This Form 10-K 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;
. Anticipated research, development, clinical, regulatory, and reimbursement
progress;
. 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-K. The risk and other
factors noted under the section "Risk factors" beginning on page 5 and
throughout this Form 10-K could cause our actual results to differ materially
from the results contained in any forward-looking statements.
ITEM 1. BUSINESS
Organogenesis Inc. - a tissue engineering company - designs, develops and
manufactures medical products containing living cells and/or natural connective
tissue. We are the developer and manufacturer of the only mass-produced product
containing living human cells to gain Food and Drug Administration ("FDA")
marketing approval. Our product development focus includes living tissue
replacements, a cell-based organ assist device and other tissue-engineered
products. Our lead product, Apligraf living skin substitute, is FDA approved and
marketed for use in the treatment of diabetic foot ulcers and venous leg ulcers.
Novartis Pharma AG ("Novartis") has exclusive global Apligraf marketing rights.
Organogenesis was organized as a Delaware corporation in 1985. Our
principal office is located at 150 Dan Road, Canton, Massachusetts 02021. The
telephone number is 781/575-0775 and the fax number is 781/575-1570. Our
website address is www.organogenesis.com.
PRODUCTS AND PROGRAMS
Organogenesis is utilizing its expertise in living cells and connective
tissue in its product development. In addition to Apligraf, major programs
include a living dermal replacement product candidate Vitrix(TM), a coronary
vascular graft and a liver assist device. These programs are profiled on the
following pages.
Apligraf(R) is a registered trademark of Novartis.
Vitrix(TM) is a trademark of Organogenesis.
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ON THE MARKET - APLIGRAF
Product Description - Apligraf is the only mass-produced product containing
living human cells to gain FDA marketing approval. Apligraf contains living
human skin cells - keratinocytes and fibroblasts - organized in an epidermal and
dermal layer. Apligraf is mass-produced, available to physicians on demand and
does not require hospitalization for use.
[IMAGE APPEARS HERE]
Apligraf compared to human skin under the microscope
Status - Novartis Pharma AG has exclusive global Apligraf marketing
rights. The 2001 amendment to our 1996 agreement with Novartis significantly
increases payments we receive for Apligraf units, as well as provides funding
support for certain facility investments, clinical development activities and up
to $20,000,000 in equity investments. Apligraf gained FDA marketing approval
for use in the treatment of venous leg ulcers in 1998. In June 2000, Apligraf
was also approved in the US for use in the treatment of diabetic foot ulcers.
Apligraf is on the market in select international markets. It is anticipated
that Novartis will submit for marketing approval across the European Union in
Spring 2001.
Current and Potential Markets -
Diabetic foot ulcers: Apligraf is FDA-approved for use in the treatment of
healing-resistant diabetic foot ulcers. Apligraf has been shown to heal more of
these ulcers, and heal them faster, than standard care alone. A common
complication of diabetes, foot ulcers afflict up to 800,000 people in the US.
Unhealed, these wounds can lead to life-threatening infections. They result in
over 50,000 amputations per year. Foot ulcers are also a leading cause of
hospitalization among diabetics. These wounds are estimated to cost the US
healthcare system over $1 billion per year.
Venous leg ulcers: Apligraf is also approved and marketed in the US for the
treatment of healing-resistant venous leg ulcers, chronic wounds caused by poor
blood circulation. Apligraf has also been shown to heal more of these ulcers,
and heal them faster, than standard care alone. Similar in incidence to diabetic
foot ulcers, venous ulcers can take six months or longer to heal. Data on the
cost-effectiveness of Apligraf in the treatment of hard-to-heal venous leg
ulcers were published during 2000.
Skin surgery wounds: For skin surgery wounds, there is a need to improve
the quality of healing, such as reducing scarring. We currently have a pivotal
trial underway to assess the ability of Apligraf to reduce scarring following
skin cancer surgery. We expect to complete this trial and submit to the FDA for
marketing approval within the next twelve months.
Other potential markets: As a skin substitute, Apligraf has a number of
additional potential uses, including pressure ulcers, burns, epidermolysis
bullosa (a genetic skin disorder), and other chronic and acute wounds.
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Reimbursement - In Summer 2000, Apligraf was placed on the Outpatient
Prospective Payment System list by the Health Care Financing Agency (HCFA).
This qualified the product for reimbursement by Medicare when applied in the
hospital outpatient setting, such as hospital-affiliated wound care clinics. In
February 2001, Apligraf was classified by HCFA as a biologic for reimbursement
purposes when used in a doctor's office. This supports the development of local
reimbursement policies for Apligraf by the 42 local administrators of Medicare.
We expect some regions to begin reimbursing Apligraf within the next few
quarters and anticipate many regions will begin reimbursing Apligraf within the
next twelve months.
LIVING DERMAL REPLACEMENT PRODUCTS
Deep wounds involve loss of dermis, the skin's lower layer. Dermal tissue
contributes to wound healing. It also plays an important role in healing
quality. Because dermal tissue, once lost, is not regenerated by the body, a
need exists for living dermal replacement products.
Our lead living dermal replacement product candidate is Vitrix. Vitrix is a
single layer product containing living human dermal cells (fibroblasts) and
dermal structural protein (collagen). Because Vitrix is a single dermal layer,
it can be folded upon itself and inserted into deep wounds. Potential
applications for Vitrix include deep diabetic foot ulcers and deep pressure
sores, such as those extending through skin to underlying bone, ligament or
tendon. We expect to begin human pivotal trials with Vitrix in Spring 2001. The
2001 amendment to the 1996 agreement with Novartis grants Novartis the right to
purchase an exclusive option to negotiate terms to license Vitrix, as well as a
second living dermal replacement product currently in research.
CORONARY VASCULAR GRAFT
Our coronary vascular graft, currently in animal trials, is being developed
for use in coronary artery bypass grafting (CABG) procedures. Approximately
350,000 CABG procedures are performed annually in the US. These procedures are
performed to channel blood around blockages in the arteries that keep the heart
alive. CABG procedures typically require several grafts as patients generally
have multiple blockages. The primary material used for bypass grafts is vein
harvested from the patient's leg. Unfortunately, the patient may not have
sufficient vein available. Additionally, use of a patients vein adds to the
surgical complexity and, thus, cost of the procedure, as well as increases the
risk of post-surgery complications.
Our vascular graft is designed to be an off-the-shelf product, available
upon demand, which would replace the need to use patient vein for grafting
material. As inclusion of living blood vessel cells would cause rejection, our
vascular graft does not contain cells when implanted. It is designed to become
populated with the patient's own cells after implantation. In 1999, we
published data showing that, in small animals, our product performs the critical
functions: it maintains blood flow over time and becomes converted into living
tissue. During 2000, our program focused on tightening the design of the
product and enhancing the reliability of its manufacturing process in
preparation for initiating studies in large animals and then humans.
