognition; sales returns and credit losses; inventory reserve; recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived assets; and the valuation and recognition of stock-based compensation. Actual results and outcomes may differ significantly from those estimates and assumptions.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents. The Company invests its cash equivalents in highly rated money market funds. Deposits may exceed federally insured limits, and the Company is exposed to credit risk on deposits in the event of default by the financial institutions to the extent account balances exceed the amount insured by the Federal Deposit Insurance Corporation (“FDIC”). However, the Company sweeps cash daily overnight and diversifies among financial institutions to reduce such exposure.
8
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-07.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to disclose specific categories in the effective tax rate reconciliation, as well as additional information for reconciling items that exceed a quantitative threshold. ASU 2023-09 also requires all entities to disclose income taxes paid disaggregated by federal, state and foreign taxes, and further disaggregated for specific jurisdictions that exceed 5% of total income taxes paid, among other expanded disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-09.
Correction of Immaterial Classification Error
3. Revenue from Contracts with Customers
The Company generates revenue through the sale of Advanced Wound Care and Surgical & Sports Medicine products. There is a single performance obligation in all of the Company’s contracts, which is the Company’s promise to transfer the Company’s products to customers based on specific payment and shipping terms in the arrangement. Product revenue is recognized when a customer obtains control of the Company’s products which occurs at a point in time and may be upon shipment, procedure date, or delivery, based on the terms of the contract. Revenue is recorded net of a reserve for returns, discounts and Group Purchasing Organization (“GPO”) rebates, which represent a direct reduction to the revenue recognized. These reductions are accrued at the time revenue is recognized, based upon historical experience and specific circumstances. For the three months ended March 31, 2024 and 2023, the Company recorded GPO fees of $
The following tables set forth revenue by product category:
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Three Months Ended March 31, |
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2024 |
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2023 |
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Advanced Wound Care |
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$ |
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$ |
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Surgical & Sports Medicine |
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Total net revenue |
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$ |
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$ |
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4. Accounts Receivable, Net
Accounts receivable consisted of the following:
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March 31, |
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December 31, |
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2024 |
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2023 |
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Accounts receivable |
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$ |
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$ |
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Less — allowance for credit losses |
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( |
) |
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( |
) |
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$ |
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$ |
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9
The Company’s allowance for credit losses is comprised of the following:
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Three Months Ended |
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2024 |
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2023 |
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Balance at beginning of period |
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$ |
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|
$ |
|
||
Cumulative effect of adopting ASU 2016-13 |
|
|
— |
|
|
|
|
|
Additions (adjustments) |
|
|
|
|
|
|
||
Write-offs |
|
|
( |
) |
|
|
( |
) |
Recoveries |
|
|
|
|
|
— |
|
|
Balance at end of period |
|
$ |
|
|
$ |
|
||
5. Inventories
Inventories, net of related reserves for excess and obsolescence, consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
6. Property and Equipment, Net
Property and equipment consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Leasehold improvements |
|
$ |
|
|
$ |
|
||
Buildings |
|
|
|
|
|
|
||
Furniture, computers and equipment |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Construction in progress |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
10
7. Goodwill and Intangible Assets
Goodwill was $
Intangible assets consisted of the following as of March 31, 2024:
|
|
Original |
|
|
Accumulated |
|
|
Net Book |
|
|||
|
|
Cost |
|
|
Amortization |
|
|
Value |
|
|||
Developed technology |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
|
||
Patent |
|
|
|
|
|
( |
) |
|
|
|
||
Independent sales agency network |
|
|
|
|
|
( |
) |
|
|
|
||
Trade names and trademarks |
|
|
|
|
|
( |
) |
|
|
|
||
Non-compete agreements |
|
|
|
|
|
( |
) |
|
|
|
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Intangible assets consisted of the following as of December 31, 2023:
|
|
Original |
|
|
Accumulated |
|
|
Net Book |
|
|||
|
|
Cost |
|
|
Amortization |
|
|
Value |
|
|||
Developed technology |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Customer relationship |
|
|
|
|
|
( |
) |
|
|
|
||
Patent |
|
|
|
|
|
( |
) |
|
|
— |
|
|
Independent sales agency network |
|
|
|
|
|
( |
) |
|
|
— |
|
|
Trade names and trademarks |
|
|
|
|
|
( |
) |
|
|
|
||
Non-compete agreements |
|
|
|
|
|
( |
) |
|
|
|
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Amortization of intangible assets, calculated on a straight-line basis or using an accelerated method, was $
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Personnel costs |
|
$ |
|
|
$ |
|
||
Royalties |
|
|
|
|
|
|
||
Accrued but unpaid lease obligations and interest |
|
|
|
|
|
|
||
Accrued milestone payment (Note 14) |
|
|
|
|
|
|
||
Accrued option payment (Note 14) |
|
|
|
|
|
— |
|
|
Accrued taxes |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
9. Restructuring
In order to reduce the Company’s cost structure and improve operating efficiency, the Company has consolidated its manufacturing operations in various locations into Massachusetts facilities.
On February 3, 2023, the Company committed to a plan to restructure its workforce to increase productivity and enhance profitability. The reduction in force reduced the Company’s headcount by
11
Company incurred a total charge of $
As a result of the restructuring activities, the Company incurred a total pre-tax charge of $
|
|
Total |
|
|
Liability balance as of December 31, 2023 |
|
$ |
|
|
Cash disbursements and other adjustments |
|
|
( |
) |
Liability balance as of March 31, 2024 |
|
$ |
|
|
|
|
Employee |
|
|
Other |
|
|
Total |
|
|||
Liability balance as of December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Expenses |
|
|
|
|
|
|
|
|
|
|||
Cash disbursements and other adjustments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Liability balance as of March 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
10. Debt Obligations
Debt obligations consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Revolving Facility |
|
$ |
— |
|
|
$ |
— |
|
Term loan |
|
|
|
|
|
|
||
Less debt discount and debt issuance cost |
|
|
( |
) |
|
|
( |
) |
Term loan, net of debt discount and debt issuance cost |
|
$ |
|
|
$ |
|
||
2021 Credit Agreement
In August 2021, the Company, as borrower, its subsidiaries, as guarantors, and Silicon Valley Bank (“SVB”), and the several other lenders thereto (collectively, the “Lenders”) entered into a credit agreement, as amended (the “2021 Credit Agreement”), providing for a term loan facility not to exceed $
Advances made under the 2021 Credit Agreement may be either SOFR Loans or ABR Loans, at the Company’s option.
