# Organogenesis Holdings Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Organogenesis Holdings Inc.](/companies/orgo.md) (CIK 1661181)
- Form: 10-Q
- Filed: 2023-08-09
- Accepted by EDGAR: Aug 9, 2023, 16:34 ET
- Period: 2023-06-30
- Accession: 0000950170-23-040670
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1661181/000095017023040670/orgo-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1661181/000095017023040670/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $117.3m | us-gaap:Revenues |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $225.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $26.3m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $52.9m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $91.0m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $172.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-04-01 to 2023-06-30 | $10.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-01-01 to 2023-06-30 | $22.1m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-04-01 to 2023-06-30 | $70.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-01-01 to 2023-06-30 | $144.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $9.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $5.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $594.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $1.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $3.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $2.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $5.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $2.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 133,066,010 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 132,475,908 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $3.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $15.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-06-30 | $88.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $216.4m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $450.3m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $73.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $179.0m | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $69.4m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-06-30 | $271.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,070 characters.

*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, 2022, filed with the SEC, on March 1, 2023. 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

Organogenesis 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. 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, cardiovascular and peripheral vascular disease and smoking. 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 service 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 and diabetic foot ulcers (“DFUs”); Dermagraft for the treatment of DFUs (manufacturing currently suspended pending transition to a new manufacturing facility or engagement of a third-party manufacturer); PuraPly AM as an antimicrobial barrier for a broad variety of wound types; and the Affinity, Novachor and NuShield wound coverings to address a variety of wound sizes and types. 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 MZ and PuraPly AM for management of open wounds in the surgical setting. We currently sell these products through independent agencies and our direct sales force.

For the six months ended June 30, 2023, we generated net revenue of $225.0 million and net income of $2.3 million compared to net revenue of $218.5 million and net income of $7.8 million for the six months ended June 30, 2022. We have incurred significant losses since inception and, while we reported net income for the most recent three years, we may incur operating losses in the future as we expend resources as part of our efforts to grow our organization to support the planned expansion of our business. As of June 30, 2023, we had an accumulated deficit of $43.6 million. Our primary sources of capital to date have been from sales of our products, borrowings from related parties and institutional lenders and proceeds from the sale of our Class A common stock. We operate as one segment of regenerative medicine.

### COVID-19 pandemic

On April 10, 2023, President Biden signed a joint congressional resolution ending the national emergency related to COVID-19, and the Biden Administration ended the public health emergency declaration related to COVID-19 on May 11, 2023. Nonetheless, COVID-19 continues to present a public health and economic challenge around the world, and we continue to closely monitor the impact of the pandemic on all aspects of our business. While the COVID-19 pandemic has not materially adversely affected our financial results and business operations through June 30, 2023, we are unable to predict the impact that COVID-19 (including the emergence of new variants) will have on our financial position and operating results in the future.

### 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.

### 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 June 30, 2023, we had approximately 310 direct sales representatives and approximately 155 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 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.

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

*Interest expense—*Interest expense consists of 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. In addition, we consider whether it is more likely than not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position. In consideration of the factors discussed above, in the fourth quarter of 2021, we determined it was more likely than not that our deferred tax assets would be realized in the future and released the valuation allowance on our net U.S. deferred tax assets as of December 31, 2021, resulting in a benefit of $48.3 million in income taxes. We maintained the same position that our net U.S. deferred tax assets did not require a valuation allowance as of June 30, 2023 and December 31, 2022.

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.