LIVER ASSIST DEVICE
Each year in the US, approximately 300,000 people are hospitalized for
liver disease and over 25,000 die from liver failure. Our liver assist device
is being developed as a "bridge to transplant" to keep a patient alive until a
donor liver becomes available. The device could also be used in some situations
as an alternative to transplantation, keeping a patient alive for the few weeks
needed for his or her own liver to recover. This would be beneficial as liver
transplantation is risky, invasive and expensive and typically requires lifelong
immunosuppressant drug therapy.
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Our goal in 2001 is to develop a prototype that demonstrates significant
efficacy in large animal models. In 1999, we received a $2 million award under
the Advanced Technology Program of the National Institute for Standards and
Technology to assist us in achieving that goal.
OTHER POTENTIAL OPPORTUNITIES
During 2000, Organogenesis formed a business unit - Technology Ventures -
to commercialize, through partnerships and distributorships, our engineered
collagen and conditioned medium technologies. During the first half of 2001,
the business unit plans to submit for FDA 510(k) marketing clearance of the
engineered collagen for several different uses. Technology Ventures has
established a collaboration with privately-held Royce(R) Medical Co. That
collaboration is for commercialization of the engineered collagen technology as
a wound dressing to certain targeted audiences. We expect to begin that
commercialization during the second half of 2001. Our goal is to establish
additional collaborations for both the engineered collagen and conditioned
medium technologies.
RISK FACTORS
OUR COMPANY HAS A HISTORY OF LOSSES AND WE EXPECT TO CONTINUE TO INCUR
LOSSES
Organogenesis Inc. was founded in 1985. We have incurred operating losses
in every year of our existence. We incurred net losses of $14,031,000 for the
year ended December 31, 1998, $28,350,000 for the year ended December 31, 1999
and $28,605,000 for the year ended December 31, 2000, which losses are
continuing. As of December 31, 2000, we have an accumulated deficit of
$157,972,000. We have not achieved profitability and expect to continue to incur
net losses through at least the first half of 2002. The extent of future losses
and the time required to achieve profitability is highly uncertain. Moreover,
although our business is not seasonal in nature, our revenues have historically
varied significantly from fiscal quarter to fiscal quarter due to the
recognition of non-refundable research, development and milestone payments.
IN ORDER TO ACHIEVE COMMERCIAL SUCCESS, OUR PRODUCTS MUST GAIN MARKET
ACCEPTANCE
We have one principal product on the market, Apligraf, which is marketed by
Novartis. Products under development, as well as additional uses for Apligraf,
will require additional research and development efforts, including clinical
testing and regulatory approval, prior to commercial use. Our potential products
are subject to the risks of failure inherent in the development of medical
products based on new technologies. These risks include the possibilities that:
. Our approach will not be successful;
. Our potential products will be found to be unsafe, ineffective or
otherwise will fail to meet applicable regulatory standards or receive
necessary regulatory clearances;
. The potential products, if safe and effective, will be difficult to
develop into commercially-viable products, will be difficult to
manufacture on a large scale, will be uneconomical to market, will fail or
be delayed in gaining acceptable insurance reimbursement or will fail to
obtain acceptance by the medical community;
. Proprietary rights of third parties will preclude us from marketing such
products; or
. Third parties will market superior or equivalent products.
Our business results would be hurt if we are unable to demonstrate to the
medical community the efficacy, relative safety and cost-effectiveness of
treating patients with our products or if our products were not accepted as
alternatives to other existing or new therapies.
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OUR MARKETS ARE COMPETITIVE AND OUR COMPETITORS COULD DEVELOP MORE
EFFECTIVE PRODUCTS
We are engaged in the rapidly evolving and competitive field of tissue
engineering for the treatment of skin wounds and other medical needs. Our
competitors include tissue engineering companies, xenotransplant companies,
wound care divisions of major pharmaceutical companies and other pharmaceutical,
biotechnology and medical products companies using traditional technologies to
develop products for wound care. Some of these companies have much greater
resources, research and development staffs and facilities, experience in
conducting clinical trials and obtaining regulatory approvals and experience in
the manufacturing, marketing and distribution of products than we do. Our
competitive position is based upon our ability to:
. create and maintain scientifically-advanced technology and proprietary
products and processes;
. attract and retain qualified personnel;
. obtain patent or other protection for our products and processes;
. obtain required government approvals on a timely basis;
. manufacture products on a cost-effective basis; and
. successfully market products.
If we are not successful in meeting these goals, our business could be
hurt. Similarly, our competitors may succeed in developing technologies,
products or procedures that are more effective than any that we are developing
or that would render our technology and products obsolete, noncompetitive or
uneconomical.
WE CURRENTLY DEPEND UPON NOVARTIS TO MARKET APLIGRAF AND NOVARTIS MAY NOT
BE SUCCESSFUL IN MARKETING APLIGRAF IN THE FUTURE
We currently have limited experience in sales, marketing and distribution
and have developed a long-term strategic relationship with Novartis, who has
marketing and sales forces with technical expertise and distribution capability.
Our revenues will depend upon the efforts of Novartis, who may or may not be
successful in marketing and selling Apligraf or gaining international approvals
for the product. We may not be able to maintain our long-term strategic
relationship with Novartis. To the extent that we choose not to maintain our
relationship with Novartis, we may need more capital and resources to undertake
a commercialization program at our own expense. In addition, we may encounter
significant delays in introducing Apligraf into certain markets or find that the
commercialization of Apligraf in such markets may be adversely affected by the
absence of a collaborative agreement.
OUR ABILITY TO COMMERCIALIZE OUR PRODUCTS DEPENDS UPON OUR COMPLIANCE WITH
GOVERNMENT REGULATIONS
Our present and proposed activities are subject to extensive and rigorous
regulation by governmental authorities in the US and other countries. To
clinically test, produce and market medical devices for human use, we must
satisfy mandatory procedural and safety and efficacy requirements established by
the FDA and comparable state and foreign regulatory agencies. Typically, such
rules require that products be approved by the government agency as safe and
effective for their intended use prior to being marketed. The approval process
is expensive, time consuming and subject to unanticipated delays. Our product
candidates may not be approved. In addition, our product approvals could be
withdrawn for failure to comply with regulatory standards or due to unforeseen
problems after the product's marketing approval.
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Testing is necessary to determine safety and efficacy before a submission
may be filed with the FDA to obtain authorization to market regulated products.
In addition, the FDA imposes various requirements on manufacturers and sellers
of products under its jurisdiction, such as labeling, Good Manufacturing
Practices, record keeping and reporting requirements. The FDA also may require
post-marketing testing and surveillance programs to monitor a product's effects.