The 2021 Credit Agreement requires the Company to make consecutive quarterly installment payments equal to the following: (a) from September 30, 2021 through and including June 30, 2022, $
The Company must pay in arrears, on the first day of each quarter prior to August 6, 2026 (the “Revolving Termination Date”) and on the Revolving Termination Date, a fee for the Company’s non-use of available funds (the “Commitment Fee”). The
12
Commitment Fee rate is between
The Company recorded debt issuance costs and related fees of $
As of March 31, 2024 and December 31, 2023, the Company had outstanding borrowings of $
The future
2024 (remaining nine months) |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Total |
|
$ |
|
11. Stockholders’ Equity and Stock-Based Compensation
Common Stock
As of March 31, 2024, the issued shares of Class A common stock include
Stock Incentive Plans
On November 28, 2018, the Board of Directors of the Company adopted, and on December 10, 2018 the Company’s stockholders approved, the Organogenesis 2018 Equity Incentive Plan (the “2018 Plan”). At the adoption of the 2018 Plan, a total of
The Organogenesis 2003 Stock Incentive Plan (the “2003 Plan”), provided for the Company to issue restricted stock awards, or to grant incentive stock options or non-statutory stock options. Effective December 10, 2018, no additional awards may be made under the 2003 Plan.
Stock-Based Compensation Expense
Stock options awarded under the stock incentive plans expire
Stock-based compensation expense was $
Restricted Stock Units (RSUs)
The Company granted
13
The activity of restricted stock units is set forth below:
|
Number |
|
|
Weighted Average |
|
|||
|
of RSUs |
|
|
Grant Date |
|
|||
|
|
|
|
Fair Value |
|
|||
Unvested at December 31, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Canceled/forfeited |
|
|
( |
) |
|
|
|
|
Unvested at March 31, 2024 |
|
|
|
|
$ |
|
||
As of March 31, 2024, the total unrecognized compensation cost related to unvested restricted stock units expected to vest was $
Stock Options
The following table summarizes the Company’s stock option activity since December 31, 2023:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
||||
|
|
|
|
|
|
|
|
Average |
|
|
|
|
||||
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
||||
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
||||
|
|
Number of |
|
|
Exercise |
|
|
Term |
|
|
Intrinsic |
|
||||
|
|
Options |
|
|
Price |
|
|
(in years) |
|
|
Value |
|
||||
Outstanding as of December 31, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Exercised |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
||
Canceled/forfeited |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
||
Outstanding as of March 31, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Options exercisable as of March 31, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Options vested or expected to vest as of March 31, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
The stock options granted during the three months ended March 31, 2024 and 2023 were
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s Class A common stock for those stock options that have exercise prices lower than the fair value of the Company’s Class A common stock.
The weighted-average grant-date fair value per share of stock options granted during the three months ended March 31, 2024 and 2023 was $
As of March 31, 2024, the total unrecognized stock compensation expense related to unvested stock options expected to vest was $
12. Earnings per Share (EPS)
Basic EPS is calculated by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of shares outstanding plus the dilutive effect, if any, of outstanding equity awards using the treasury stock method which includes consideration of unrecognized compensation expenses as additional proceeds.
The Company’s potentially dilutive securities include restricted stock units and stock options to purchase shares of Class A common stock. As the Company had a net loss in the periods presented, the potentially dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be anti-dilutive. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same for these periods. For the three months ended March 31, 2024 and 2023, the Company excluded
14
period end, from the computation of diluted net loss per share attributable to the common stockholders for these periods.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Numerator: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
||
Weighted-average common shares outstanding — basic and diluted |
|
|
|
|
|
|
||
Net loss per share—basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
13. Leases
The Company’s leases consist primarily of real estate, equipment and vehicle leases.
The Company leases real estate for office, lab, warehouse and production space under noncancelable leases that expire at various dates through 2035, subject to the Company’s options to terminate or renew certain leases for an additional to
On January 1, 2013, the Company entered into finance lease arrangements with 65 Dan Road SPE, LLC, 85 Dan Road Associates, LLC, Dan Road Equity I, LLC and 275 Dan Road SPE, LLC for office and laboratory space in Canton, Massachusetts (the “Related-Party Leases”). 65 Dan Road SPE, LLC, 85 Dan Road Associates, LLC, Dan Road Equity I, LLC and 275 Dan Road SPE, LLC are related parties as the owners of these entities are also directors, former directors and / or stockholders of the Company.
