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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 JUNE 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 August 5, 1996 was 14,032,513 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 June 30, 1996 and December 31, 1995.................................... 3
Consolidated Statements of Operations
for the three-month and six-month periods ended June 30, 1996 and 1995.... 4
Consolidated Statements of Cash Flows
for the six months ended June 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................................... 8
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............................. 11
Item 5 - Other Information............................................................... *
Item 6 - Exhibits and Reports on Form 8-K................................................ 11
Signatures............................................................................... 12
</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>
June 30,1996 December 31,
(unaudited) 1995
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,339 $ 2,569
Investments 15,932 11,152
Other current assets 560 557
-------- --------
19,831 14,278
Property and equipment, net 4,749 4,942
Other assets 85 84
-------- --------
$ 24,665 $ 19,304
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 618 $ 605
Accrued expenses 742 787
Deferred revenue 2,500 -
-------- --------
3,860 1,392
Deferred rent payable 93 114
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
14,028,361 and 13,732,437 shares as of
June 30, 1996 and December 31,1995,
respectively 140 137
Additional paid-in capital 83,103 77,341
Accumulated deficit (62,531) (59,680)
-------- --------
Total stockholders' equity 20,712 17,798
-------- --------
$ 24,665 $ 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 Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Research and development support $ 2,187 $ - $ 4,000 $ -
Contract revenue and royalties - - 21 17
Interest income 239 98 491 237
----------- ----------- ----------- -----------
Total revenues 2,426 98 4,512 254
----------- ----------- ----------- -----------
Costs and expenses:
Research and development 2,500 2,316 5,288 4,529
General and administrative 1,018 975 2,075 1,864
----------- ----------- ----------- -----------
Total costs and expenses 3,518 3,291 7,363 6,393
----------- ----------- ----------- -----------
Net loss $ (1,092) $ (3,193) $ (2,851) $ (6,139)
=========== =========== =========== ===========
Net loss per common share $(.08) $(.27) $(.20) $(.52)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 14,021,495 11,722,504 13,972,966 11,719,313
=========== =========== =========== ===========
</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
Six Months
Ended June 30,
--------------------
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,851) $(6,139)
Adjustment to reconcile net loss to
cash used in operating activities:
Depreciation 505 502
Changes in assets and liabilities:
Other current assets (3) (413)
Other assets (1) (2)
Accounts payable 13 246
Accrued expenses (45) 43
Deferred revenue 2,500 (13)
Deferred rent payable (21) (22)
Other liabilities 0 (15)
------- -------
Cash provided by (used in) operating activities 97 (5,813)
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Cash flows from investing activities:
Capital expenditures (312) (154)
Purchases of investments (8,750) -
Sales/maturities of investments 3,970 3,249
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Cash provided by (used in) investing activities (5,092) 3,095
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Cash flows from financing activities:
Proceeds from sale of common stock 5,000 -
Proceeds from exercise of warrant 488 -
Proceeds from exercise of stock options 277 103
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Cash provided by financing activities 5,765 103
------- -------
Increase (decrease) in cash and cash equivalents 770 (2,615)
Cash and cash equivalents, beginning of period 2,569 3,187
------- -------
Cash and cash equivalents, end of period $ 3,339 $ 572
======= =======
</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 contain forward-looking statements involving risks and uncertainties
as defined in the Private Securities Litigation Reform Act of 1995. 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 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 and six month periods ended June
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 exclusive worldwide marketing rights to
Apligraf/TM/ (formerly known as 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 Apligraf/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
$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.
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 six month periods ended June 30, 1996, the Company has recorded
$2,187,000 and $4,000,000, respectively, as research and development
support revenue in the accompanying consolidated statements of operations
and $2,500,000 as deferred revenue in the accompanying consolidated balance
sheets. An additional research and
6
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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 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 Apligraf/TM /. The JDC's main
objective is the global registration of Apligraf/TM/ in the most
expeditious and economical way possible.
