<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 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 0-15246
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ORGANOGENESIS INC.
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(Exact name of registrant as specified in its charter)
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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 May 3, 1996 was 13,972,725 shares.
<PAGE>
ORGANOGENESIS INC.
INDEX
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<CAPTION> Page
PART I - FINANCIAL INFORMATION Number
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Item 1 - Financial Statements
Consolidated Balance Sheets
at March 31, 1996 and December 31, 1995....................... 1
Consolidated Statements of Operations
for the three months ended March 31, 1996 and 1995............ 2
Consolidated Statements of Cash Flows
for the three months ended March 31, 1996 and 1995............ 3
Notes to Consolidated Financial Statements.................... 4
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 6
PART II - OTHER INFORMATION
- - --------------------------------------------------------------
Item 1 - Legal Proceedings ................................. 9
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................................. 9
Item 6 - Exhibits and Reports on Form 8-K.................... 9
Signatures.................................................... 10
</TABLE>
* No information provided due to inapplicability of item
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ORGANOGENESIS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,1996 December 31,
(unaudited) 1995
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,407 $ 2,569
Investments 17,890 11,152
Other current assets 688 557
-------- --------
19,985 14,278
Property and equipment, net 4,778 4,942
Other assets 85 84
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$ 24,848 $ 19,304
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 861 $ 605
Accrued expenses 466 787
Deferred revenue 2,187 -
-------- --------
3,514 1,392
Deferred rent payable 103 114
Commitments
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 $.01; authorized
20,000,000 shares; issued and outstanding
13,970,663 and 13,732,437 shares as of
March 31, 1996 and December 31,1995,
respectively 140 137
Additional paid-in capital 82,530 77,341
Accumulated deficit (61,439) (59,680)
-------- --------
Total stockholders' equity 21,231 17,798
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$ 24,848 $ 19,304
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
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ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
For the
Three Months
Ended March 31,
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1996 1995
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<S> <C> <C>
Revenues:
Research and development support $ 1,813 $ -
Contract revenue and royalties 21 17
Interest income 252 139
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2,086 156
Costs and expenses:
Research and development 2,788 2,213
General and administrative 1,057 889
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Net loss $ (1,759) $ (2,946)
=========== ===========
Net loss per common share $(.13) $(.25)
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Weighted average number of
common shares outstanding 13,924,486 11,714,125
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
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ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the
Three Months
Ended March 31,
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1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,759) $(2,946)
Adjustment to reconcile net loss to
cash used in operating activities:
Depreciation 249 250
Changes in assets and liabilities:
Other current assets (131) (103)
Other assets (1) -
Accounts payable 256 97
Accrued expenses (321) (117)
Deferred revenue 2,187 (13)
Deferred rent payable (11) (11)
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Cash provided by (used in) operating activities 469 (2,843)
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Cash flows from investing activities:
Capital expenditures (85) (71)
Purchases of investments (8,750) -
Sales/maturities of investments 2,012 92
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Cash provided by (used in) investing activities (6,823) 21
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Cash flows from financing activities:
Proceeds from sale of common stock 5,000 -
Proceeds from exercise of stock options 192 70
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Cash provided by financing activities 5,192 70
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Decrease in cash and cash equivalents (1,162) (2,752)
Cash and cash equivalents, beginning of period 2,569 3,187
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Cash and cash equivalents, end of period $ 1,407 $ 435
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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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 contain forward-looking statements which 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".
1. Basis of Presentation:
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q.
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 months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the year ended
December 31, 1996. These financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Company's Annual Report filed on Form 10-K for the year ended December
31, 1995 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 exclusive worldwide marketing rights to
Graftskin/TM/. The Company will supply Sandoz's global requirements for
the product and receive payment for each unit. The Company will also
receive royalty revenues on all Graftskin/TM/ sales. In addition, Sandoz
has agreed to provide the Company with up to $37,500,000 in equity
investments, research support payments 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
$10,500,000 will be made based upon certain events as stated in the
agreement. As a result of this initial equity investment, Sandoz holds
approximately 1.5% of the outstanding shares of the Company.
In February 1996, the Company received proceeds from Sandoz of $4,000,000
representing the first contribution to the Company's research and
development costs for Graftskin/TM/. The Company has recorded $1,813,000 as
research and development support revenue in the accompanying consolidated
statements of operations and $2,187,000 as deferred revenue in the
accompanying consolidated balance sheets. Additional research and
development support contributions are scheduled to be received by certain
due dates as stated in the agreement.
4
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In addition to the equity investments and research and development support
payments, the Company will receive non-refundable milestone payments based
upon achievement of certain milestones as stated in the agreement.
The Company and Sandoz have established a Joint Development Committee
("JDC"), which is comprised of representatives from both Companies, to
oversee the global development activities of Graftskin/TM /. The JDC's main
objective is the global registration of Graftskin/TM/ in the most
expeditious and economical way possible.
3. 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.
4. 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 ended December 31, 1996.
5. Reclassifications:
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Certain reclassifications have been made to the prior period financial
statements to conform to the current presentation.
5
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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
innovative medical therapeutics using living human cells and natural
connective tissue components. The Company's cell therapies, matrix
scaffold, and other tissue engineered products are designed to promote the
establishment and growth of new tissues that maintain, restore or improve
biological function. The Company's product development focus includes
wound care, urology, cardiovascular surgery, and general surgery.
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 regulations, 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, if any, of milestone and research and
development support payments from Sandoz, the timing of certain expenses
and the establishment, if any, of additional collaborative agreements.