### Results of Operations

The following table sets forth, for the periods indicated, our results of operations:

|  | Three Months Ended June 30, 2023 (Unaudited) (in thousands) | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net revenue | $117,316 | $121,401 | $224,958 | $218,518 |
| Cost of goods sold | 26,316 | 26,652 | 52,923 | 51,732 |
| Gross profit | 91,000 | 94,749 | 172,035 | 166,786 |
| Operating expenses: |  |  |  |  |
| Selling, general and administrative | 70,317 | 72,609 | 144,151 | 136,187 |
| Research and development | 10,938 | 10,205 | 22,140 | 18,792 |
| Total operating expenses | 81,255 | 82,814 | 166,291 | 154,979 |
| Income from operations | 9,745 | 11,935 | 5,744 | 11,807 |
| Other expense, net: | - | - | - | - |
| Interest expense | (594) | (730) | (1,243) | (1,467) |
| Other expense, net | 28 | (21) | 51 | (24) |
| Total other expense, net | (566) | (751) | (1,192) | (1,491) |
| Net income before income taxes | 9,179 | 11,184 | 4,552 | 10,316 |
| Income tax expense | (3,863) | (2,440) | (2,205) | (2,485) |
| Net income | $5,316 | $8,744 | $2,347 | $7,831 |

### 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 income to non-GAAP EBITDA and non-GAAP Adjusted EBITDA for each of the periods presented:

|  | Three Months Ended June 30, 2023 (Unaudited) (in thousands) | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net Income | $5,316 | $8,744 | $2,347 | $7,831 |
| Interest expense, net | 594 | 730 | 1,243 | 1,467 |
| Income tax expense | 3,863 | 2,440 | 2,205 | 2,485 |
| Depreciation | 2,228 | 1,528 | 4,922 | 2,875 |
| Amortization | 1,229 | 1,221 | 2,459 | 2,442 |
| EBITDA | 13,230 | 14,663 | 13,176 | 17,100 |
| Stock-based compensation expense | 2,299 | 1,692 | 4,213 | 2,995 |
| Restructuring charge (adjustment) (1) | (126) | 643 | 1,782 | 907 |
| Settlement fee (2) | - | 1,600 | - | 2,600 |
| Adjusted EBITDA | $15,403 | $18,598 | $19,171 | $23,602 |

(1) Amounts reflect employee severance, retention and benefits as well as other exit costs associated with the Company’s restructuring activities. See Note “12. Restructuring” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

(2) Amount reflects the fee the Company agreed to pay to a GPO to settle previously disputed GPO fees.

### Comparison of Three and Six Months Ended June 30, 2023 and 2022

### Revenue

*(in thousands, except for percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Advanced Wound Care | $110,075 | $113,791 | $(3,716) | (3%) |
| Surgical & Sports Medicine | 7,241 | 7,610 | (369) | (5%) |
| Net revenue | $117,316 | $121,401 | $(4,085) | (3%) |

*(in thousands, except for percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Advanced Wound Care | $210,992 | $203,881 | $7,111 | 3% |
| Surgical & Sports Medicine | 13,966 | 14,637 | (671) | (5%) |
| Net revenue | $224,958 | $218,518 | $6,440 | 3% |

Net revenue from our Advanced Wound Care products decreased by $3.7 million, or 3%, to $110.1 million in the three months ended June 30, 2023, from $113.8 million in the three months ended June 30, 2022. The decrease in Advanced Wound Care net revenue was primarily attributable to a decrease in sales of certain of our products due to changes in customer buying patterns, partially offset by an increase in sales of certain of our products to our existing and new customers.

Net revenue from our Advanced Wound Care products increased by $7.1 million, or 3%, to $211.0 million in the six months ended June 30, 2023, from $203.9 million in the six months ended June 30, 2022. The increase in Advanced Wound Care net revenue was primarily attributable to an increase in sales of certain of our products to our existing and new customers partially offset by a decrease in sales of certain of our products due to changes in customer buying patterns.

Net revenue from our Surgical & Sports Medicine products decreased by $0.4 million, or 5% to $7.2 million in the three months ended June 30, 2023 from $7.6 million in the three months ended June 30, 2022. Net revenue from our Surgical & Sports Medicine products decreased by $0.7 million, or 5%, to $14.0 million in the six months ended June 30, 2023 from $14.6 million in the six months ended June 30, 2022. The decrease in Surgical & Sports Medicine net revenue was primarily due to attrition within our sales force, as well as the decrease in the pricing for certain of our products.