In August 2021, the Company purchased the building (the “275 Dan Road Building”) under the lease with 275 Dan Road SPE, LLC for $
The remaining three Related-Party Leases were set to terminate on December 31, 2022 and each contained a renewal option for a five-year period with a rental rate at the greater of (i) rent for the last year of the prior term, or (ii) the then fair market value. In November 2021, the Company exercised the option to extend the leases for an additional five years, and at such time, remeasured the right of use assets and lease liabilities based on its best estimate of the market rental rate in the renewal period and reassessed the classification for these leases. As a result, these leases were reclassified from finance leases to operating leases on the consolidated balance sheets as of December 31, 2021. In December 2022, the Company and the landlord finalized the market rental rate in the renewal period for these properties, resulting in an additional $
Effective April 1, 2019, the Company agreed to accrue interest on accrued but unpaid lease obligations owed for rent in arrears to the owners of the buildings subject to the Related-Party Leases, at an interest rate equal to the rate charged under the 2019 Credit Agreement. The remaining accrued but unpaid lease obligation with respect to the 275 Dan Road Building was paid in five quarterly installments through January 3, 2023, and accordingly at March 31, 2024 and December 31, 2023, there is no remaining balance or accrued interest associated with the 275 Dan Road Building. The accrued but unpaid lease obligations as well as the related accrued interest with respect to the remaining three Related-Party Leases are shown below:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Principal portion of rent in arrears |
|
$ |
|
|
$ |
|
||
Accrued interest on accrued but unpaid lease obligations |
|
$ |
|
|
$ |
|
||
The accrued but unpaid lease obligations owed for rent in arrears on the three remaining Related-Party Leases was included in current portion of operating lease obligations on the condensed consolidated balance sheets, as of March 31, 2024 and December 31, 2023. The accrued interest on the accrued but unpaid lease obligations was included in accrued expenses and other current liabilities on the condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023.
15
The components of lease cost were as follows:
|
|
Classification |
|
Three Months Ended March 31, |
|
|||||
|
|
|
|
2024 |
|
|
2023 |
|
||
Finance lease |
|
|
|
|
|
|
|
|
||
Amortization of right-of-use assets |
|
COGS and SG&A |
|
$ |
|
|
$ |
|
||
Interest on lease liabilities |
|
Interest Expense |
|
|
|
|
|
|
||
Total finance lease cost |
|
|
|
|
|
|
|
|
||
Operating lease cost |
|
COGS, R&D, SG&A |
|
|
|
|
|
|
||
Short-term lease cost |
|
COGS, R&D, SG&A |
|
|
|
|
|
|
||
Variable lease cost |
|
COGS, R&D, SG&A |
|
|
|
|
|
|
||
Total lease cost |
|
|
|
$ |
|
|
$ |
|
||
Supplemental balance sheet information related to finance leases was as follows:
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Property and equipment, gross |
|
$ |
|
|
$ |
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
$ |
|
|
$ |
|
|||
Supplemental cash flow information related to leases was as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
||
Operating cash flows for operating leases |
|
$ |
|
|
$ |
|
||
Operating cash flows for finance leases |
|
$ |
|
|
$ |
|
||
Financing cash flows for finance leases |
|
$ |
|
|
$ |
|
||
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Weighted-average remaining lease term |
|
|
|
|
|
|
||
Finance leases |
|
|
|
|
|
|
||
Operating leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Weighted-average discount rate |
|
|
|
|
|
|
||
Finance leases |
|
|
% |
|
|
% |
||
Operating leases |
|
|
% |
|
|
% |
||
16
As of March 31, 2024, maturities of lease liabilities were as follows:
|
|
Operating leases |
|
|
Finance leases |
|
||
2024 (remaining nine months) |
|
$ |
|
|
$ |
|
||
2025 |
|
|
|
|
|
|
||
2026 |
|
|
|
|
|
|
||
2027 |
|
|
|
|
|
|
||
2028 |
|
|
|
|
|
— |
|
|
Thereafter |
|
|
|
|
|
— |
|
|
Total lease payments |
|
|
|
|
|
|
||
Less: interest |
|
|
( |
) |
|
|
( |
) |
Total lease liabilities |
|
$ |
|
|
$ |
|
||
14. Commitments and Contingencies
License and Manufacturing Agreement
In November 2023, the Company entered into a trademark license and manufacturing agreement with Vivex Biologics, Inc. (“Vivex”) to sell its CYGNUS Dual (“Dual”) and CYGNUS Matrix (“Matrix") products, with the option to license the VIA Matrix (“VIA”) products.
The Company paid an upfront licensing fee to Vivex to sell Dual and Matrix, and also agreed to pay a fixed milestone payment for Dual in the event that its average sales price (“ASP”) is published by certain government agencies for a specified period of time. In addition, the Company is required to pay a low double digit royalty and a high single-digit royalty on the Net Sales of Dual and Matrix, respectively, during the royalty term, as defined in the agreement with Vivex. The royalty term is commensurate with the initial term of the contract and will continue for each subsequent renewal period. The initial term of the agreement expires on
The Company recorded $
Royalties
The Company entered into a license agreement with a university for certain patent rights related to the development, use, and production of one of its advanced wound care products. Under this agreement, the Company incurred a royalty based on a percentage of net product sales, for the use of these patents until the patents expired, which was in November 2006.
In October 2017, the Company entered into a license agreement with a third party. Under the license agreement, the Company is required to pay royalties based on a percentage of net sales of the licensed product that occur, after December 31, 2017, through the expiration of the underlying patent in October 2026, subject to minimum royalty payment provisions.
The Company recorded total royalty expense of $
Legal Matters
In conducting its activities, the Company, from time to time, is subject to various claims and also has claims against others. In management’s opinion, the ultimate resolution of such claims would not have a material effect on the financial position, operating results or cash flows of the Company. The Company accrues for these claims when amounts due are probable and estimable.
15. Related Party Transactions
Lease obligations to affiliates, including accrued but unpaid lease obligations, purchase of an asset under a finance lease with an affiliate, and renewal of leases with affiliates are further described in Note 13, Leases.
16. Taxes
17
The Company is principally subject to taxation in the United States. The Company has a history of net operating losses both federally and in various states and began utilizing those losses to offset current taxable income in 2020. As net operating loss carryovers become limited or are fully utilized, the Company will accrue current federal and state income tax expense. The Company’s wholly owned Swiss subsidiary, Organogenesis GmbH, is subject to taxation in Switzerland and has a transfer pricing arrangement in place with Organogenesis Inc., its U.S. parent.