Furthermore, changes in existing regulations or the adoption of new regulations
could prevent us from obtaining, or affect the timing of, future regulatory
approvals or could negatively affect the marketing of our existing products. We
would not be able to commercialize our products as planned and our operating
results would be hurt if:
. the regulatory agencies find our testing protocols to be inadequate;
. the appropriate authorizations are not granted on a timely basis, or at
all;
. the process to obtain authorization takes longer than expected or we have
insufficient funds to pursue such approvals;
. we lose previously-received authorizations; or
. we do not comply with regulatory requirements.
Medical and biopharmaceutical research and development involves the
controlled use of hazardous materials, such as radioactive compounds and
chemical solvents. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and waste products. In addition, we handle and dispose of human
tissue. Although we believe that our safety procedures for handling these
materials are adequate, if accidental contamination or injury were to occur, we
could be liable for damages.
WE RELY HEAVILY UPON OUR PATENTS AND PROPRIETARY TECHNOLOGY AND ANY FUTURE
CLAIMS THAT OUR PATENTS ARE INVALID COULD SERIOUSLY HARM OUR BUSINESS
We rely upon our portfolio of patent rights, patent applications and
exclusive licenses to patents and patent applications relating to living tissue
products, organ assist treatments and other aspects of tissue engineering. We
currently have 26 patents issued in the US, 11 patents issued in Europe and 6
patents issued in Japan. As part of our continuing interest in protecting
intellectual property rights, we have filed and are prosecuting 15 other patent
applications in the US. We also license some of our technologies under an
exclusive patent license agreement with the Massachusetts Institute of
Technology ("MIT"). The agreement with MIT covers certain US patents and
corresponding patents in Europe and Japan. The earliest patent expiration is in
2006 for the US. Pursuant to the MIT agreement, we have been granted an
exclusive, worldwide license to make, use and sell the products covered by the
patents and to practice the procedures covered by the patents. Additionally, we
have purchased intellectual property from Baxter Healthcare Corporation related
to our liver assist device program, which includes two US patents - one issued
and one pending - as well as corresponding international patents. We are not
currently a party in any infringement claim.
We expect to aggressively patent and protect our proprietary technologies.
However, we cannot be sure that any additional patents will be issued to us as a
result of our domestic or foreign patent applications or that any of our patents
will withstand challenges by others. Patents issued to or licensed by us may be
infringed or third parties may independently develop either the same or similar
technology. Similarly, our patents may not provide us with meaningful protection
from competitors, including those who may pursue patents which may prevent,
limit or interfere with our products or will require licensing and the payment
of significant fees or royalties by us to such third parties in order to enable
us to conduct our business. We may sue or be sued by third parties regarding
patents and other intellectual property rights. These suits are costly and would
divert funds and management and technical resources from our operations.
7
We also rely upon unpatented proprietary technology, know-how and trade
secrets and seek to protect them through confidentiality agreements with
employees, consultants and advisors. We request that any corporate sponsor with
which we enter into a collaborative agreement do so as well. If these
confidentiality agreements are breached, we may not have adequate remedies for
the breach. In addition, others may independently develop or otherwise acquire
substantially the same proprietary technology as our technology and trade
secrets.
We have relationships with a number of academic consultants who are not
employed by us. Accordingly, we have limited control over their activities and
can expect only limited amounts of their time to be dedicated to our activities.
These persons may have consulting, employment or advisory arrangements with
other entities that may conflict with or compete with their obligations to us.
Our consultants typically sign agreements that provide for confidentiality of
our proprietary information and results of studies. However, in connection with
every relationship, we may not be able to maintain the confidentiality of our
technology, the dissemination of which could hurt our competitive position and
results of operations. To the extent that our scientific consultants develop
inventions or processes independently that may be applicable to our proposed
products, disputes may arise as to the ownership of the proprietary rights to
such information, and we may not win those disputes.
WE MUST BE ABLE TO MANUFACTURE OUR PRODUCTS SUCCESSFULLY
The process of manufacturing our products is complex, requiring strict
adherence to manufacturing protocols. We have been producing our lead product,
Apligraf, for commercial sale since the second half of 1997 in adherence with
these manufacturing protocols. However, with increasing demand for Apligraf, we
must further transition from small-scale to full-scale production of our
products. If we do not make the full-scale transition successfully, we will not
be able to satisfy the demand for our products and our results of operations
will be hurt.
We are required to maintain a manufacturing facility in compliance with
Good Manufacturing Practices. Manufacturing facilities and processes must pass
an inspection before the FDA issues any product licenses necessary to market
medical therapeutics and are subject to continual review and periodic
inspection. Foreign regulatory agencies can also have manufacturing controls
and inspections. We may not be able to maintain the necessary regulatory
approvals for our manufacturing operations or manufacture our products in a
cost-effective manner. If we were unable to manufacture potential products
independently or obtain or retain third party manufacturing on commercially
acceptable terms, the submission of products for final regulatory approval and
initiation of marketing would be delayed. This, in turn, may cause us to be
unable to commercialize product candidates as planned, on a timely basis or on a
profitable basis.
WE MUST BE ABLE TO OBTAIN ADEQUATE SOURCES OF SUPPLY
We manufacture Apligraf for commercial sale, as well as for use in clinical
trials, at our Canton, Massachusetts facility. Among the fundamental raw
materials needed to manufacture Apligraf are keratinocyte and fibroblast cells.
Because these cells are derived from donated infant foreskin, they may contain
human-borne pathogens. We perform extensive testing of the cells for pathogens,
including the HIV or "AIDS" virus. Our inability to obtain cells of adequate
purity, or cells that are pathogen-free, would limit our ability to manufacture
sufficient quantities of our products.
8
Another major material required to produce our products is collagen, a
protein obtained from animal source tissue. We have developed a proprietary
method of procuring our own collagen that we believe is superior in quality and
strength to collagen available from commercial sources. We currently obtain
animal source tissue from US suppliers only. We may not be able to obtain
adequate supplies of animal source tissue to meet our future needs or on a cost-
effective basis. The thermo-formed tray assembly that is used in the
manufacturing process of Apligraf is available to us under a supply arrangement
with only one manufacturing source. Because the FDA approval process requires
manufacturers to specify their proposed materials of certain components in their
applications, FDA approval of a new material would be required if a currently
approved material became unavailable from a supplier. If we are unable to obtain
adequate supplies of thermo-formed tray assemblies to meet future Apligraf
manufacturing needs or if we cannot obtain such assemblies on a cost-effective
basis, our operations would be hurt.
