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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-9898
------
ORGANOGENESIS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2871690
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
150 DAN ROAD, CANTON, MA 02021
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 575-0775
______________________
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.
Yes ( X ) No ( )
The number of shares outstanding of registrant's Common Stock, par value $.01
per share, at November 4, 1996 was 14,260,547 shares.
1
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ORGANOGENESIS INC.
INDEX
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<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
- - ------------------------------ ------
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets
at September 30, 1996 and December 31, 1995....................................... 3
Consolidated Statements of Operations
for the three-month and nine-month periods ended September 30, 1996 and 1995...... 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1996 and 1995............................. 5
Notes to Consolidated Financial Statements............................................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................... 9
PART II - OTHER INFORMATION
- - ---------------------------
Item 1 - Legal Proceedings..................................................................... *
Item 2 - Changes in Securities................................................................. *
Item 3 - Defaults upon Senior Securities....................................................... *
Item 4 - Submission of Matters to a Vote of Security Holders................................... *
Item 5 - Other Information..................................................................... *
Item 6 - Exhibits and Reports on Form 8-K...................................................... 12
Signatures..................................................................................... 13
</TABLE>
* No information provided due to inapplicability of item
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ORGANOGENESIS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
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ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,176 $ 2,569
Short-term investments 14,049 11,152
Other current assets 622 557
-------- --------
15,847 14,278
Long-term investments 2,670 -
Property and equipment, net 4,871 4,942
Other assets 85 84
-------- --------
$ 23,473 $ 19,304
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 889 $ 605
Accrued expenses 655 787
-------- --------
1,544 1,392
Deferred rent payable 82 114
STOCKHOLDERS' EQUITY
Preferred Stock, par value $1.00; authorized
1,000,000 shares; issued and converted
250,000 Series A Convertible Preferred
shares (liquidation preference - $2,000,000) - -
Preferred Stock, Series B Junior Participating,
par value $1.00; authorized 50,000 shares;
no shares issued and outstanding - -
Common Stock, par value $.01; authorized
40,000,000 shares; issued and outstanding
14,242,814 and 13,732,437 shares as of
September 30, 1996 and December 31,1995,
respectively 142 137
Additional paid-in capital 85,093 77,341
Accumulated deficit (63,388) (59,680)
-------- --------
Total stockholders' equity 21,847 17,798
-------- --------
$ 23,473 $ 19,304
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
For the For the
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Research and development support $ 2,500 $ - $ 6,500 $ -
Contract revenue and royalties 20 - 42 18
Interest income 264 156 754 392
----------- ----------- ----------- -----------
Total revenues 2,784 156 7,296 410
----------- ----------- ----------- -----------
Costs and expenses:
Research and development 2,688 2,404 7,976 6,921
General and administrative 953 1,029 3,028 2,905
----------- ----------- ----------- -----------
Total costs and expenses 3,641 3,433 11,004 9,826
----------- ----------- ----------- -----------
Net loss $ (857) $ (3,277) $ (3,708) $ (9,416)
=========== =========== =========== ===========
Net loss per common share $ (.06) $ (.25) $ (.26) $ (.72)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 14,124,886 13,027,974 14,023,809 13,022,814
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the
Nine Months
Ended September 30,
---------------------
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,708) $ (9,416)
Adjustment to reconcile net loss to
cash used in operating activities:
Depreciation 766 751
Changes in assets and liabilities:
Other current assets (65) (194)
Other assets (1) (2)
Accounts payable 284 126
Accrued expenses (132) (119)
Deferred revenue - (13)
Deferred rent payable (32) (32)
Other liabilities - (15)
-------- --------
Cash used in operating activities (2,888) (8,914)
-------- --------
Cash flows from investing activities:
Capital expenditures (695) (227)
Purchases of investments (13,870) (12,500)
Sales/maturities of investments 8,303 3,756
-------- --------
Cash used in investing activities (6,262) (8,971)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock 5,000 14,888
Proceeds from exercise of warrants 2,190 -
Proceeds from exercise of stock options 567 707
-------- --------
Cash provided by financing activities 7,757 15,595
-------- --------
Decrease in cash and cash equivalents (1,393) (2,290)
Cash and cash equivalents, beginning of period 2,569 3,187
-------- --------
Cash and cash equivalents, end of period $ 1,176 $ 897
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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ORGANOGENESIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Notes to Consolidated Financial Statements and other parts of this Form
10-Q which express the "belief", "anticipation" or "expectation," as well
as other statements which are not historical fact, are forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 and involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such a difference include, but
are not limited to, those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this report
or included in publicly available filings with the Securities and Exchange
Commission, such as the Company's Annual Report on Form 10-K for the year
ended December 31,1995.