The income tax rate for the three months ended March 31, 2024 was
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Form 10-Q and the financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC, on February 29, 2024. Please refer to our cautionary note regarding forward-looking statements on page 3 of this Form 10-Q, which is incorporated herein by this reference.
Overview
We are a leading regenerative medicine company focused on the development, manufacture, and commercialization of solutions for the Advanced Wound Care and Surgical & Sports Medicine markets. Our products have been shown through clinical and scientific studies to support and in some cases accelerate tissue healing and improve patient outcomes. We are advancing the standard of care in each phase of the healing process through multiple breakthroughs in tissue engineering and cell therapy. Our solutions address large and growing markets driven by aging demographics and increases in comorbidities such as diabetes, obesity, and cardiovascular and peripheral vascular disease. We offer our differentiated products and in-house customer support to a wide range of health care customers including hospitals, wound care centers, government facilities, ambulatory surgery centers (ASCs) and physician offices. Our mission is to provide integrated healing solutions that substantially improve medical outcomes and the lives of patients while lowering the overall cost of care.
We offer a comprehensive portfolio of products in the markets we serve that address patient needs across the continuum of care. We have and intend to continue to generate data from clinical trials, real-world outcomes and health economics research that validate the clinical efficacy and value proposition offered by our products. Several of our existing and pipeline products in our portfolio have PMA approval, or 510(k) clearance from the FDA. Given the extensive time and cost required to conduct clinical trials and receive FDA approvals, we believe that our data and regulatory approvals provide us with a strong competitive advantage. Our product development expertise and multiple technology platforms provide a robust product pipeline, which we believe will drive future growth.
In the Advanced Wound Care market, we focus on the development and commercialization of advanced wound care products for the treatment of chronic and acute wounds in various treatment settings. We have a comprehensive portfolio of regenerative medicine products, capable of supporting patients from early in the wound healing process through wound closure regardless of wound type. Our Advanced Wound Care products include Apligraf for the treatment of venous leg ulcers (VLUs) and diabetic foot ulcers (DFUs); Dermagraft for the treatment of DFUs (manufacturing and distribution currently suspended pending transition to a new manufacturing facility or engagement of a third-party manufacturer); PuraPly AM and PuraPly XT as antimicrobial barriers and native, cross-linked ECM scaffolds for a broad variety of wound types; and Affinity, Novachor, NuShield, and CYGNUS placental allografts to address a variety of wound sizes and types as a protective barrier and ECM scaffold. We have a highly trained and specialized direct wound care sales force paired with comprehensive customer support services.
In the Surgical & Sports Medicine market, we are leveraging our broad regenerative medicine capabilities to address chronic and acute surgical wounds and tendon and ligament injuries. Our Sports Medicine products include NuShield for surgical applications in targeted soft tissue repairs; and Affinity, Novachor, PuraPly AM, PuraPly MZ, and PuraPly SX for management of open wounds in the surgical setting. We currently sell these products through independent agencies and our direct sales force.
In May 2024, we announced that our Phase 3 randomized control trial evaluating the safety and efficacy of ReNu, a cryopreserved amniotic suspension allograft (ASA) for the management of symptoms associated with knee osteoarthritis (OA), achieved its primary endpoint upon the analysis of positive top line data. ReNu demonstrated a statistically significant reduction in knee OA pain at six months post-treatment compared with the control group. A complete analysis of the data from the Phase 3 clinical trial is expected later in May 2024.
Dermagraft
As previously disclosed, manufacturing of Dermagraft was suspended in the fourth quarter of 2021 and sales of Dermagraft were suspended in the second quarter of 2022. We currently plan to transition our Dermagraft manufacturing to a new manufacturing facility or engage a third-party manufacturer, which we expect will result in substantial long-term cost savings. In the period when Dermagraft is not available, we expect that customers will be willing to substitute Apligraf for Dermagraft and that the suspension of Dermagraft sales will not have a material impact on our net revenue. However, if we do not realize the expected substantial long-term cost savings or if customers are unwilling to substitute Apligraf for Dermagraft during the period in which Dermagraft is unavailable, it could have an adverse effect on our net revenue and results of operations.
19
Local Coverage Determinations
In August 2023, three Medicare Administrative Contractors (MACs) issued local coverage determinations (LCDs) eliminating coverage for DFUs and VLUs for over 130 products, including five of our commercially marketed products. The LCDs were scheduled to take effect on September 17, 2023, and subsequently delayed to October 1, 2023. Given the potential adverse impact these LCDs could have on patients and on our business, we worked with our advisors to convince the MACs to withdraw the LCDs and incurred legal expenses and compensation expenses related to retention for impacted sales employees. On September 28, 2023, the three MACs withdrew the LCDs. Notwithstanding the ultimate withdrawal of the LCDs, we believe that some of our customers elected to purchase covered products from our competitors, reducing our revenue for the third and fourth quarters of the year ended December 31, 2023.
Similarly, on April 25, 2024, seven MACs published proposed LCDs for skin substitute grafts/cellular and tissue-based products (CTPs) for the treatment of DFUs and VLUs in the Medicare population, that classify five of our commercially marketed product lines as “non-covered.” We are engaging with the MACs to provide clinical evidence for these non-covered products demonstrating their efficacy for the treatment of DFUs and VLUs, however there is no guarantee that the MACs will agree to cover these products in the final LCDs.
License And Manufacturing Agreement
In November 2023, we entered into a trademark license and manufacturing agreement with Vivex Biologics, Inc. (Vivex) to sell its CYGNUS Dual (Dual) and CYGNUS Matrix (Matrix) products, with the option to license its VIA Matrix (VIA) products. We paid an upfront licensing fee to Vivex to sell Dual and Matrix, and also agreed to pay a fixed milestone payment for Dual in the event that its average selling price (ASP) is published by certain government agencies for a specified period of time, for which we previously accrued because we determined that payment would be probable in December 2024. In March 2024, we exercised the option to license VIA.