Interruptions in our supply of materials may occur in the future or we may
have to obtain alternative vendors for these materials. Any significant supply
interruption would adversely affect the production of Apligraf. In addition, an
uncorrected impurity or a supplier's variation in a raw material, either unknown
to us or incompatible with our manufacturing process, could hurt our ability to
manufacture products.
THE RETENTION OF KEY PERSONNEL IS IMPORTANT TO OUR COMPETITIVE POSITION
Because of the specialized nature of our business, our success will depend
upon our ability to attract and retain highly qualified personnel and to develop
and maintain relationships with leading research institutions. The competition
for those relationships and for experienced personnel amongst the biotechnology,
pharmaceutical and healthcare companies, universities and non-profit research
institutions is intense. If we are unable to continue to attract and retain such
personnel or relationships, our competitive position could be hurt.
WE MAY BE SUBJECT TO PRODUCT LIABILITY SUITS; OUR INSURANCE MAY NOT BE
SUFFICIENT TO COVER DAMAGES
Our business exposes us to potential liability risks that are inherent in
the testing, manufacturing, marketing and sale of medical products. The use of
our products and product candidates, whether for clinical trials or commercial
sale, may expose us to product liability claims or product recall and possible
adverse publicity. Although we have product liability insurance coverage, the
level or breadth of our coverage may not be adequate to fully cover potential
liability claims. In addition, we may not be able to obtain additional product
liability coverage in the future at an acceptable cost. A successful claim or
series of claims brought against us in excess of our insurance coverage and the
effect of product liability litigation upon the reputation and marketability of
our technology and products, could negatively affect our business.
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OUR BUSINESS IS SUBJECT TO THE UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT AND
HEALTH CARE REFORM MEASURES WHICH MAY LIMIT MARKET ACCEPTANCE
In both domestic and foreign markets, our ability to commercialize our
product candidates will depend, in part, upon the availability of reimbursement
from third-party payors, such as government health administration authorities,
private health insurers and other organizations. Third-party payors are
increasingly challenging the price and cost-effectiveness of medical products.
If our products are not considered cost-effective, third-party payors may limit
reimbursement. Government and other third-party payors are increasingly
attempting to contain healthcare costs by limiting both coverage and the level
of reimbursement for new therapeutic products approved for marketing by the FDA
and by refusing, in some cases, to provide any coverage for uses of approved
products for disease indications for which the FDA has not granted marketing
approval. If government and third party payors do not provide adequate coverage
and reimbursement levels for uses of our products, the market acceptance of our
products would be limited.
There have been a number of federal and state proposals during the last few
years to subject the pricing of pharmaceuticals to government control and to
make other changes to the health care system of the US. It is uncertain what
legislative proposals will be adopted or what actions federal, state or private
payors for health care goods and services may take in response to any health
care reform proposals or legislation. We cannot predict the effect health care
reforms may have on our business.
OUR STOCK PRICE IS VOLATILE AND CAN FLUCTUATE SIGNIFICANTLY BASED ON EVENTS
NOT IN OUR CONTROL AND GENERAL INDUSTRY CONDITIONS
The biotechnology sector seems particularly vulnerable to abrupt changes in
investor sentiment. Stock prices of companies in the biotechnology industry,
including ours, can swing dramatically, with little relationship to operating
performance. Our stock price may be affected by a number of factors including,
but not limited to:
. clinical trial results, regulatory decisions and other product development
events;
. the outcome of litigation;
. decisions relating to intellectual property rights;
. the entrance of competitive products into our market;
. changes in reimbursement policies or other practices related to the
pharmaceutical industry; or
. other industry and market changes or trends.
During the past three years, the price of our common stock, adjusted for
stock splits, has ranged from $6.75 to $35.19 per share. These fluctuations can
occur due to events outside of our control, regulatory actions such as
government approval of products or reimbursements, and general market conditions
affecting the biotechnology sector or the stock market generally.
WE WILL NEED TO RAISE ADDITIONAL FUNDS, WHICH COULD ADVERSELY AFFECT YOUR
INVESTMENT
Based upon our current plans, we believe existing working capital at
December 31, 2000, together with the proceeds of product and other revenues in
2001 and proceeds available from exercising a portion or all of a $20,000,000
equity security put with Novartis, which is at our discretion, will be
sufficient to finance operations through at least the first quarter of 2002. We
expect to raise additional funds in 2001 through equity financing. 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:
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. Sales volume forecasts not achieved;
. Delays in obtaining regulatory approvals of products in different
countries, if needed, 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 adverse effect on our financial condition and results of operations.
OUR ANTI-TAKEOVER MEASURES MAY AFFECT THE VALUE OF OUR STOCK
We, as a Delaware corporation, are subject to the General Corporation Law
of the State of Delaware, including Section 203, an anti-takeover law enacted in
1988. In general, Section 203 restricts the ability of a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder. As a result of the
application of Section 203 and certain provisions in our certificate of
incorporation and bylaws, potential acquirors may be discouraged from attempting
to acquire us, thereby possibly depriving our stockholders of acquisition
opportunities to sell or otherwise dispose of our stock at above market prices
typical of such acquisitions.
We have also adopted a shareholder rights plan, which gives holders of
common stock the right to purchase shares of our Series B Junior Participating
Preferred Stock if a potential acquiror purchases or plans to make a tender
offer to purchase 15% or more of our outstanding common stock. The existence of
this plan may make it more difficult for a third party to acquire control of us.
We are authorized to issue up to 1,000,000 shares of preferred stock, $1.00
par value per share and to determine the price, privileges and other terms of
such shares. The issuance of any preferred stock with superior rights to the
common stocks could reduce the value of the common stock. In particular,
specific rights granted to future holders of preferred stock could be used to
restrict our ability to merge with or sell our assets to a third party, thereby
preserving control of Organogenesis by present owners and management and
preventing our holders of common stock from realizing a premium on their shares.
THE VALUE OF YOUR SECURITIES MAY DECREASE IF OTHER SECURITY HOLDERS
EXERCISE THEIR OPTIONS AND WARRANTS OR CONVERT THEIR DEBT INTO COMMON STOCK
At December 31, 2000, 34,489,459 shares of our common stock are
outstanding, which excludes 85,000 treasury shares. We have reserved an
additional 9,583,539 shares of common stock for future issuance or conversion of
stock options, warrants and the convertible debentures (excluding 1,911,075
shares of common stock remaining under a shelf registration declared effective
on February 14, 2000). We plan to issue additional options in the future. If
any of these securities are exercised or converted, investors may experience
dilution in the market value and earnings per share of the common stock into
which these securities are convertible.
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COLLABORATIVE AND OTHER AGREEMENTS
In January 1996, we entered into a collaborative agreement with Novartis
granting Novartis exclusive global marketing rights to Apligraf. Under the
agreement, we have received equity investments, non-refundable research,
development and milestone support payments, product payments and other payments.
