<PAGE>
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, 2000
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: (781) 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 1, 2000 was 34,489,459 shares (excluding treasury
shares).
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ORGANOGENESIS INC.
Index
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Page
PART I - FINANCIAL INFORMATION Number
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<TABLE>
<CAPTION>
Item 1 - Financial Statements
<S> <C>
Consolidated Balance Sheets
At December 31, 1999 and September 30, 2000...................... 3
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1999 and 2000.. 4
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 2000............ 5
Notes to Consolidated Financial Statements............................ 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 10
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.................................. 15
Signatures................................................................. 16
</TABLE>
In this report, "Organogenesis" "we" "us" and "our" refer to Organogenesis Inc.
* 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>
December 31, September 30,
1999 2000
--------- ---------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,727 $ 14,976
Investments 6,712 3,355
Inventory 906 892
Receivable from related party 985 469
Other current assets 643 941
--------- ---------
Total current assets 14,973 20,633
Property and equipment -
Less accumulated depreciation of $11,080 and $12,707 11,731 12,186
Other assets 601 475
--------- ---------
Total Assets $ 27,305 $ 33,294
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 1,378 $ 646
Accrued expenses 3,438 3,471
Other current liabilities 602 -
Series C redeemable convertible preferred stock 6,180 -
Current portion of term loan 394 1,576
--------- ---------
Total current liabilities 11,992 5,693
Long-term convertible debt 17,953 15,977
Term loan 4,334 3,152
Commitments (see notes)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.01; authorized 80,000,000 shares:
Issued 30,689,019 and 34,525,926 shares as of
December 31, 1999 and September 30, 2000, respectively 307 345
Additional paid-in capital 122,890 153,979
Accumulated deficit (129,367) (145,048)
Treasury stock at cost, 85,000 shares at December 31, 1999
and September 30, 2000 (804) (804)
--------- ---------
Total stockholders' equity (deficit) (6,974) 8,472
--------- ---------
Total Liabilities and Stockholders' Equity (Deficit) $ 27,305 $ 33,294
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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ORGANOGENESIS INC.
Consolidated Statements of Operations
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Research and development support
from related party $ - $ - $ - $ 5,000
Product sales to related party and others 477 719 1,302 2,050
Other income 231 336 517 931
Interest income 238 341 745 917
----------- ----------- ----------- -----------
Total Revenues 946 1,396 2,564 8,898
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of product sales to related party and 969 1,310 2,699 3,744
others
Research and development 4,443 4,664 13,374 13,664
General and administrative 1,607 1,770 4,775 5,624
Non-cash purchase of incomplete technology - - 900 -
Interest expense-net 407 600 812 1,547
----------- ----------- ----------- -----------
Total Costs and Expenses 7,426 8,344 22,560 24,579
----------- ----------- ----------- -----------
NET LOSS $ (6,480) $ (6,948) $ (19,996) $ (15,681)
=========== =========== =========== ===========
Net loss per common share - basic and diluted $(0.21) $(0.20) $(0.66) $(0.47)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic and diluted 30,478,115 34,315,711 30,466,603 33,216,444
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
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ORGANOGENESIS INC.
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(19,996) $(15,681)
Adjustments to reconcile net loss to cash flows used in operating
activities:
Depreciation 1,311 1,627
Issuance of stock options 21 -
Amortization of warrants and deferred debt issuance costs relating to
long-term convertible debt 226 379
Issuance of treasury stock for purchase of incomplete technology 900 -
Issuance of common stock for interest on convertible debt - 696
Changes in assets and liabilities:
Inventory (65) 14
Other current assets and receivable from related party (412) 218
Accounts payable (582) (732)
Accrued expenses and other current liabilities 688 (569)
-------- --------
Cash used in operating activities (17,909) (14,048)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,769) (2,082)
Purchases of investments (19,000) -
Sales and maturities of investments 18,534 3,357
-------- --------
Cash provided by (used in) investing activities (5,235) 1,275
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term convertible debt 20,000 -
Deferred debt issuance costs (575) -
Preferred stock redeemed in cash - (6,180)
Proceeds from sale of common stock - net - 15,930
Proceeds from exercise of stock options 373 12,272
Purchase of treasury stock (951) -
-------- --------
Cash provided by financing activities 18,847 22,022
-------- --------
Increase (decrease) in cash and cash equivalents (4,297) 9,249
Cash and cash equivalents, beginning of period 5,052 5,727
-------- --------
Cash and cash equivalents, end of period $ 755 $ 14,976
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash during the period $ - $ 271
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
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ORGANOGENESIS INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of
Organogenesis Inc. 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 nine months ended September 30, 2000 are not necessarily indicative of the
results to be expected for the year ending December 31, 2000.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in our Form 10-K
for the year ended December 31, 1999 as filed with the Securities and Exchange
Commission.