In addition, the Company is required to pay a low double-digit royalty and a high single-digit royalty on the Net Sales of Dual and Matrix, respectively, during the royalty term, as defined in the agreement with Vivex. The royalty term is commensurate with the initial term of the contract and will continue for each subsequent renewal period. The initial term of the agreement expires on December 31, 2026 and can be renewed for up to five additional one-year terms.
We paid $5.0 million in upfront licensing fees and accrued $2.5 million for the milestone payment in the fourth quarter of 2023, and paid an additional $2.5 million licensing fee for the VIA option in April 2024.
Components of Our Condensed Consolidated Results of Operations
In assessing the performance of our business, we consider a variety of performance and financial measures. We believe the items discussed below provide insight into the factors that affect these key measures.
Revenue
We derive our net revenue from our portfolio of Advanced Wound Care and Surgical & Sports Medicine products. We primarily sell our Advanced Wound Care products through direct sales representatives who manage and maintain the sales relationships with hospitals, wound care centers, government facilities, ASCs and physician offices. We primarily sell our Surgical & Sports Medicine products through third party agencies. As of March 31, 2024, we had approximately 250 direct sales representatives and approximately 157 independent agencies.
We recognize revenue from sales of our Advanced Wound Care and Surgical & Sports Medicine products when the customer obtains control of our product, which occurs at a point in time and may be upon procedure date, shipment, or delivery, based on the contractual terms of a contract. We record revenue net of a reserve for returns, discounts and Group Purchasing Organization (GPO) rebates, which represent a direct reduction to the revenue we recognize.
Several factors affect our reported revenue in any period, including product, payer and geographic sales mix, operational effectiveness, pricing realization, marketing and promotional efforts, the timing of orders and shipments, regulatory actions including healthcare reimbursement scenarios, competition and business acquisitions.
Cost of goods sold and gross profit
Cost of goods sold includes personnel costs, product testing costs, quality assurance costs, raw materials and product costs, manufacturing costs, and the costs associated with our manufacturing and warehouse facilities. The changes in our cost of goods sold correspond with the changes in sales units and are also affected by product mix.
20
Gross profit is calculated as net revenue less cost of goods sold and generally increases as revenue increases. Our gross profit is affected by product and geographic sales mix, realized pricing of our products, the efficiency of our manufacturing operations, and the costs of materials used and fees charged by third-party manufacturers to produce our products. Regulatory actions, including healthcare reimbursement scenarios, which may require costly expenditures or result in pricing pressures, may decrease our gross profit.
Selling, general and administrative expenses
Selling, general and administrative expenses generally include personnel costs for sales, marketing, sales support, customer support, and general and administrative personnel, sales commissions, incentive compensation, insurance, professional fees, depreciation, amortization, bad debt expense, royalties, information systems costs, gain or loss on disposal of long-lived assets, and costs associated with our administrative facilities. We generally expect our selling, general and administrative expenses to continue to increase due to increased investments in market development and the geographic expansion of our sales forces as we drive for continued revenue growth.
Research and development expenses
Research and development expenses include expenses for clinical trials, personnel costs for our research and development personnel, expenses related to improvements in our manufacturing processes, enhancements to our currently available products, and additional investments in our product and platform development pipeline. We expense research and development costs as incurred. We generally expect that research and development expenses will increase as we continue to conduct clinical trials on new and existing products, move products through the regulatory pathway (e.g., seek biologics license application approval), add personnel to support product enhancements as well as to bring new products to market, and enhance our manufacturing process and procedures.
Other expense, net
Other expense, net consists primarily of interest expense, which is interest on our outstanding indebtedness, including amortization of debt discount and debt issuance costs, net of interest income recognized.
Income taxes
We account for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized.
In determining whether a valuation allowance for deferred tax assets is necessary, we analyze both positive and negative evidence related to the realization of deferred tax assets including projected future taxable income, recent financial results and estimates of future reversals of deferred tax assets and liabilities. We maintain the position that our net U.S. deferred tax assets did not require a valuation allowance as of March 31, 2024 and December 31, 2023.
We account for uncertainty in income taxes recognized in the condensed consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the condensed consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.
21
Results of Operations
The following table sets forth, for the periods indicated, our results of operations:
` |
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(Unaudited, in thousands) |
|
|||||
Net revenue |
|
$ |
109,976 |
|
|
$ |
107,642 |
|
Cost of goods sold |
|
|
28,696 |
|
|
|
26,607 |
|
Gross profit |
|
|
81,280 |
|
|
|
81,035 |
|
Operating expenses: |
|
|
|
|
|
|
||
Selling, general and administrative |
|
|
72,322 |
|
|
|
73,834 |
|
Research and development |
|
|
12,810 |
|
|
|
11,202 |
|
Total operating expenses |
|
|
85,132 |
|
|
|
85,036 |
|
Loss from operations |
|
|
(3,852 |
) |
|
|
(4,001 |
) |
Other expense, net: |
|
|
|
|
|
|
||
Interest expense |
|
|
(514 |
) |
|
|
(649 |
) |
Other income, net |
|
|
23 |
|
|
|
23 |
|
Total other expense, net |
|
|
(491 |
) |
|
|
(626 |
) |
Net loss before income taxes |
|
|
(4,343 |
) |
|
|
(4,627 |
) |
Income tax benefit |
|
|
2,243 |
|
|
|
1,658 |
|
Net loss |
|
$ |
(2,100 |
) |
|
$ |
(2,969 |
) |
EBITDA and Adjusted EBITDA
Our management uses financial measures that are not in accordance with generally accepted accounting principles in the United States (non-GAAP), in addition to financial measures in accordance with generally accepted accounting principles in the United States (GAAP) to evaluate our operating results. These non-GAAP financial measures should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. Our management uses Adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. Our management believes Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the items that we exclude. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.