### Cost of goods sold and gross profit

*(in thousands, except for percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | $26,316 | $26,652 | $(336) | (1%) |
| Gross profit | $91,000 | $94,749 | $(3,749) | (4%) |

*(in thousands, except for percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | $52,923 | $51,732 | $1,191 | 2% |
| Gross profit | $172,035 | $166,786 | $5,249 | 3% |

Cost of goods sold in the three months ended June 30, 2023 was $26.3 million, which is relatively consistent with the cost of goods sold of $26.7 million in the three months ended June 30, 2022. Cost of goods sold increased by $1.2 million, or 2%, to $52.9 million in the six months ended June 30, 2023 from $51.7 million in the six months ended June 30, 2022. The increase in cost of goods sold was primarily due to increased sales volume in our Advanced Wound Care products.

Gross profit decreased by $3.7 million, or 4%, to $91.0 million in the three months ended June 30, 2023 from $94.7 million in the three months ended June 30, 2022. The decrease in gross profit resulted primarily from decreased sales volume.

Gross profit increased by $5.2 million, or 3%, to $172.0 million in the six months ended June 30, 2023 from $166.8 million in the six months ended June 30, 2022. The increase in gross profit resulted primarily from increased sales volume in our Advanced Wound Care products as well as a shift in product mix to our higher gross margin products.

### Research and Development Expenses

*(in thousands, except for percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Research and development | $10,938 | $10,205 | $733 | 7% |

*(in thousands, except for percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Research and development | $22,140 | $18,792 | $3,348 | 18% |

Research and development expenses increased by $0.7 million, or 7%, to $10.9 million in the three months ended June 30, 2023 from $10.2 million in the three months ended June 30, 2022. Research and development expenses increased by $3.3 million, or 18%, to $22.1 million in the six months ended June 30, 2023 from $18.8 million in the six months ended June 30, 2022.The increase in research and development expenses was primarily due to an increase in product costs associated with our pipeline products not yet commercialized, an increase in the clinical study and related costs necessary to seek regulatory approvals for certain of our products, and increased headcount associated with our existing Advanced Wound Care and Surgical & Sports Medicine products.

### Selling, General and Administrative Expenses

*(in thousands, except for percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative | $70,317 | $72,609 | $(2,292) | (3%) |

*(in thousands, except for percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative | $144,151 | $136,187 | $7,964 | 6% |

Selling, general and administrative expenses decreased by $2.3 million, or 3%, to $70.3 million in the three months ended June 30, 2023 from $72.6 million in the three months ended June 30, 2022. The decrease in selling, general and administrative expenses was primarily due to a $4.1 million decrease in compensation cost, largely related to decreased commissions paid to our sales force, and a $0.8 million decrease in restructuring cost as our restructuring activities were substantially completed as of March 31, 2023. These decreases were partially offset by a $2.0 million increase related to increased travel and marketing programs along with the ending of the COVID-19 national emergency, and a $0.6 million increase in legal, consulting and other costs associated with the ongoing operations of our business and the enterprise resource planning (“ERP”) system implementation.

Selling, general and administrative expenses increased by $8.0 million, or 6%, to $144.2 million in the six months ended June 30, 2023 from $136.2 million in the six months ended June 30, 2022. The increase in selling, general and administrative expenses was primarily due to a $6.3 million increase related to increased travel and marketing programs, as well as an annual sales meeting that was held in the first quarter of 2023 (and in 2022, the sales meeting was held in the third quarter instead of the first quarter), a $2.7 million increase in legal, consulting and other costs associated with the ongoing operations of our business and the ERP system implementation, and a $0.9 million increase in restructuring costs primarily due to the reduction in force in the first quarter of 2023. The increases were partially offset by a $1.9 million decrease in compensation cost, largely related to decreased commissions paid to our sales force.