Certain reclassifications have been made to the prior period financial
statements to conform to the current presentation.
2. Revenue Recognition
-------------------
Research and development support revenue under a collaborative agreement
with Novartis Pharma AG ("Novartis") is recognized as related expenses are
incurred or contractual obligations are met and is not refundable. Revenue from
Apligraf sales is recognized upon shipment or, in certain cases, after
fulfillment of firm purchase orders in accordance with the Manufacturing and
Supply Agreement with Novartis and when risk of ownership passes to the buyer
and we have no performance obligations. Other product revenues are recognized
upon shipment. Royalty revenue is recorded as earned. Grant revenue is
recognized to the extent of allowable costs incurred. Deferred revenue arises
from the difference between cash received and revenue recognized in accordance
with these policies.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), was issued in December 1999 and summarizes certain of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The application of the guidance in SAB
101, as amended by SAB No. 101B, will be required during the quarter ended
December 31, 2000. The effects of applying this guidance, if any, will be
reported as a cumulative effect adjustment resulting from a change in accounting
principle. Our evaluation of SAB 101 is not yet complete.
3. Net Loss Per Common Share
-------------------------
Net loss per common share (basic and diluted) is based on the weighted
average number of common shares outstanding during each period. Potentially
dilutive securities at September 30, 2000 include: stock options outstanding to
purchase 3,931,400 common shares; warrants to purchase 900,000 common shares;
and debt convertible into 1,736,813 common shares; however, such securities have
not been included in the net loss per common share calculation because their
effect would be anti-dilutive.
6
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4. Inventory
---------
Inventory is stated at the lower of cost or market, cost being standard
cost, which approximates the first-in, first-out method of accounting.
Inventory, at net realizable value, consisted of the following (in thousands):
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
Raw materials $ 348 $ 443
Work in process 558 449
----- -----
$ 906 $ 892
===== =====
5. Receivable from Related Party
-----------------------------
Receivable from related party consisted of amounts due on product sales to
Novartis and funding of certain programs by Novartis.
6. Accrued Expenses
----------------
Accrued expenses consisted of the following (in thousands):
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
Compensation and employee benefits $1,402 $1,592
Professional services 825 431
Accrued interest 361 679
Other 850 769
------ ------
$3,438 $3,471
====== ======
7. Term Loan Agreement
-------------------
In November of 1999, we entered into a $5,000,000 term loan agreement with
a commercial bank to finance the purchase of certain equipment, leasehold
improvements and other items. Borrowings under the term loan are collateralized
by a security interest in the items financed. The agreement provides repayment
of the principal amount of the loan in 12 equal quarterly installments
commencing December 29, 2000, with final payment due on September 30, 2003. The
loan bears interest at a fluctuating rate per annum that is equal to the prime
rate in effect from time to time, or we may elect that all or any portion of any
term loan be made as a LIBOR loan with an interest period of one month, two
months, three months or six months with the interest rate being equal to LIBOR
plus an applicable margin (175 to 225 basis points). We are required to comply
with certain covenants relating to our outstanding term loans, involving
limitations on future indebtedness, dividends and investments, and to maintain
certain financial covenants pertaining to liquidity, capital base, and debt
service coverage (or, alternatively, maintaining a minimum unencumbered cash
balance). We are in compliance with these covenants at September 30, 2000. At
September 30, 2000, we had an outstanding balance of $4,728,000 against this
term loan. The weighted average interest rate paid during this period was
8.73%. The current portion of this term loan is $1,576,000 at September 30,
2000.