During 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 support revenue
when achievement of the milestone was met upon FDA approval of Apligraf for use
in diabetic foot ulcers. The following table summarizes by year all equity
investments, non-refundable research, development and milestone support payments
received to date. Product and other payments are included under the captions
"Product sales to related party" and "Other revenues" in our financial
statements.
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ------------
Equity investments $ 5,000,000 $ - $ 6,000,000 $ - $ -
Up front non-refundable research and
development support payments 6,500,000 2,500,000 750,000 - -
Non-refundable milestone payments - - 6,000,000 - 5,000,000
----------- ----------- ----------- ------------ ------------
Total $11,500,000 $ 2,500,000 $12,750,000 $ - $ 5,000,000
=========== =========== =========== ============ ===========
During February 2001, we amended our collaborative agreement with Novartis,
effective January 2, 2001. The amended agreement:
. Grants Novartis the right to purchase an exclusive option to negotiate
terms to license Organogenesis's product Vitrix, soon to commence human
pivotal trials, and also for a second living dermal replacement product
currently in Organogenesis research;
. Provides Organogenesis with significantly higher payments for units of
Apligraf;
. Grants Organogenesis the right for three years to sell, at its discretion,
to Novartis up to $20 million in equity;
. Includes funding support from Novartis to upgrade Organogenesis's
manufacturing facility and for the facility investment needed for approval
and sale of Apligraf in the European Union;
. Includes funding support for Apligraf clinical development activities
(e.g., to further broaden its approved uses); and
. Includes development funding support for each living dermal replacement
product for which Novartis purchases an option to commence licensing
negotiations.
We supply Novartis's global requirements for Apligraf and receive a product
payment based on net product sales.
In 1994, we signed a license agreement with Toyobo Ltd. granting Toyobo a
license to manufacture and market TestSkin(TM) in Japan in exchange for royalty
payments. Additionally, Toyobo may, but is not obligated to, purchase collagen
and other products from us. Revenues under this arrangement are included in
other revenues and are not significant. This agreement is coterminous with
certain patents.
RESEARCH AGREEMENTS
We have entered into various collaborative research agreements that are
generally funded over a one or two-year period. Each agreement is reviewed at
least annually and the amounts to be funded for the next period are then
determined. Either party may cancel the agreement upon advance written notice.
Total payments made by us to third parties under these agreements were $648,000,
$662,000 and $542,000 for 1998, 1999 and 2000, respectively. All our research
agreements are early stage today, but have the potential to develop into more
material relationships in the future.
Testskin(TM) is a trademark of Organogenesis.
12
RESEARCH AND DEVELOPMENT
We plan to continue to focus product development efforts on high-quality
cell therapy and connective tissue scaffolds for use in a variety of areas,
including wound care, surgery, cardiovascular medicine and liver disease.
Our research and development staff consists of scientists and laboratory
assistants with technical expertise in cell and developmental biology,
engineering, chemistry, immunology, cryopreservation, molecular biology and
clinical medicine.
For 1998, 1999 and 2000, research and development expenses were
$17,542,000, $19,066,000, and $17,511,000, respectively, which consist of costs
associated with research, development, clinical and process development,
facilities and engineering support used in R&D. All amounts expended were for
company-sponsored research and development.
EMPLOYEES
As of March 5, 2001, we had 236 full-time employees, inclusive of: 134 in
Operations; 67 in Research and Clinical; and 35 in General and Administrative.
In total we have 15 employees with PhDs. We have established a stock option plan
providing equity incentives, an employee stock purchase plan and a 401(k) plan
for all full-time employees. We believe that, through equity participation,
attractive fringe benefit programs and the opportunity to contribute to the
development and commercialization of new products using new technology, we will
continue to be able to attract highly-qualified personnel.
SCIENTIFIC ADVISORY BOARD
We have a Scientific Advisory Board ("SAB") composed of five physicians,
professors and scientists in various fields of medicine and science. The SAB
meets from time to time to advise and consult with management and our scientific
staff. Each member of the SAB is expected to devote only a portion of his time
to us and may have consulting or other advisory arrangements with other entities
that may conflict or compete with his obligations to us. Members of the SAB
have no formal duties, authority or management obligations.
Item 2. PROPERTIES
We occupy our main office 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
100,000 square feet of space.
We believe that current facilities will adequately support manufacturing
needs and research and development activities through the end of 2001 and
beyond.
13
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the American Stock Exchange under the symbol
ORG. On March 5, 2001, there were 786 shareholders of record of our common
stock. The table below lists the high and low quarterly range of reported
closing prices of our common stock during the past two years.
1999 2000
--------------------- ---------------------
High Low High Low
------ ------ ------ ------
First Quarter $15.69 $10.94 $19.50 $ 8.00
Second Quarter 13.75 8.75 12.69 8.25
Third Quarter 11.56 7.50 16.27 11.11
Fourth Quarter 11.88 6.75 13.81 6.80
On March 28, 2001, the last sale price of the common stock was $8.26.
We have never paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in our business and do not
expect to pay any cash dividends in the foreseeable future. As a result, an
investor will only recognize an economic gain on an investment in our stock from
an appreciation in the price of our stock. Under our term loan, we are
restricted from paying cash dividends until the loans are fully repaid.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER
OF EMPLOYEES)
The selected financial data set forth in the table below is not
necessarily indicative of our results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes included in item 7.
For the Years Ended December 31,
-------------------------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Revenues $ 6,542 $ 3,029 $ 7,939 $ 2,676 $ 10,240
Net Loss (7,499) (19,807) (14,031) (28,350) (28,605)(1)
Net Loss Per Common Share (0.27) (0.70) (0.48) (0.93) (0.85)(1)
Working Capital 11,256 4,843 15,541 2,981 6,226
Capital Expenditures 3,311 1,069 2,464 5,767 3,397
Total Assets 22,436 13,780 26,710 27,305 27,872
Total Long-Term Debt - - - 22,287 18,835
Stockholders' Equity (Deficit) 18,478 11,523 23,239 (6,974) (3,784)
Number of Employees 115 137 186 208 232
PRO FORMA AMOUNTS ASSUMING SAB 101 IS APPLIED RETROACTIVELY:
Revenues 545 1,344 8,222 3,733
Net Loss (13,496) (21,492) (13,748) (27,293)
Net Loss Per Common Share (0.49) (0.76) (0.47) (0.90)
(1) Includes the cumulative effect of a change in accounting principle related
to all up front non-refundable research and development support payments
recognized in prior periods of $6,342,000 or $0.19 per share (basic and
diluted) for 2000, in accordance with SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB 101).
15
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview of Organogenesis Inc.