### Other Expense, net

*(in thousands, except for percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Interest expense, net | $(594) | $(730) | $136 | (19%) |
| Other income (expense), net | 28 | (21) | 49 | \*\* |
| Total other expense, net | $(566) | $(751) | $185 | (25%) |

*(in thousands, except for percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Interest expense, net | $(1,243) | $(1,467) | $224 | (15%) |
| Other expense, net | 51 | (24) | 75 | \*\* |
| Total other expense, net | $(1,192) | $(1,491) | $299 | (20%) |

\*\* not meaningful

Other expense, net, decreased by $0.2 million, or 25%, to $0.6 million in the three months ended June 30, 2023 from $0.8 million in the three months ended June 30, 2022. Other expense, net, decreased by $0.3 million, or 20% to $1.2 million in the six months ended June 30, 2023 from $1.5 million in the six months ended June 30, 2022. The decrease in other expense, net was primarily due to the decrease in interest expense resulting from the lower debt balance under the 2021 Credit Agreement.

### Income Tax Expense

*(in thousands, except for percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Income tax expense | $(3,863) | $(2,440) | $(1,423) | 58% |

*(in thousands, except for percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Income tax expense | $(2,205) | $(2,485) | $280 | (11%) |

Income tax expense increased by $1.4 million, or 58%, to $3.9 million in the three months ended June 30, 2023 from $2.4 million in the three months ended June 30, 2022. Income tax expense decreased by $0.3 million, or 11%, to $2.2 million in the six months ended June 30, 2023 from $2.5 million in the six months ended June 30, 2022. The changes in income tax expense were due to a combined impact of changes in pre-tax income in these periods and a higher effective rate for the twelve months ended December 31, 2023 resulting from the larger forecasted tax adjustment in 2023 as compared to 2022.

### Liquidity and Capital Resources

Since our inception, we have funded our operations and capital expenditures through cash flows from product sales, loans from affiliates and entities controlled by certain of our affiliates, third-party debt and proceeds from the sale of our capital stock. As of June 30, 2023, we had an accumulated deficit of $43.6 million and working capital of $143.0 million which included $88.9 million in cash and cash equivalents. We also have $125.0 million available for future revolving borrowings under our Revolving Facility (see Note “13. Long-Term Debt Obligations” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). For the six months ended June 30, 2023, we reported net revenue of $225.0 million, a net income of $2.3 million and $3.6 million of cash inflows from operating activities. We expect that our cash on hand and other components of working capital as of June 30, 2023, 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.

While the COVID-19 pandemic has not materially adversely affected our financial results and business operations to date, we continue to closely monitor ongoing developments in connection with the pandemic that could negatively affect our commercial prospects, cash position and access to capital in fiscal 2023 or beyond. We are also closely monitoring ongoing developments in connection with the published local coverage determinations as discussed in “Part II, Item 1A—Risk Factors” of this Form 10-Q, which may negatively impact our revenue and projected cash position. We will continue to assess our cash and other sources of liquidity and, if circumstances warrant, we will make appropriate adjustments to our operating plan.

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.

### Cash Flows

The following table summarizes our cash flows for each of the periods presented:

*(in thousands)*

|  | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $3,569 | $11,606 |
| Net cash used in investing activities | (15,061) | (12,840) |
| Net cash used in financing activities | (2,290) | (350) |
| Net change in cash, cash equivalents, and restricted cash | $(13,782) | $(1,584) |

#### Operating Activities

During the six months ended June 30, 2023, net cash provided by operating activities was $3.6 million, resulting from our net income of $2.3 million and non-cash charges of $19.7 million, partially offset by net cash used in connection with changes in our operating assets and liabilities of $18.4 million. Net cash used in changes in our operating assets and liabilities included an increase in accounts receivable of $5.0 million, an increase in inventory of $4.0 million, an increase in prepaid expenses and other current assets of $2.9 million, a decrease in operating leases liabilities of $4.2 million, and a decrease in accounts payable of $3.5 million, partially offset by an increase in accrued expenses and other liabilities of $1.2 million.