7
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8. Series C Redeemable Convertible Preferred Stock
------------------------------------------------
At December 31, 1999, we had 62 shares of Series C redeemable convertible
preferred stock outstanding. In March 2000, we redeemed for cash all
outstanding shares of Series C redeemable convertible preferred stock for
$6,180,000.
9. Commitments
-----------
Lease Obligations
We occupy our main offices and manufacturing premises under a facility
lease for 79,500 square feet of space in Canton, Massachusetts at an annual
average base rent of approximately $790,000, plus operating expenses, that
expires on September 30, 2004. This lease has three options to extend the term
for an additional five years per option. Taxes, insurance and operating
expenses are our responsibility under the terms of the lease. In May 1999, we
entered into another facility lease for approximately 62,500 square feet of
additional office and warehouse space in Canton, Massachusetts. In June 2000,
we amended this lease to terminate 42,000 square feet, leaving 20,500 square
feet remaining at an annual average base rent of approximately $138,500, plus
operating expenses, that expires on December 5, 2004. This lease has three
options to extend the term for an additional five years per option. In total,
we currently lease approximately 100,000 square feet of space.
Future minimum lease payments are as follows (in thousands):
2000 $1,101
2001 957
2002 976
2003 962
2004 754
Thereafter -
------
$4,750
======
Grants
In November 1999, we received notice of grants to support two research
projects: (1) $2,000,000 grant under the Advanced Technology Program of the
National Institute for Standards and Technology ("NIST") to help support
development of an effective liver assist device prototype, which we have
received $474,000 and expect to receive the remaining amount over the period
through December 2001; and (2) $100,000 grant under the Small Business
Innovation Research Program of the National Institutes of Health to support
development of a vascular graft, which was fully received as of September 30,
2000. Both of these grants require that the United States federal government
can access for its own purposes technology developed using the funding. A
product developed based on the funding from the NIST grant must be manufactured
substantially in the United States. In addition, we are subject to regular
audit and reporting requirements. We have recorded other income of $258,000 and
$732,000 for the three and nine months ended September 30, 2000 relating to
these research grants.
8
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10. Collaborative Agreement
-----------------------
The collaborative agreement with Novartis provides us with up to
$40,000,000 in equity investments and nonrefundable research, development and
milestone support payments, of which $31,750,000 has been received to date, all
of which are non refundable. The remaining payments are based upon achievement
of specified events. In March 2000, we received $5,000,000 from Novartis, which
represented a support payment received in advance of achievement of a milestone
related to the diabetic foot ulcer indication. In June 2000, we recognized
research and development support revenue of $5,000,000 when achievement of the
milestone was met upon FDA approval of Apligraf for use in diabetic foot ulcers.
Under the agreement, we supply Novartis' global requirements for Apligraf and
receive revenue consisting of a per unit manufacturing payment and royalties on
product sales.
11. Common Stock Issuance
---------------------
On February 14, 2000, the Securities and Exchange Commission declared
effective a shelf registration for the placement of up to 3,000,000 shares of
common stock with an aggregate offering price not to exceed $50,000,000. In
February 2000, we completed a private placement of 788,925 shares of common
stock at $14.00 per share under this shelf registration yielding net proceeds of
approximately $10,755,000. In March 2000, we completed a private placement of
300,000 shares of common stock at $17.25 per share under this shelf registration
yielding proceeds of approximately $5,175,000.
In April 2000, we issued 44,035 shares of common stock for payment of
interest on our long-term convertible debt. In August 2000, we issued 176,536
shares of common stock for conversion of 2,500,000 face value convertible notes,
plus accrued interest.
During the nine months ended September 30, 2000, we issued 2,527,411 shares
of common stock for the exercise of employee stock options, yielding proceeds of
approximately $12,272,000.
12. Accounting Pronouncements
-------------------------
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on the Company's financial
position or results of operations.
9
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ORGANOGENESIS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements include information on:
. Our business outlook and future financial performance;
. Anticipated profitability, revenues, expenses and capital expenditures;
. Future funding and expectations as to any future events; and
. Other statements that are not historical fact and are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 that involve risks and uncertainties.