The following is a reconciliation of GAAP net loss to non-GAAP EBITDA and non-GAAP Adjusted EBITDA for each of the periods presented:
` |
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(Unaudited, in thousands) |
|
|||||
Net loss |
|
$ |
(2,100 |
) |
|
$ |
(2,969 |
) |
Interest expense, net |
|
|
514 |
|
|
|
649 |
|
Income tax benefit |
|
|
(2,243 |
) |
|
|
(1,658 |
) |
Depreciation |
|
|
3,072 |
|
|
|
2,694 |
|
Amortization |
|
|
901 |
|
|
|
1,230 |
|
EBITDA |
|
|
144 |
|
|
|
(54 |
) |
Stock-based compensation expense |
|
|
2,407 |
|
|
|
1,914 |
|
Restructuring charge (1) |
|
|
— |
|
|
|
1,908 |
|
Adjusted EBITDA |
|
$ |
2,551 |
|
|
$ |
3,768 |
|
22
Comparison of Three Months Ended March 31, 2024 and 2023
Revenue
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Advanced Wound Care |
|
$ |
103,864 |
|
|
$ |
100,917 |
|
|
$ |
2,947 |
|
|
|
3 |
% |
Surgical & Sports Medicine |
|
|
6,112 |
|
|
|
6,725 |
|
|
|
(613 |
) |
|
|
(9 |
%) |
Net revenue |
|
$ |
109,976 |
|
|
$ |
107,642 |
|
|
$ |
2,334 |
|
|
|
2 |
% |
Net revenue from our Advanced Wound Care products increased by $2.9 million, or 3%, to $103.9 million in the three months ended March 31, 2024, from $100.9 million in the three months ended March 31, 2023. The increase in Advanced Wound Care net revenue was primarily attributable to an increase in product sales of certain of our products to our existing and new customers.
Net revenue from our Surgical & Sports Medicine products decreased by $0.6 million, or 9% to $6.1 million in the three months ended March 31, 2024 from $6.7 million in the three months ended March 31, 2023. The decrease in Surgical & Sports Medicine net revenue was primarily due to a decrease in certain customer buying patterns.
Cost of goods sold and gross profit
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Cost of goods sold |
|
$ |
28,696 |
|
|
$ |
26,607 |
|
|
$ |
2,089 |
|
|
|
8 |
% |
Gross profit |
|
$ |
81,280 |
|
|
$ |
81,035 |
|
|
$ |
245 |
|
|
|
0 |
% |
Cost of goods sold increased by $2.1 million, or 8%, to $28.7 million in the three months ended March 31, 2024, from $26.6 million in the three months ended March 31, 2023. The increase in cost of goods sold in the three months ended March 31, 2024 was primarily due to an increase in sales volume as well as a shift in product mix.
Gross profit increased by $0.2 million to $81.3 million in the three months ended March 31, 2024 from $81.0 million in the three months ended March 31, 2023. Gross profit remained consistent from the three months ended March 31, 2023 to the three months ended March 31, 2024, but decreased as a percentage of revenue, due to a shift in product mix.
Research and Development Expenses
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Research and development |
|
$ |
12,810 |
|
|
$ |
11,202 |
|
|
$ |
1,608 |
|
|
|
14 |
% |
Research and development expenses increased by $1.6 million, or 14%, to $12.8 million in the three months ended March 31, 2024 from $11.2 million in the three months ended March 31, 2023. The increase in research and development expenses was primarily due to expenses associated with clinical research and trials, primarily related to ReNu, and support of Biologics License Application (BLA) efforts.
23
Selling, General and Administrative Expenses
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Selling, general and administrative |
|
$ |
72,322 |
|
|
$ |
73,834 |
|
|
$ |
(1,512 |
) |
|
|
(2 |
%) |
Selling, general and administrative expenses decreased by $1.5 million, or 2%, to $72.3 million in the three months ended March 31, 2024 from $73.8 million in the three months ended March 31, 2023. The decrease in selling, general and administrative expenses was primarily due to a $5.2 million reduction in headcount-related expenses, including $1.9 million in severance expense incurred in the three months ended March 31, 2023 and not repeated in the three months ended March 31, 2024; partially offset by $3.5 million in royalty expense.
Other Expense, net
Other expense, net, decreased by $0.1 million, or 17%, to $0.5 million in the three months ended March 31, 2024 from $0.6 million in the three months ended March 31, 2023. Other expense, net is comprised primarily of interest expense, and the decrease is due to the decreased debt balance under the 2021 Credit Agreement.
Income Tax Benefit
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except for percentages) |
|
|||||||||||||
Income tax benefit |
|
$ |
2,243 |
|
|
$ |
1,658 |
|
|
$ |
585 |
|
|
|
35 |
% |
Income tax benefit increased by $0.6 million, or 35%, to $2.2 million in the three months ended March 31, 2024 from $1.7 million in the three months ended March 31, 2023. The change in the income tax benefit is primarily attributable to a higher estimated effective tax rate for the twelve months ended December 31, 2024 resulting from a reduction in expected pre-tax income in 2024 compared to 2023.
Liquidity and Capital Resources
As of March 31, 2024, we had working capital of $144.4 million, which included $88.6 million in cash and cash equivalents. We also have $125.0 million available for future revolving borrowings under our Revolving Facility (see Note 10, Long-Term Debt Obligations to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). We expect that our cash on hand and other components of working capital as of March 31, 2024, availability under the 2021 Credit Agreement, plus net cash flows from product sales, will be sufficient to fund our operating expenses, capital expenditure requirements and debt service payments for at least 12 months beyond the filing date of this quarterly report.
Our primary uses of cash are working capital requirements, capital expenditure and debt service payments. Additionally, from time to time, we may use capital for acquisitions and other investing and financing activities. Working capital is used principally for our personnel as well as manufacturing costs related to the production of our products. Our working capital requirements vary from period to period depending on manufacturing volumes, the timing of shipments and the payment cycles of our customers and payers. Our capital expenditures consist primarily of building improvements, manufacturing equipment, and computer hardware and software.