During the six months ended June 30, 2022, net cash provided by operating activities was $11.6 million, resulting from our net income of $7.8 million and non-cash charges of $18.0 million, partially offset by net cash used in connection with changes in our operating assets and liabilities of $14.2 million. Net cash used in changes in our operating assets and liabilities included an increase in accounts receivable of $6.5 million, an increase in inventory of $3.4 million, an increase in prepaid expenses and other current assets of $1.8 million, a decrease in operating leases liabilities of $3.5 million, and a decrease in accrued expenses and other current liabilities of $1.7 million, partially offset by an increase in accounts payable of $2.7 million.

#### Investing Activities

During the six months ended June 30, 2023, we used $15.1 million of cash in investing activities consisting exclusively of capital expenditures.

During the six months ended June 30, 2022, we used $12.8 million of cash in investing activities consisting exclusively of capital expenditures.

#### Financing Activities

During the six months ended June 30, 2023, net cash used in financing activities was $2.3 million. This consisted of the payment of term loan of $1.9 million, payment of the finance lease obligations and the stock awards activities of $0.4 million.

During the six months ended June 30, 2022, net cash used in financing activities was $0.4 million. This consisted primarily of the payment of term loan and finance lease obligations of $1.1 million and the payment of $0.6 million related to the CPN deferred acquisition consideration, partially offset by the net receipts of $1.4 million in connection with 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.

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 June 30, 2023, we were in compliance with the covenants under the 2021 Credit Agreement. We had outstanding borrowings of $69.4 million under our Term Loan Facility and no borrowings outstanding under our Revolving Facility with $125 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 our 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, liquidity and financial condition. See also our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, 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.

## Market risk

As filed, 277 characters.

During the six months ended June 30, 2023, 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, 2022.

## Controls and procedures

As filed, 7,124 characters.

### Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of its principal executive officer and principal financial officer, evaluated the effectiveness of its disclosure controls and procedures as of June 30, 2023. 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 their evaluation, our management, including our principal executive officer and principal financial officer, concluded that, as of June 30, 2023, our disclosure controls and procedures were ineffective because, as disclosed in the Company’s Annual Report for the fiscal year ended December 31, 2022, our management team identified the following material weakness in our internal control over financial reporting: we did not design and maintain effective controls (i) to properly identify and assess significant non-routine transactions and (ii) 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.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.

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. As a result of this assessment, management concluded that, as of June 30, 2023, our internal control over financial reporting was not effective based on those criteria. Although management has made notable progress in remediating this material weakness, management concluded that the material weakness described above continued to exist as of June 30, 2023.

### 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:

- In 2022, we finalized the plan to implement a new company-wide enterprise resource planning, or ERP, system to provide additional systematic controls and segregation of duties for our accounting processes. Due, in part, to turnover in key positions and changes in design, our ERP system go-live date has been delayed. We anticipate the ERP system going live in 2024.
- In 2022, we determined that our forward-facing customer sales systems were not catering to our customer needs. We started to implement a new sales force software system in 2023.
- We have continued to train and cross train our employees on their internal control responsibilities and how to best support other control owners if personnel turnover issues within their departments occur. We have also supplemented our internal resources with third-party resources, where necessary.
- We have instituted a new Director of Internal Audit overseeing an outside firm that will continue to assist management with performing control operating effectiveness testing throughout the year.
- We regularly reported the results of control testing to the key stakeholders across our organization, including our audit committee, on testing progress and defined corrective actions, and we monitored and reported on the results of control remediation. We have strengthened our internal policies, processes, and reviews through these actions.
- We implemented a new control to ensure that significant transactions are identified and effectively communicated so that they are properly and timely reported.
- We have continued working on documenting and remediating weaknesses and structuring the Company’s processes to meet SOX 404(b) requirements.