Organogenesis Inc. - a tissue engineering company - designs, develops and
manufactures medical products containing living cells and/or natural connective
tissue. We are the developer and manufacturer of the only mass-produced product
containing living human cells to gain FDA marketing approval. Our product
development focus includes living tissue replacements, a cell-based organ assist
device and other tissue-engineered products.
OUR LEAD PRODUCT, APLIGRAF
Our lead product, Apligraf living skin substitute, gained FDA marketing
approval for use in the treatment of healing-resistant venous leg ulcers in
1998. In June 2000, Apligraf was approved for use in the treatment of healing-
resistant diabetic foot ulcers. Novartis Pharma AG ("Novartis") has exclusive
global Apligraf marketing rights. In addition to being marketed in the US,
Apligraf is also available in select international markets. Novartis expects to
submit for marketing approval across the European Union in the Spring of 2001.
OUR PIPELINE
Our research and development pipeline includes a living dermal replacement
product candidate, Vitrix, which we anticipate beginning human pivotal clinical
trials in Spring 2001, a coronary vascular graft and a liver assist device.
Additionally, a business unit - Technology Ventures - has been formed to
commercialize, through partnerships and distributorships, our engineered
collagen and conditioned medium technologies.
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 at least the next 18 months due to the high costs associated with low volume
production. We expect production volume to increase due to recent Medicare
progress with coverage for Apligraf, FDA approval of Apligraf for use in
diabetic foot ulcers and expanded Novartis sales and marketing support.
REVENUES
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. We adopted SAB 101 in the fourth quarter of
2000, effective January 1, 2000, and recorded a cumulative effect of a change in
accounting principle related to all up front non-refundable research and
development support payments recognized in prior periods of $6,342,000. Of this
amount, $1,057,000 was recognized as revenue in 2000, and the remainder will be
recognized ratably through December 2005, in accordance with SAB 101's guidance.
Total revenues for the years 1998, 1999 and 2000 consisted of:
1998 1999 2000
---------- ---------- -----------
Research, development and milestone support from related
party $6,750,000 $ - $ 6,057,000
Product sales to related party 1,082,000 1,844,000 2,957,000
Research and development grants - 101,000 1,065,000
Other revenues 107,000 731,000 161,000
---------- ---------- -----------
$7,939,000 $2,676,000 $10,240,000
========== ========== ===========
In 2000, research, development and milestone support from related party of
$6,057,000 includes a $5,000,000 milestone payment related to the diabetic foot
ulcer indication and $1,057,000 of deferred revenue recognized in the current
year. No such revenues were earned in 1999. In 1998, we received
16
$6,750,000 of payments primarily related to the venous leg ulcer indication. The
increase in product sales to related party over the last three years is due to
increased unit sales of Apligraf to Novartis. We expect Apligraf commercial
sales to continue to increase. Research and development grants revenue increased
primarily due to a full year of grant work performed during 2000 compared to one
month performed during 1999 and no grants in 1998 (refer to the grant section
under the "Commitments" footnote to the Financial Statements for a full
description). Other revenues decreased in 2000 and increased in 1999, primarily
due to changes in the level of Novartis funding for publication study programs.
Total revenues for the years 1998 and 1999 have not been adjusted for the
adoption of SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements".
COSTS AND EXPENSES
Cost of product sales to related party: Our cost of product sales was
$6,421,000 in 2000, compared to $3,773,000 in 1999. These expenses increased
due to higher unit sales of Apligraf to Novartis and a higher amount of fixed
costs due to infrastructure increases needed to support anticipated future
higher unit volume levels. Cost of product sales includes the direct costs to
manufacture and package Apligraf and an allocation of our production-related
indirect costs. All costs of production prior to 1999 were included in research
and development expense due to insignificant commercial sales and low production
volume associated with early stage commercialization. Cost of product sales
exceeded product sales due to the high costs associated with low volume
production. We expect production volume to increase and our margins to improve
in 2001. We expect that we will have to revise standard costs and the
allocation of costs to product sales in the future as we continue to modify
our manufacturing processes.
Research and development: Research and development expenses ("R&D")
consist of costs associated with research, development, clinical, process
development, facilities and engineering support excluding the allocation of our
production related indirect costs. These expenses decreased to $17,511,000 for
2000 from $19,066,000 in 1999 and $17,542,000 in 1998. The decrease in 2000
versus 1999 was primarily due to: a decrease in clinical-related costs due to
completion of the Apligraf diabetic foot ulcer pivotal trial partially off-set
by an increase in operations support for supplies, personnel costs; and
increases in depreciation expense on significant leasehold improvements put into
service during 2000. The increase in 1999 versus 1998 was primarily due to: an
increase in personnel costs, outside services, supplies, and occupancy costs to
support our ongoing programs, including Vitrix and the liver assist device; and
costs to support publications studies and other sponsored programs. This was
partially off-set by a decrease in clinical-related costs because 1998 included
non-recurring expenses related to FDA approval and because the Apligraf diabetic
foot ulcer pivotal trial was at its peak, and by a decrease in operating-related
expenditures. Process development, facilities and engineering support expenses
included in research and development were $8,001,000, $7,305,000 and $7,160,000
for the periods 2000, 1999 and 1998, respectively. We expect that our R&D
expenses will increase moderately during 2001.
Included in R&D for 1999 is a non-cash charge of $900,000 relating to the
purchase of incomplete technology to be used specifically in our liver assist
device research and development efforts (refer to the "Commitments" footnote to
the Financial Statements for a full description of this technology). The
purchase was made to strengthen our resources and intellectual property
position. The charge to expense was due to the early stage of the technology
that had not provided proof of principle. Additionally, the time and cost to
prove this principle was not known. We expect it will cost millions of dollars
and take a minimum of 4 to 6 years before we could develop a product which might
be approved for commercial sale. It is our intent that if proof of principle is
established, we will seek a partnership for this project.
17
General and administrative expenses: General and administrative expenses
("G&A") include the costs of our corporate, finance, information technology and
human resource functions. These expenses were $7,638,000 for 2000, $7,808,000
for 1999 and $5,486,000 for 1998. The 2000 decrease was primarily due to
decreased personnel costs and professional service fees. The 1999 increase from
$5,486,000 in 1998 was primarily due to personnel additions and increased
outside professional fees; occupancy costs and consolidating administrative
facilities; and the estimated fair value of warrants issued relating to a
consulting contract. We expect that our G&A expenses will decrease during 2001
as we expect to use less outside services.
Other Income and Expense: Interest income increased primarily due to the
increase in funds available for investment. Interest expense increased to
$2,092,000 for 2000 compared to $1,281,000 in 1999, primarily due to a full year
of convertible debenture and term loan interest in 2000 compared to 1999.