Although we believe that our plans, intentions and expectations reflected
in or suggested by such forward-looking statements are reasonable, we can give
no assurance that such plans, intentions or expectations will be achieved. When
considering such forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this Form 10-Q and in other publicly
available filings with the SEC, such as our Annual Report on Form 10-K for the
year ended December 31, 1999. The risk and other factors noted throughout this
Form 10-Q could cause our actual results to differ materially from the results
contained in any forward-looking statements.
In Management's Discussion and Analysis ("MD&A"), we explain the general
financial condition and results of operations for Organogenesis Inc. As you
read this MD&A, referring to our consolidated financial statements contained in
Item 1 of this Form 10-Q may be helpful. Results of operations may vary
significantly from quarter to quarter depending on, among other factors, the
progress of our research and development efforts, the receipt of milestone and
research and development support payments, if any, from Novartis, product
revenues, manufacturing costs, the timing of certain expenses and the
establishment of additional collaborative agreements, if any.
OVERVIEW OF ORGANOGENESIS INC.
------------------------------
Organogenesis Inc. - a tissue-engineering firm - designs, develops and
manufactures medical products containing living cells and/or natural connective
tissue. Our product development program includes living tissue replacements,
cell-based organ assist devices and other tissue-engineered products. Our lead
product, Apligraf(R) skin substitute, was launched in the United States in June
1998 by Novartis Pharma AG ("Novartis"). Novartis has global Apligraf marketing
rights. Our strategy is to commercialize products either by ourselves or
through partners with an established marketing presence.
OUR LEAD PRODUCT, APLIGRAF(R)
--------------------------
Apligraf is the first and only product containing living human cells to
prove efficacy and gain FDA PMA marketing approval. In 1998, Apligraf was
approved and launched for use in the treatment of venous leg ulcers. In June
2000, Apligraf gained approval for a second indication - use in diabetic foot
ulcers - and was launched for this purpose in July 2000. Apligraf is also
available in some international markets, including Canada and Switzerland.
Effective August 2000, Apligraf qualified nationally for reimbursement
under Medicare when used in the hospital outpatient setting, such as hospital-
affiliated wound care clinics. Progress is also being made with gaining
Medicare reimbursement for Apligraf applied in a physician's office.
Apligraf(R) is a registered trademark of Novartis.
10
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A pivotal trial is underway to assess whether use of Apligraf to treat
wounds due to skin cancer surgery reduces post-surgical scarring. Data on
Apligraf in other applications, including donor site wounds, burns and
epidermolysis bullosa (a genetic skin disorder), have been published.
OUR PIPELINE
------------
Our pipeline includes our Vitrix(TM) living dermal replacement product, now
in pilot human clinical trials; our vascular graft program, currently in animal
studies; and our liver assist device program, currently in research. Our
portfolio also includes potential licensing opportunities such as the ECM(TM)
(formerly GraftPatch(TM)) soft tissue repair product and our cell-culture
derived conditioned medium product.
RESULTS OF OPERATIONS
---------------------
We are currently at low volume production as Apligraf has, to date, shown a
gradual ramp-up in sales. We expect production costs to exceed product sales
for the near term due to start-up expenses and the high costs associated with
low volume production. We expect production volume to increase due to progress
being made in gaining Medicare coverage for Apligraf and its recent FDA approval
for use in diabetic foot ulcers.
REVENUES
Total revenues were $1,396,000 and $8,898,000 for the three and nine months
ended September 30, 2000, compared to $946,000 and $2,564,000 for the same
periods in 1999. Revenues for the nine months ended September 30, 2000, include
recognition of $5,000,000 for achievement of a milestone related to the diabetic
foot ulcer indication received under the collaborative agreement with Novartis.
Product sales to related party and others increased to $719,000 and $2,050,000
for the three and nine months ended September 30, 2000, compared to $477,000 and
$1,302,000 for the same periods in 1999, due to increased unit sales of Apligraf
to Novartis. We expect Apligraf commercial sales to continue to increase. Other
income increased to $336,000 and $931,000 for the three and nine months ended
September 30, 2000, compared to $231,000 and 517,000 for the same periods in
1999, mainly due to funding received under research grants.