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 weaknesses. However, we believe the above actions will be effective in remediating the material weaknesses 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 weaknesses 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 June 30, 2023 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. However, 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 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.

## Risk factors

As filed, 5,912 characters.

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, 2022, 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 June 30, 2023. You should consider carefully the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, 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, 2022, 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.

***Three Medicare Administrative Contractors, or MACs, recently published local coverage determinations, or LCDs, for skin substitutes/cellular and/or tissue-based products (CTPs) for the treatment of DFUs and Venous Leg Ulcers, or VLUs, in the Medicare population that list our PuraPly, Novachor, TransCyte, Affinity and NuShield products as non-covered effective as of September 17, 2023. This non-coverage determination could have a material adverse effect on utilization of our products, our business, and our revenue.***

On August 3, 2023, three MACs (Novitas, First Coast Services, and CGS) published final LCDs for skin substitutes and CTPs for the treatment of DFUs and VLUs in the Medicare population. While our Apligraf and Dermagraft products remain “covered,” the LCDs classify our PuraPly, Novachor, TransCyte, Affinity and NuShield products as “non-covered” effective as of September 17, 2023. The elimination of coverage for these products by the three MACs presents a significant amount of uncertainty regarding (i) future revenue for these products in the applicable regions and (ii) the potential impact on demand for our products when used for treatment of non-DFU/VLU wounds. Although we believe that our non-covered products were improperly excluded from coverage, and we are engaging with all relevant parties in advance of the effective date of these LCDs, there is no guarantee that the MACs will agree to include our products as “covered” prior to September 17, 2023. If these products are not “covered,” we believe it would likely materially adversely impact utilization of our products, our business, and our revenue.

***Uncertainty and adverse changes in the general economic conditions, including recent turmoil in the global banking system, may negatively affect our business, financial condition, stock price and results of operations.***

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. For example, the global financial crisis of 2007-2008 caused extreme volatility and disruptions in the capital and credit markets. If general economic conditions in the United States decline, or if consumers fear that economic conditions will decline, sales of our products may decline. Adverse changes may occur as a result of adverse economic conditions, fluctuating oil prices, supply chain problems, inflation, political instability, declining consumer confidence, a continuation or worsening of the COVID-19 pandemic or another pandemic, unemployment, fluctuations in stock markets, contraction of credit availability, or other factors affecting economic conditions generally. These changes may negatively affect the sales of our existing or development of future products, increase the cost, and decrease the availability of financing, or increase costs associated with producing and distributing our products and potential product candidates.

Moreover, there has been recent turmoil in the global banking system. On March 10, 2023, Silicon Valley Bank (“SVB”), one of our lenders at which we maintained deposit and money market accounts, was closed, followed on March 11, 2023 and May 1, 2023, by Signature Bank and First Republic Bank, respectively, and the FDIC was appointed as receiver for those banks. There have been reports of instability at other banks across the globe including Credit Suisse, which was acquired by UBS. Despite the steps taken to date by U.S. agencies to protect depositors and our current belief that we do not have exposure to loss as a result of SVB’s receivership, the follow-on effects of the events surrounding the SVB, Signature Bank and First Republic Bank failures and pressure on other banks are unknown and could include failures of other financial institutions or significant disruptions to our operations, financial position, and reputation. A severe or prolonged economic downturn, such as the global financial crisis of 2007-2008, could result in a variety of risks to our business, including a decrease in the demand for our products and in our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy also could strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our products. We cannot anticipate all the ways in which the foregoing, and the current economic climate and financial market conditions generally, could adversely impact our business. Furthermore, our stock price may decline due in part to the volatility of the stock market and any general economic downturn.

Filed Aug 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-040670. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.