1. Basis of Presentation:
---------------------
The accompanying unaudited consolidated financial statements of
Organogenesis Inc. (the "Company"), have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying consolidated
financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position, results of operations and changes in cash flows for the periods
presented. The results of operations for the three and nine month periods
ended September 30, 1996 are not necessarily indicative of the results to
be expected for the year ending December 31, 1996.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995
as filed with the Securities and Exchange Commission.
2. Collaborative Agreement:
------------------------
In January 1996, the Company and Sandoz Ltd. ("Sandoz") entered into an
agreement that grants Sandoz global marketing rights to Apligraf/TM/
(formerly known as Graftskin/TM/). Sandoz is a global pharmaceutical
company with experience in marketing medical products and a demonstrated
commitment to the fields of transplantation and dermatology. Sandoz is
responsible for Apligraf/TM/ sales and marketing costs worldwide, as well
as all clinical trials, registrations and patent costs outside the U.S. The
Company will supply Sandoz's global requirements for Apligraf/TM/ and will
receive both a per unit manufacturing payment and royalty revenues on all
sales. In addition, Sandoz has agreed to provide the Company up to
$37,500,000 in equity investments, research support and milestone payments.
In January 1996, the Company received an initial $5,000,000 equity
investment at $23.37 per share. Additional equity investments of
$3,000,000 and $7,500,000 will be made based upon certain events as stated
in the agreement. As a result of the initial equity investment, Sandoz
holds approximately 1.5% of the outstanding shares of the Company.
6
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In February and June 1996, the Company received proceeds from Sandoz of
$4,000,000 and $2,500,000, respectively, representing contributions to the
Company's research and development costs for Apligraf/TM/. For the three
and nine month periods ended September 30, 1996, the Company has recorded
$2,500,000 and $6,500,000, respectively, as research and development
support revenue in the accompanying consolidated statements of operations.
An additional research and development support contribution is scheduled to
be received by the due date stated in the agreement.
In addition to the equity investments and research and development support
payments, the Company will also receive non-refundable milestone payments,
if any, based upon achievement of certain milestones as stated in the
agreement.
The Company and Sandoz have established several committees, comprised of
representatives from both companies, including a Joint Development
Committee ("JDC") and a Joint Manufacturing Committee ("JMC"). The JDC has
been established to oversee the global development activities of
Apligraf/tm/, with its main objective being the global registration of
Apligraf/tm/, in the most expeditious and economical way possible. The JMC
has been established to ensure that Sandoz's projected demand for
Apligraf/tm/ and the Company's capacity strategy are well synchronized.
3. Cash and Cash Equivalents
--------------------------
Cash and cash equivalents consists of cash and money market funds, which
are convertible into a known amount of cash and carry an insignificant risk
of change in value. These investments are highly liquid and have original
maturities of less than three months.
4. Investments
-----------
The Company considers all investments purchased with an original maturity
of less than twelve months to be short-term investments and all investments
purchased with a scheduled maturity date greater than twelve months at the
date of acquisition to be long-term investments. All investments are
classified as available-for-sale and are carried at cost plus accrued
interest, which approximates fair market value. The Company invests its
excess cash in U.S. government agency bonds or notes, time deposits,
commercial paper, corporate notes, certificates of deposit and money
market funds. These securities have an A or A1 rating or better.
5. Stockholders' Equity:
---------------------
In January 1996, the Company issued 213,975 shares of common stock related
to its agreement with Sandoz (see "Collaborative Agreement" note).
In April 1996, the Company received proceeds of $487,500 related to the
exercise of warrants to purchase Common Stock which were issued in April
1991. The warrants allowed for the purchase of 31,250 shares of Common
Stock at $9.60 per share and 15,625 shares at $12.00 per share.