COSTS AND EXPENSES
Cost of product sales: Cost of product sales was $1,310,000 and $3,744,000
for the three and nine months ended September 30, 2000, compared to $969,000 and
$2,699,000 for the same periods in 1999, due to increased unit sales of Apligraf
to Novartis. Cost of product sales includes the direct costs to manufacture and
package Apligraf and an allocation of our production related indirect costs.
Cost of product sales continues to exceed product sales due to the high costs
associated with low volume production. We expect production volume to increase
and our margins to improve.
Research and development: Research and development expenses ("R&D")
consist of costs associated with research, development, clinical and operations
support. These expenses increased to $4,664,000 and $13,664,000 for the three
and nine months ended September 30, 2000, compared to $4,443,000 and $13,374,000
for the same periods in 1999. This change is due to an increase in operations
support start-up costs related to Apligraf commercialization, offset by a
decrease in R&D related expenses primarily due to decreased costs to support
sponsored research programs and publication studies and also a decrease in
clinical related costs due to completion of the Apligraf diabetic ulcer pivotal
trial. Quality systems and operations support expenses were $2,266,000 and
$6,780,000 for the three and nine months ended September 30, 2000, compared to
$1,898,000 and $5,339,000 for the same periods in 1999.
11
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General and administrative expenses: General and administrative expenses
("G&A") include the costs of our corporate, finance, information technology and
human resource functions. G&A expenses increased to $1,770,000 and $5,624,000
for the three and nine months ended September 30, 2000, compared to $1,607,000
and $4,775,000 for the same periods in 1999. The increase is primarily due to
higher personnel costs, occupancy costs and increased professional service fees.
We expect that G&A expenses will remain level to the third quarter through the
remainder of 2000 and for 2001.
Interest expense-net: Interest expense, net of capitalized interest of
$197,000, increased to $600,000 and $1,547,000 for the three and nine months
ended September 30, 2000, compared to $407,000 and $812,000 for the same periods
in 1999, due to the issuance of convertible debentures in March 1999 and
entering into a term loan in November 1999.
NET LOSS
As a result of the net effect described above, we incurred a net loss of
$6,948,000 or $(0.20) per share (basic and diluted), and $15,681,000, or $(0.47)
per share (basic and diluted), for the three and nine months ended September 30,
2000, respectively, compared to $6,480,000, or $(0.21) per share (basic and
diluted), and $19,996,000, or $(0.66) per share (basic and diluted), for the
comparable 1999 periods.
CAPITAL RESOURCES AND LIQUIDITY
-------------------------------
FUNDS USED IN OPERATIONS
At September 30, 2000, we had cash, cash equivalents and investments in the
aggregate amount of $18,331,000 and working capital of $14,940,000, compared to
$12,439,000 and $2,981,000, respectively, at December 31, 1999. Cash
equivalents consist of money market funds, which are highly liquid and have
original maturities of less than three months. Investments consist of
securities that have an A or A1 rating or better with a maximum maturity of two
years. Cash used in operating activities was $14,048,000 for the nine months
ended September 30, 2000, compared to $17,909,000 for the same period in 1999,
primarily for financing our ongoing research, development and manufacturing
operations, offset by cash received from Novartis in 2000 for achievement of a
milestone related to the diabetic foot ulcer indication.
CAPITAL SPENDING
Capital expenditures were $2,082,000 and $4,769,000 during the nine months
ended September 30, 2000 and 1999, respectively, primarily related to the
further build-out of existing facilities to support Apligraf manufacturing, as
well as the acquisition of equipment for research and development programs and
manufacturing. We will continue to utilize funds during 2000 and 2001 to expand
our existing facility in the areas of Apligraf manufacturing, packaging and
other process development improvement programs.
NOVARTIS SUPPORT
In March 2000, we received $5,000,000 from Novartis, which represented a
support payment received in advance of achievement of a milestone related to the
diabetic foot ulcer indication. In June 2000, we recognized research and
development support revenue of $5,000,000 when achievement of the milestone was
met upon FDA approval of Apligraf for use in diabetic foot ulcers.