To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute on our business strategy, we anticipate that they will be obtained through additional equity or debt financings, other strategic transactions or a combination of these potential sources of funds. There can be no assurance that we will be able to obtain additional funds on terms acceptable to us, on a timely basis, or at all.
24
Cash Flows
The following table summarizes our cash flows for each of the periods presented:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Net cash used in operating activities |
|
$ |
(10,162 |
) |
|
$ |
(5,077 |
) |
Net cash used in investing activities |
|
|
(2,222 |
) |
|
|
(7,562 |
) |
Net cash used in financing activities |
|
|
(2,608 |
) |
|
|
(1,236 |
) |
Net change in cash, cash equivalents, and restricted cash |
|
$ |
(14,992 |
) |
|
$ |
(13,875 |
) |
Operating Activities
During the three months ended March 31, 2024, net cash used in operating activities was $10.2 million, resulting from our net loss of $2.1 million and non-cash charges of $12.6 million, partially offset by net cash used in connection with changes in our operating assets and liabilities of $20.7 million. Net cash used in changes in our operating assets and liabilities included an increase in inventory of $4.7 million, an increase in prepaid expenses and other current assets of $4.3 million, an increase in accounts receivable of $15.1 million, a decrease in operating lease liabilities of $2.2 million, and a decrease in accounts payable of $4.4 million, partially offset by an increase in accrued expenses and other liabilities of $12.3 million.
During the three months ended March 31, 2023, net cash used in operating activities was $5.1 million, resulting from our net loss of $3.0 million and net cash used in connection with changes in our operating assets and liabilities of $11.8 million, partially offset by non-cash charges of $9.7 million. Net cash used in changes in our operating assets and liabilities included an increase in accounts receivable of $3.4 million, an increase in inventory of $2.2 million, an increase in prepaid expenses and other current assets of $4.8 million, a decrease in operating leases liabilities of $2.1 million, and a decrease in accounts payable of $1.4 million, partially offset by an increase in accrued expenses and other liabilities of $2.1 million.
Investing Activities
During the three months ended March 31, 2024, we used $2.2 million of cash in investing activities consisting exclusively of capital expenditures.
During the three months ended March 31, 2023, we used $7.6 million of cash in investing activities consisting exclusively of capital expenditures.
Financing Activities
During the three months ended March 31, 2024, net cash used in financing activities was $2.6 million. This consisted of the payment of term loan of $1.4 million, principal payments on finance lease obligations of $0.2 million, and net cash payments associated with our stock awards activities of $1.1 million.
During the three months ended March 31, 2023, net cash used in financing activities was $1.2 million. This consisted of the payment of term loan and the stock awards activities.
Indebtedness
2021 Credit Agreement
In August 2021, we and our subsidiaries entered into a credit agreement with SVB and several other lenders, which we refer to as the 2021 Credit Agreement. The 2021 Credit Agreement, as amended, provides for a term loan facility not to exceed $75.0 million (the Term Loan Facility) and a revolving credit facility not to exceed $125.0 million (the Revolving Facility).
Advances made under the 2021 Credit Agreement may be either SOFR Loans or ABR Loans, at our option. For SOFR Loans, the interest rate is a per annum interest rate equal to the Adjusted Term SOFR plus an Applicable Margin between 2.00% to 3.25% based on the Total Net Leverage Ratio. For ABR Loans, the interest rate is equal to (1) the highest of (a) the Wall Street Journal Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) the Adjusted Term SOFR rate plus 1.0%, plus (2) an Applicable Margin between 1.00% to 2.25% based on the Total Net Leverage Ratio. On March 31, 2024, the applicable interest rate for outstanding borrowings is 7.64%.
25
The 2021 Credit Agreement requires us to make consecutive quarterly installment payments equal to the following: (a) from September 30, 2021 through and including June 30, 2022, $0.5 million; (b) from September 30, 2022 through and including June 30, 2023, $0.9 million; (c) from September 30, 2023 through and including June 30, 2025, $1.4 million and (d) from September 30, 2025 and the last day of each quarter thereafter until August 6, 2026 (the Term Loan Maturity Date), $1.9 million. The remaining principal balance of $50.6 million is also due on the Term Loan Maturity Date. We may prepay the Term Loan Facility. Once repaid, amounts borrowed under the Term Loan Facility may not be re-borrowed.
We must pay in arrears, on the first day of each quarter prior to August 6, 2026 (the Revolving Termination Date) and on the Revolving Termination Date, a fee for our non-use of available funds (the Commitment Fee). The Commitment Fee rate is between 0.25% to 0.45% based on the Total Net Leverage Ratio. We may elect to reduce or terminate the Revolving Facility in its entirety at any time by repaying all outstanding principal and unpaid accrued interest.
Under the 2021 Credit Agreement, we are required to comply with certain financial covenants including the Consolidated Fixed Charge Coverage Ratio and Consolidated Total Net Leverage Ratio, tested quarterly. In addition, we are also required to make representations and warranties and comply with certain non-financial covenants that are customary in loan agreements of this type, including restrictions on the payment of dividends, repurchase of stock, incurrence of indebtedness, dispositions and acquisitions.
As of March 31, 2024, we were in compliance with the covenants under the 2021 Credit Agreement. We had outstanding borrowings of $65.2 million under our Term Loan Facility and no borrowings outstanding under our Revolving Facility with $125.0 million available for future revolving borrowings, respectively.