In May 1996, the Company's stockholders approved an increase in the number
of authorized shares of Common Stock from 20,000,000 to 40,000,000.
7
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During August and September 1996, the Company received proceeds of
approximately $1,703,000 related to the partial exercise of a warrant to
purchase Common Stock which was issued in November 1991. The warrant allows
for the purchase of 187,500 shares of Common Stock at $9.75 per share. The
remaining amounts under the warrant were subsequently exercised in October
1996, for proceeds of approximately $125,000.
6. Revenue Recognition:
--------------------
Revenue under the collaborative agreement with Sandoz is recognized as
related expenses are incurred. Deferred revenue arises from the difference
between cash received and revenue recognized. Royalty revenue is recorded
as earned.
7. New Accounting Pronouncement:
-----------------------------
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which is effective for transactions entered into
in fiscal years that begin after December 15, 1995. SFAS 123 established a
fair value based method of accounting for stock-based compensation plans.
The Company intends to continue to apply current accounting rules and
comply with the disclosure requirements of this standard in its
consolidated financial statements for the year ending December 31, 1996.
8. Reclassifications:
------------------
Certain reclassifications have been made to the prior period financial
statements to conform to the current presentation.
8
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ORGANOGENESIS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview:
--------
Organogenesis Inc. (the "Company") designs, develops and manufactures
medical therapeutics containing living cells and/or natural connective
tissue components. The Company's products are designed to promote the
establishment and growth of new tissues to restore, maintain or improve
biological function. The Company's product development focus includes
living tissue replacements, organ assist treatments and guided tissue
regeneration scaffolds.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company's
competitors of new technologies or products that are more effective than
the Company's, risks of failure of clinical trials, dependence on and
retention of key personnel, protection of proprietary technology,
compliance with U.S. Food and Drug Administration ("FDA") regulations,
continued availability of raw material for the Company's products,
availability of product liability insurance upon commercialization of the
Company's products, ability to transition from pilot-scale manufacturing to
large-scale commercial production of products, uncertainty as to the
availability of additional capital on acceptable terms, if at all, and the
demand for the Company's products, if and when approved.
Results of Operations may vary significantly from quarter to quarter
depending on, among other factors, the progress of the Company's research
and development efforts, the receipt of milestone and research and
development support payments, if any, from Sandoz, the timing of certain
expenses and the establishment of additional collaborative agreements, if
any.
Results of Operations:
---------------------
Revenues
Research and development support revenue was $2,500,000 and $6,500,000 for
the three and nine month periods ended September 30, 1996, respectively.
The research and development support revenue is attributable to the
agreement with Sandoz (See "Notes to Consolidated Financial Statements").
There was no research and development support revenue for the same periods
in 1995.
Interest income was $264,000 and $754,000 for the three and nine month
periods ended September 30, 1996, as compared to $156,000 and $392,000 for
the same periods in 1995. The increase in interest income was primarily
due to more cash being available from the equity investment and research
and development support payments received from Sandoz of $11,500,000 during
the first half of 1996 and the exercise of certain warrants for common
stock.
9
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Costs and Expenses
Research and development expenses were $2,688,000 and $7,976,000 for the
three and nine month periods ended September 30, 1996, respectively, as
compared to $2,404,000 and $6,921,000 for the same periods in 1995. The
increase was primarily due to the activities supporting the Company's lead
product, Apligraf/TM/, including: development of routine updates to the
venous ulcer premarket approval application, which is currently under
review at the FDA with expedited review status; initiation of the diabetic
ulcer pivotal trial; and preparation for product commercialization. The
increase was also due to the Company's research collaborations with leading
academic institutions to further expand its product portfolio, including
Brigham and Women's Hospital, Children's Hospital in Boston, Harvard
Medical School and Massachusetts General Hospital. The Company expects to
continue to increase research and development expenditures, particularly
with respect to its clinical programs and manufacturing scale up, for the
remainder of 1996.
General and administrative expenses were $953,000 and $3,028,000 for the
three and nine month periods ended September 30, 1996, respectively, as
compared to $1,029,000 and $2,905,000 for the same periods in 1995. The
nine month increase was primarily due to higher personnel costs, expanding
the Company's public and investor relations programs, and increased
professional fees.