Results of Operations:
---------------------
Revenues
Research and development support revenue for the three month period ended
March 31, 1996 was $1,813,000, attributable to the agreement with Sandoz
(See "Notes to Consolidated Financial Statements"). There were no research
and development support revenues for the same period in 1995.
Contract revenue and royalties were $21,000 for the three month period
ended March 31, 1996, as compared to $17,000 for the same period in 1995.
The amount for 1996 was royalty revenue realized under a license agreement
with Toyobo Ltd. ("Toyobo"), granting Toyobo a license to manufacture and
market Testskin in Japan. During the same period in 1995, the Company did
not realize any royalty revenues from this agreement. The amount for 1995
was contract revenue realized under an agreement with Biomet, Inc.
("Biomet") for the development of orthopedic implants using the Company's
proprietary dense fibrillar collagen. The Company and Biomet have mutually
agreed to replace the research agreement with a supply arrangement under
which the Company will sell collagen to Biomet. Future revenues from this
supply arrangement are not expected to be significant.
6
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Interest income was $252,000 for the three month period ended March 31,
1996, as compared to $139,000 for the same period in 1995. The increase in
interest income was primarily from the investment of the equity and
research and development support payments received from Sandoz of
$9,000,000 during the first quarter of 1996 and the completion of a public
offering in July 1995, in which the Company received net proceeds of
$14,773,000.
Costs and Expenses
Research and development costs increased to $2,788,000 for the three month
period ended March 31, 1996, from $2,213,000 for the same period in 1995.
The increase was primarily due to the activities supporting the Company's
lead product, Graftskin/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, including Brigham and Women's Hospital and Harvard
Medical School, to further expand its product portfolio.
General and administrative expenses increased to $1,057,000 for the three
month period ended March 31, 1996 from $889,000 for the same period in
1995. The increase was primarily due to personnel costs and to expanding
the Company's public and investor relations programs.
The Company's net loss for the first quarter of 1996 was $1,759,000, or
$.13 per share, a decrease from the $2,946,000, or $.25 per share, net loss
for the same period in 1995.
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 March 31, 1996 and December 31, 1995, respectively, the
Company had cash, cash equivalents and investments in the aggregate of
$19,297,000 and $13,721,000. The increase was primarily due to an equity
investment of $5,000,000 and a research and development support payment of
$4,000,000 received under the agreement with Sandoz (See "Notes to
Consolidated Financial Statements"). The Company invests its 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 and generally mature within one
year or less.
The Company will continue to utilize working capital in 1996 related to
ongoing research and development activities, conducting preclinical and
clinical trials, enhancement of proprietary manufacturing technologies,
manufacturing scale-up, filing and maintaining patents, expansion of
business development, public and investor relations programs, and general
and administrative resources. These activities will require substantial
additional financial resources before the Company can expect to realize a
net profit from product sales. The Company has not had, and does not
anticipate having, significant revenue from the sale of its lead product,
Graftskin/TM/, before 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.
7
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The Company currently anticipates devoting substantial funds during 1996 to
the purchase of capital equipment and leasehold improvements, expansion of
its research and development programs and the commercialization of
Graftskin/TM/. These activities are expected to involve the hiring of
additional qualified personnel during 1996. 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 Graftskin/TM/ for the
treatment of diabetic ulcers. In addition, another pivotal trial, for
decubitus ulcers, is expected to begin within the next twelve months. The
Company intends to devote significant funds to conducting these pivotal
trials and to other activities requiring regulatory review or approval
during 1996 and beyond. The approval process may require additional testing
and cost more than is currently planned for by the Company.
Based upon its current plans, the Company believes that future equity and
research and development support contributions from Sandoz, together with
existing working capital, will be sufficient to fund its operations at
least through the second quarter of 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.
8
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ORGANOGENESIS INC.
PART II - OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
In December 1995, the Company announced that an alleged class action
lawsuit had been filed against it alleging federal securities law
violations. On March 14, 1996, the Company announced that this lawsuit was
dismissed without prejudice. No payment or compensation of any kind was
made to the plaintiff or his counsel in connection with this dismissal.
ITEM 5. OTHER INFORMATION
On March 12, 1996, the Company announced the initiation of a pivotal trial
to assess the efficacy and safety of Graftskin/TM/ for the treatment of
diabetic ulcers. The U.S. Food and Drug Administration ("FDA") has
informed the Company that its Premarket Approval Application ("PMA") for
use in diabetic ulcers will receive expedited review status when filed,
which means it will receive priority review over other pending PMAs and
510(k)s at the FDA.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- None.
(b) Reports on Form 8-K
(i) A current report on Form 8-K dated January 17, 1996 was filed by
the Registrant reporting that it had entered into an agreement with
Sandoz Ltd. ("Sandoz") which grants Sandoz worldwide marketing rights
to Graftskin/TM/.
9
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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: May 13, 1996 /S/ Herbert M. Stein
-------------------- --------------------
Herbert M. Stein, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: May 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)
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,407
<SECURITIES> 17,890
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,985
<PP&E> 10,185
<DEPRECIATION> 5,407
<TOTAL-ASSETS> 24,848
<CURRENT-LIABILITIES> 3,514
<BONDS> 0
0
0
<COMMON> 140
<OTHER-SE> 82,530
<TOTAL-LIABILITY-AND-EQUITY> 24,848
<SALES> 0
<TOTAL-REVENUES> 2,086
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,845
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (1,759)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,759)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