Interest expense was $1,281,000 for 1999 due to the issuance of convertible
debentures in March 1999.
Net Loss: We incurred a net loss before cumulative effect of change in
accounting principle of $22,263,000 or $0.66 per share (basic and diluted) and a
net loss effected for the change in accounting principle of $28,605,000 or $0.85
per share (basic and diluted) for 2000, compared to a net loss of $28,350,000 or
$0.93 per share (basic and diluted) for 1999 and a net loss of $14,031,000 or
$0.48 per share (basic and diluted) for 1998.
Cumulative effect of change in accounting principle: 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. We adopted SAB 101 in the fourth quarter of 2000, effective January
1, 2000, and recorded a cumulative effect of a change in accounting principle
related to all up front non-refundable research and development support payments
recognized in prior periods of $6,342,000 or $0.19 per share (basic and diluted)
for 2000, with a corresponding increase to deferred revenue which will be
recognized in future periods. The impact of adopting SAB 101 is not reflected
in the amounts presented in the Results of Operations for the years ended
December 31, 1999 and 1998. See financial statements and related notes for
additional details related to this change in accounting principle.
Liquidity and Capital Resources
FUNDS USED IN OPERATIONS
At December 31, 2000, we had cash, cash equivalents and investments in the
aggregate amount of $12,183,000 and working capital of $6,226,000, compared to
$12,439,000 and $2,981,000, respectively, at December 31, 1999. Working capital
increased in 2000 due primarily to the excess of financings over operating cash
flows. 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 $18,482,000 in 2000, compared to
$23,650,000 in 1999, primarily for financing our ongoing research, development
and manufacturing operations, offset by $5,000,000 cash received from Novartis
in 2000 for achievement of a milestone related to the diabetic foot ulcer
indication.
18
CAPITAL SPENDING
Capital expenditures were $3,397,000 and $5,767,000 during 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 2001 to expand our existing facility in the areas of
Apligraf manufacturing, packaging and other process development improvement
programs, including funds which we will receive from Novartis to upgrade our
manufacturing facility and for the facility investment needed for approval and
sale of Apligraf in the European Union.
NOVARTIS SUPPORT PAYMENTS
During 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 support revenue
when achievement of the milestone was met upon FDA approval of Apligraf for use
in diabetic foot ulcers. We did not receive any support payments from Novartis
in 1999 and received equity and support payments totaling $12,750,000 in 1998.
(Refer to the "Related Party Transactions and Other Agreements" footnote to the
Financial Statements for a full description).
FINANCING
From inception, we have financed our operations substantially through
private and public placements of equity securities and convertible debt, as well
as the receipt of research, development and milestone support payments and
contract revenues, interest income from investments, sale of products and
receipt of royalties. During 2000, financing activities provided cash of
$21,623,000 primarily from the sale of common stock that generated net proceeds
of $15,930,000 and the exercise of stock options that generated $12,267,000,
partially offset by the redemption of Series C redeemable convertible preferred
stock in cash for $6,180,000 and payment of a term loan for $394,000. Financing
activities provided cash of $24,015,000 during 1999 from: the sale of
convertible debentures and warrants to purchase common stock that generated net
proceeds of $19,425,000; the issuance of a term loan that generated proceeds of
$4,728,000 and the exercise of stock options of $813,000, offset by the purchase
of treasury stock totaling $951,000.
During March 2000, we redeemed in cash 62 shares of Series C convertible
preferred stock representing all outstanding shares of Series C convertible
preferred stock, for approximately $6,180,000.
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 and March 2000, we completed private placements for 1,088,925 shares of
common stock under this shelf registration yielding net proceeds of
approximately $15,930,000.
In December 2000, the Board of Directors authorized a common stock
repurchase program for up to 500,000 additional shares. Subsequent to December
31, 2000, we repurchased 165,000 shares of common stock for an aggregate
purchase price of approximately $1,367,000. The stock repurchase program may be
discontinued at any time.
19
LIQUIDITY
Based upon our current plans, we believe existing working capital at
December 31, 2000, together with the proceeds of product and other revenues in
2001 and proceeds available from exercising a portion or all of a $20,000,000
equity security put with Novartis, which is at our discretion, will be
sufficient to finance operations through at least the first quarter of 2002. We
expect to raise additional funds in 2001 through equity financing. 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:
. Sales volume forecasts not achieved;
. Delays in obtaining regulatory approvals of products in different
countries, if needed, 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 adverse effect on our financial condition and results of operations.
TAXES
At December 31, 2000, we had federal net operating loss and tax credit
carryforwards of approximately $139,955,000 and $3,769,000, and state net
operating loss and tax credit carryforwards of approximately $91,139,000 and
$2,648,000. These losses and tax credits are available to reduce federal and
state taxable income and income taxes, respectively, in future years, if any.
However, the realizability of deferred tax assets is not assured as it depends
upon future taxable income. Accordingly, we have recorded a 100% valuation
allowance against these assets. We are required to recognize all or a portion of
net deferred tax assets, with corresponding increases to net income, when we
believe, given the weight of all available evidence, that it is more likely than
not that all or a portion of the benefits of net operating loss carryforwards
and other credits will be realized. However, there can be no assurance that we
will ever realize any future cash flows or benefits from these losses and tax
credits. Ownership changes, as defined in internal revenue code, may result in
future limitations on the utilization of net operating losses and research and
development tax credit carryforwards that can be utilized annually to offset
future taxable income.
IMPACT OF INFLATION
Although it is difficult to predict the impact of inflation on our costs
and revenues in connection with our products, we do not anticipate that
inflation will materially impact our costs of operation or the profitability of
our products when marketed.
20
Impact of New Accounting Pronouncement
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. We will adopt SFAS No.
133 as required by SFAS No. 137, "Deferral of the Effective Date of SFAS No.
133" in 2001. To date, we have not utilized derivative instruments or hedging
activities and, therefore, the adoption of SFAS No. 133 is not expected to have
a material impact on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The exposure of market risk associated with risk-sensitive instruments is
not material, as our sales are transacted primarily in United States dollars,
invest primarily in money market funds and have not entered into hedging
transactions.