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. Stockholders' Equity:
---------------------
In January 1996, the Company issued 213,975 shares of common stock related
to its marketing 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.
5. 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.
6. 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.
7. Reclassifications:
------------------
Certain reclassifications have been made to the prior period financial
statements to conform to the current presentation.
7
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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 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 ("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 $2,187,000 and $4,000,000 for
the three and six month periods ended June 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.
The Company expects to recognize as revenue in the current fiscal year the
remaining $2,500,000 in research and development support payments received
from Sandoz through June 30, 1996.
Interest income was $239,000 and $491,000 for the three and six month
periods ended June 30, 1996, as compared to $98,000 and $237,000 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 completion of a public offering in July 1995, in
which the Company received net proceeds of $14,773,000.
8
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Costs and Expenses
Research and development expenses were $2,500,000 and $5,288,000 for the
three and six month periods ended June 30, 1996, respectively, as compared
to $2,316,000 and $4,529,000 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, Harvard Medical School and, most recently, Massachusetts
General Hospital for the development of a liver assist device. 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 $1,018,000 and $2,075,000 for the
three and six month periods ended June 30, 1996, respectively, as compared
to $975,000 and $1,864,000 for the same periods in 1995. The 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 $1,092,000, or $.08 per share and $2,851,000, or $.20 per share,
for the three and six month periods ended June 30, 1996, respectively, a
decrease from the net loss of $3,193,000, or $.27 per share, and
$6,139,000, or $.52 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 June 30, 1996 and December 31, 1995, respectively, the Company
had cash, cash equivalents and investments in the aggregate of $19,271,000
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 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 expects to utilize working capital at a higher rate during the
second half of 1996 related to conducting clinical and preclinical trials,
enhancement of proprietary manufacturing technologies, manufacturing scale-
up, filing and maintaining patents, and expanding investor relations and
business development 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.
9
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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. 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 within the next twelve months. 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 at least through the fourth 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.
10
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ORGANOGENESIS INC.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting for Stockholders on May 15, 1996. At
the meeting, Messrs. Richard S. Cresse, William J. Hopke, Bjorn R.
Olsen, Ms. Marguerite A. Piret, David T. Rovee, Anton E. Schrafl and
Herbert M. Stein, were re-elected as Directors. The vote with respect to
each nominee is set forth below:
<TABLE>
<CAPTION>
Total Vote for Total Vote Withheld
Each Director from each Director
-------------- -------------------
<S> <C> <C>
Mr. Cresse 12,626,921 131,858
Mr. Hopke 12,628,846 129,933
Dr. Olsen 12,626,871 132,908
Ms. Piret 12,625,246 133,533
Dr. Rovee 12,628,971 129,808
Dr. Schrafl 12,627,846 130,933
Mr. Stein 12,627,988 130,791
</TABLE>
The stockholders authorized an increase to the number of authorized shares
of Common Stock from 20,000,000 to 40,000,000 by a vote of 12,432,592
shares for, 283,155 shares against, 43,032 shares abstaining and 1,210,833
shares non-voting.
The stockholders also ratified the selection of Coopers & Lybrand L.L.P. as
the Company's independent public accountants for the 1996 fiscal year by a
vote of 12,609,132 shares for, 123,712 shares against, 25,935 abstaining
and 1,210,833 shares non-voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- None.
(b) No current reports on Form 8-K were filed during the quarter ended June
30, 1996.
11
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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: August 13, 1996 /S/ Herbert M. Stein
--------------- ---------------------------------
Herbert M. Stein, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: August 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)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,339
<SECURITIES> 15,932
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,831
<PP&E> 10,412
<DEPRECIATION> 5,663
<TOTAL-ASSETS> 24,665
<CURRENT-LIABILITIES> 3,860
<BONDS> 0
0
0
<COMMON> 140
<OTHER-SE> 20,572
<TOTAL-LIABILITY-AND-EQUITY> 24,665
<SALES> 0
<TOTAL-REVENUES> 4,512
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,363
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,851)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,851)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