12
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FINANCING
From inception, we have financed our operations substantially through
private and public placements of equity securities, as well as receipt of
research support and contract revenues, interest income from investments, sale
of products and receipt of royalties. During the nine months ended September
30, 2000, financing activities provided cash of $22,022,000 primarily from the
sale of common stock that generated net proceeds of $15,930,000 and the exercise
of stock options that generated $12,272,000, partially offset by the redemption
of Series C redeemable convertible preferred stock in cash for $6,180,000.
Financing activities provided cash of $18,847,000 for the nine months ended
September 30, 1999 primarily from the sale of five-year convertible debentures
and warrants to purchase common stock that generated net proceeds of $19,425,000
and the exercise of stock options that generated $373,000, partially offset by
the purchase of treasury stock totaling $951,000.
LIQUIDITY
Based upon current plans, we believe that proceeds received from common
stock issued in the first quarter of 2000, together with existing working
capital and future funds from Novartis, including product and royalty revenue,
will be sufficient to finance operations into 2001. In addition, we anticipate
the need to raise additional funds to operate through the end of 2001. However,
this statement is forward-looking and changes may occur that would significantly
decrease available cash before such time. Factors that may change our cash
requirements include:
. Timing of regulatory approvals of products in different countries and
subsequent timing of product launches;
. Delays in commercial acceptance and reimbursement when product launches
occur;
. Changes in the progress of research and development programs; and
. Changes in the resources devoted to outside research collaborations or
projects, self-funded projects, proprietary manufacturing methods and advanced
technologies.
Any of these events could adversely impact our capital resources, requiring
us to raise additional funds. Management believes that additional funds may be
available through equity or debt financing, strategic alliances with corporate
partners, capital lease arrangements, or other sources of financing in the
future. There can be no assurances that these funds will be available when
required on terms acceptable to us, if at all. If adequate funds are not
available when needed, we would need to delay, scale back or eliminate certain
research and development programs or license to third parties certain products
or technologies that we would otherwise undertake ourselves, resulting in a
potential material adverse effect on our financial condition and results of
operations.
13
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ADDITIONAL CAUTIONARY CONSIDERATIONS
------------------------------------
We are subject to risks common to entities in the biotechnology industry,
including, but not limited to, the following uncertainties:
. Market acceptance of our products and successful marketing and selling of
Apligraf by Novartis;
. Manufacture and sale of products in sufficient volume to realize a
satisfactory margin;
. Achievement of product cost reductions through process development
improvements;
. Adequate third-party reimbursement for products;
. FDA approval of Apligraf for other indications and successful registrations
of Apligraf outside the United States;
. Development by competitors of new technologies or products that are more
effective than ours;
. Protection of proprietary technology through patents;
. Ability to recover the investment in property and equipment;
. Dependence on and retention of key personnel;
. Compliance with FDA regulations and similar foreign regulatory bodies;
. Risk of failure of clinical trials for future indications of Apligraf and
other products;
. Availability of additional capital on acceptable terms, if at all;
. Continued availability of raw material for products; and
. Availability of sufficient product liability insurance.
14
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ORGANOGENESIS INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(ee) Second Amendment to and Partial Termination of Lease Agreement
between 85 John Road LLC (formerly North Queen Street LP) and the
Company, dated June 30, 2000.
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, 2000.
15
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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 14, 2000 /S/ Philip M. Laughlin
--------------------------------------------
Philip M. Laughlin, President
and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 /S/ John J. Arcari
--------------------------------------------
John J. Arcari, Vice President, Finance and
Administration, Chief Financial Officer
(Principal Financial and Accounting Officer)
16
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ORGANOGENESIS INC.
EXHIBIT INDEX
Exhibit No. Description of Exhibit
------------- ----------------------
10(ee) Second Amendment to and Partial Termination of Lease Agreement
between 85 John Road LLC (formerly North Queen Street LP) and the
Company, dated June 30, 2000.
27 Financial Data Schedule (filed with electronic submission only)