As a result of the net effect described above, the Company incurred a net
loss of $857,000, or $.06 per share, and $3,708,000, or $.26 per share, for
the three and nine month periods ended September 30, 1996, respectively, a
decrease from the net loss of $3,277,000, or $.25 per share, and
$9,416,000, or $.72 per share, for the comparable 1995 periods. The
Company expects to incur additional losses as its research and development
expenses and other costs continue to increase due to factors described
above.
Liquidity and Capital Resources:
-------------------------------
From inception, the Company has financed its operations through private and
public placements of equity securities, as well as receipt of contract
revenues, interest income from investments and, to a lesser extent, sale of
products. At September 30, 1996 and December 31, 1995, respectively, the
Company had cash, cash equivalents and investments in the aggregate of
$17,895,000 and $13,721,000. The increase was primarily due to an equity
investment of $5,000,000 and research and development support payments
totaling $6,500,000 received under the agreement with Sandoz (See "Notes to
Consolidated Financial Statements"). The increase was also due to the
receipt of $2,190,000 from the exercise of warrants.
The Company expects to continue to utilize working capital at an increasing
rate relative to the prior year related to the preparation for the
commercialization of Apligraf/TM/ and research, development, and clinical
programs. These activities will require substantial additional financial
resources before the Company can expect to realize a net profit from
product sales. The Company does not anticipate having significant revenue
from the sale of its lead product, Apligraf/TM/, until 1997, at the
earliest. While management believes that additional financing composed of
equity investments and funding provided under collaborative agreements will
be sufficient to fund future operations, and are being pursued, there can
be no assurances that additional funds will be available when required on
terms acceptable to the Company.
10
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The Company currently anticipates devoting substantial funds during 1996
and early 1997 to the purchase of capital equipment and leasehold
improvements, expansion of its research and development programs and the
commercialization of Apligraf/TM/. These activities are expected to involve
the hiring of additional qualified personnel as well.
In October 1996, the Company made arrangements to lease additional
warehouse and office space to enable more of its main facility to be
dedicated to manufacturing-related operations. The Company is also
exploring the options available for a new facility for large-scale
commercial production of products in the future.
On March 12, 1996, the Company announced the initiation of a pivotal
clinical trial to assess the efficacy and safety of Apligraf/TM/ for the
treatment of diabetic ulcers. In addition, a pivotal trial for decubitus
ulcers is expected to begin during 1997. The Company intends to devote
significant funds, with research support provided by Sandoz, to conducting
these pivotal trials and to other activities requiring regulatory review or
approval during 1996 and beyond. As with any medical device product
subject to FDA approval, the regulatory process may require greater testing
than is currently anticipated by the Company. There can be no assurance
that the FDA will approve any of the Company's products and, if approved,
that any of the Company's products will be successful commercially.
Based upon its current plans, the Company believes that future equity and
research and development support contributions from Sandoz and revenues
from product sales, together with existing working capital, will be
sufficient to fund its operations through 1997. However, the Company's
capital requirements may vary depending on numerous factors, including:
progress of the Company's research and development programs; time required
to obtain regulatory approvals; resources the Company devotes to self-
funded projects, proprietary manufacturing methods and advanced
technologies; and the demand for the Company's products, if and when
approved.
11
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ORGANOGENESIS INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (filed with electronic submission only)
(b) No current reports on Form 8-K were filed during the quarter ended
September 30, 1996.
12
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ORGANOGENESIS INC.
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.
ORGANOGENESIS INC.
------------------
(Registrant)
Date: November 13, 1996 /S/ Herbert M. Stein
----------------- --------------------
Herbert M. Stein, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1996 /S/ Donna L. Abelli
----------------- -------------------
Donna L. Abelli, Vice President Finance and
Administration, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,176
<SECURITIES> 16,719
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,847
<PP&E> 10,795
<DEPRECIATION> 5,924
<TOTAL-ASSETS> 23,473
<CURRENT-LIABILITIES> 1,544
<BONDS> 0
0
0
<COMMON> 142
<OTHER-SE> 21,705
<TOTAL-LIABILITY-AND-EQUITY> 23,473
<SALES> 0
<TOTAL-REVENUES> 7,296
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,004
<LOSS-PROVISION> 0
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<NET-INCOME> (3,708)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
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