Critical Accounting Policies and Significant Judgments and Estimates
Our unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of unaudited condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, and the disclosure at the date of the unaudited condensed consolidated financial statements, as well as revenue and expenses recorded during the reporting periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our unaudited condensed consolidated financial statements, which, in turn, could materially change our results from those reported. Management evaluates its estimates, assumptions and judgments on an ongoing basis. Historically, our critical accounting estimates have not differed materially from actual results. However, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our condensed consolidated statements of operations and comprehensive loss, liquidity and financial condition. See also our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, for information about these accounting policies as well as a description of our other significant accounting policies.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Recently Issued Accounting Pronouncements
We have reviewed all recently issued standards as disclosed in Note 2, Summary of Significant Accounting Policies to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the three months ended March 31, 2024, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
26
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2024. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that, as of March 31, 2024, our disclosure controls and procedures were ineffective because, as disclosed in the Company’s Annual Report for the fiscal year ended December 31, 2023, we did not design and maintain effective controls over information technology general controls and proper segregation of duties to support the proper initiation and recording of transactions and the resulting impact on business process controls and applications that rely on such data.
Management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria established in the SEC guidance on conducting such assessments as of the end of the period covered by this report. Management conducted the assessment based on certain criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (COSO framework). Although it has made progress in remediating the remaining material weakness, as a result of its assessment, management concluded that as of March 31, 2024, our internal control over financial reporting was ineffective based on the criteria of the COSO framework, and the continued existence of the material weakness described above.
Plans for Remediation of Material Weakness
Management has taken actions to remediate the deficiencies in its internal controls over financial reporting and implemented additional processes and controls designed to address the underlying causes associated with the above-mentioned material weakness. Management is committed to finalizing the remediation of the material weakness. Management’s internal control remediation efforts include the following:
As management continues to evaluate and work to improve our internal control over financial reporting, management may determine it is necessary to take additional measures to address the material weakness. However, we believe the above actions will be effective in remediating the remaining material weakness and we will continue to devote significant time and attention to these remediation efforts. Until the controls have been operating for a sufficient period of time and management has concluded, through testing, that these controls are executed consistently and operating effectively, the material weakness described above will continue to exist.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than those described above related to remediation efforts of the remaining material weakness. As the implementation of the new ERP system continues and our remediation efforts continue, we will change our processes and procedures, which in turn, could result in
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changes to our internal control over financial reporting. As such changes occur, we will evaluate quarterly whether such changes materially affect our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
On December 10, 2021, a class action complaint captioned Somogyi v. Organogenesis Holdings Inc., et al. was filed on behalf of a putative class of all purchasers of our securities against us and our Chief Executive Officer and Chief Financial Officer in the United States District Court for the Eastern District of New York (the Court). The Court appointed Donald Martin as lead plaintiff. Mr. Martin filed an amended complaint on October 24, 2022 that brought claims on behalf of a purported class of all purchasers of our securities from August 10, 2020 through August 9, 2022 and alleged violations of federal securities law in connection with alleged false and misleading statements with respect to, among other matters, revenue, sales growth and ability to compete in connection with our Affinity and PuraPly XT products. The amended complaint alleged violations of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and sought unquantified damages as well as attorneys’ fees, expert fees and other costs. On March 13, 2023, we filed our motion to dismiss the litigation for failure to state a claim upon which relief can be granted, and briefing was completed on May 30, 2023. On March 29, 2024, the Court granted, with prejudice, the Company’s motion to dismiss all claims asserted and the plaintiffs did not appeal the Court’s determination.
We are not a party to any other material legal proceedings. From time to time, we may become involved in litigation or other legal proceedings relating to claims arising from the ordinary course of business. These matters may include intellectual property, employment and other general claims. With respect to our outstanding legal matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.
Item 1A. Risk Factors
Investing in our Class A common stock involves a high degree of risk. Our Annual Report on Form 10-K for the year ended December 31, 2023, includes a detailed discussion of our risk factors under the heading “Part I, Item 1A—Risk Factors.” Except as set forth below, there have been no material changes from such risk factors during the quarter ended March 31, 2024. You should consider carefully the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2023, and all other information contained in or incorporated by reference in this Quarterly Report on Form 10-Q before making an investment decision. If any of the risks discussed in the Annual Report on Form 10-K for the year ended December 31, 2023, or herein actually occur, they may materially harm our business, financial condition, operating results, cash flows or growth prospects. As a result, the market price of our Class A common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties that are not yet identified or that we think are immaterial may also materially harm our business, financial condition, operating results, cash flows or growth prospects and could result in a complete loss of your investment.
Seven MACs recently published new proposed LCDs, for skin substitute grafts/CTPs for the treatment of DFUs and VLUs in the Medicare population that list certain of our products as non-covered. If the final LCDs include this non-coverage determination, it could, at least in the near term, have a material adverse effect on utilization of these products, our business and our revenue.
On April 25, 2024, seven MACs (CGS, WPS, NGS, Palmetto, Novitas, First Coast Services, and Noridian) published new proposed LCDs for skin substitute grafts/CTPs for the treatment of DFUs and VLUs in the Medicare population. While our Affinity, Apligraf and Dermagraft products remain covered, the LCDs classify our PuraPly, Novachor, TransCyte, NuShield and CYGNUS products as “non-covered.” If the final LCDs do not include coverage for these products, it would present a significant amount of uncertainty, at least in the near term, regarding future revenue for these products. Although we are engaging with the MACs to provide clinical evidence for these non-covered products demonstrating their efficacy for the treatment of DFUs and VLUs, there is no guarantee that the MACs will agree to cover these products in the final LCDs. If these products are not covered in the final LCDs, it could, at least in the near term, materially and adversely impact utilization of these products, our business and our revenue.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
During the three months ended March 31, 2024,
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Item 6. Exhibits
Exhibit number |
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Description |
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3.1 |
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3.2 |
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3.3 |
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31.1† |
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31.2† |
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32.1† |
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101.INS† |
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Inline XBRL Instance Document XBRL |
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101.SCH† |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL† |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF† |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB† |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE† |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104† |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
† Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 9, 2024 |
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Organogenesis Holdings Inc. |
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(Registrant) |
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/s/ David Francisco |
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David Francisco |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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