21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ORGANOGENESIS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements included in Item 8:
Report of Independent Accountants...................................................................... 23
Consolidated Balance Sheets as of December 31, 1999 and 2000........................................... 24
Consolidated Statements of Operations For the Years Ended December 31, 1998, 1999 and 2000............. 25
Consolidated Statements of Cash Flows For the Years Ended December 31, 1998, 1999 and 2000............. 26
Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1998,
1999 and 2000......................................................................................... 27
Notes to Consolidated Financial Statements............................................................ 28
22
Report of Independent Accountants
To the Board of Directors and Stockholders of Organogenesis Inc.:
In our opinion, the accompanying consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Organogenesis Inc. and its subsidiaries at December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in the notes to the consolidated financial statements, during the
year ended December 31, 2000 the Company changed its method of recognizing
revenue.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 13, 2001
23
ORGANOGENESIS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
At December 31,
-------------------------
1999 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 5,727 $ 9,539
Investments 6,712 2,644
Inventory 906 1,377
Receivable from related party 985 501
Other current assets 643 758
-------- --------
Total current assets 14,973 14,819
Property and equipment, net 11,731 12,608
Other assets 601 445
-------- --------
Total Assets $ 27,305 $ 27,872
======== ========
Liabilities
Current liabilities:
Accounts payable $ 1,378 $ 2,378
Accrued expenses 3,438 3,582
Current portion of term loan 394 1,576
Deferred revenue -- 1,057
Other current liabilities 602 --
Series C convertible preferred stock 6,180 --
-------- --------
Total current liabilities 11,992 8,593
Deferred revenue 4,228
Long-term convertible debt 17,953 16,077
Term loan 4,334 2,758
Commitments (see Notes)
Stockholders' Deficit
Common stock, par value $.01; authorized 80,000,000 shares:
Outstanding 30,604,019 and 34,489,459 shares at
December 31, 1999 and 2000, respectively 307 346
Additional paid-in capital 122,890 154,646
Accumulated deficit (129,367) (157,972)
Treasury stock at cost, 85,000 shares at
December 31, 1999 and 2000 (804) (804)
-------- --------
Total stockholders' deficit (6,974) (3,784)
-------- --------
Total Liabilities and Stockholders' Deficit $ 27,305 $ 27,872
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
24
ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
For the Years Ended December 31,
-----------------------------------------------
1998 1999 2000
----------- ----------- -----------
Revenues:
Research, development and milestone support from related party $ 6,750 $ - $ 6,057
Product sales to related party 1,082 1,844 2,957
Research and development grants - 101 1,065
Other revenues 107 731 161
----------- ----------- -----------
Total Revenues 7,939 2,676 10,240
----------- ----------- -----------
COST AND EXPENSES:
Cost of product sales to related party - 3,773 6,421
Research and development 17,542 19,066 17,511
General and administrative 5,486 7,808 7,638
----------- ----------- -----------
Total Costs and Expenses 23,028 30,647 31,570
----------- ----------- -----------
LOSS FROM OPERATIONS (15,089) (27,971) (21,330)
OTHER INCOME (EXPENSE):
Interest income 1,058 902 1,159
Interest expense - (1,281) (2,092)
----------- ----------- -----------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (14,031) (28,350) (22,263)
Cumulative effect of adopting Staff Accounting Bulletin 101 ("SAB 101") - - (6,342)
----------- ----------- -----------
NET LOSS $ (14,031) $ (28,350) $ (28,605)
=========== =========== ===========
Net loss per common share - basic and diluted before cumulative effect
of change in accounting principle $ (0.48) $ (0.93) $ (0.66)
Cumulative effect of adopting SAB 101 - - (0.19)
----------- ----------- -----------
Net loss per common share - basic and diluted $ (0.48) $ (0.93) $ (0.85)
=========== =========== ===========
Weighted average number of common shares outstanding - basic and diluted 29,453,104 30,484,982 33,536,507
=========== =========== ===========
PRO FORMA AMOUNTS ASSUMING SAB 101 IS APPLIED RETROACTIVELY:
Revenues $ 8,222 $ 3,733
Net loss (13,748) (27,293)
Net loss per common share - basic and diluted $ (0.47) $ (0.90)
The accompanying notes are an integral part of the consolidated financial
statements.
25
ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
For the Years Ended December 31,
----------------------------------------
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,031) $(28,350) $(28,605)
Adjustments to reconcile net loss to cash flows used in operating
activities:
Depreciation and amortization 1,474 1,741 2,520
Issuance of stock options and warrants for services - 432 -
Amortization of warrants and deferred debt issuance costs relating to
long-term convertible debt - 338 505
Issuance of treasury stock for purchase of incomplete technology - 900 -
Issuance of common stock for interest on convertible debt - 705 1,373
Cumulative effect of adopting SAB 101 - - 6,342
Changes in assets and liabilities:
Inventory - (176) (471)
Other current assets and receivable from related party (244) (1,187) 369
Accounts payable 393 342 1,000
Accrued expenses and other liabilities 821 1,605 (458)
Deferred revenue - - (1,057)
-------- -------- --------
Cash used in operating activities (11,587) (23,650) (18,482)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,464) (5,767) (3,397)
Purchases of investments (16,224) (23,728) -
Sales/maturities of investments 9,247 29,805 4,068
-------- -------- --------
Cash provided by (used in) investing activities (9,441) 310 671
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term convertible debt - 20,000 -
Deferred debt issuance costs - (575) -
Proceeds (payment) of term loan - 4,728 (394)
Preferred stock redeemed in cash - - (6,180)
Proceeds from sale of preferred stock - net 19,117 - -
Proceeds from sale of common stock - net 6,000 - 15,930
Proceeds from exercise of stock options 1,021 813 12,267
Purchase of treasury stock (391) (951) -
-------- -------- --------
Cash provided by financing activities 25,747 24,015 21,623
-------- -------- --------
Increase in cash and cash equivalents 4,719 675 3,812
Cash and cash equivalents, beginning of year 333 5,052 5,727
-------- -------- --------
Cash and cash equivalents, end of year $ 5,052 $ 5,727 $ 9,539
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid in cash during the year $ - $ 28 $ 380
======== ======== ========
Supplemental disclosure of noncash financing activities:
In August 2000, we issued 176,536 shares of common stock for $2,500 face
value convertible notes, plus accrued interest.
The accompanying notes are an integral part of the consolidated financial
statements.
26
ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
For the Years Ended December 31, 1998, 1999 and 2000
Additional Total
Paid-in Accumulated Stockholders'
Common Stock Capital Deficit Treasury Stock Equity (Deficit)
------------ --------------
Shares Amount Shares Amount
---------------------------------------- ----------------------------------------------------------------------------------
Balance - December 31, 1997 23,160 $232 $ 98,277 $ (86,986) - $ - $ 11,523
---------------------------------------- ----------------------------------------------------------------------------------
Issuance of common stock upon
exercise of stock options and in
connection with employee stock
purchase plan 146 2 1,019 1,021
One-for-four common
stock dividend 5,826 58 (58) -
Sale of Series C preferred
stock-net 19,117 19,117
Conversion of Series C preferred
stock 1,136 11 (11) -
Sale of common stock to
related party 212 2 5,998 6,000
Purchase of treasury stock 40 (391) (391)
Net loss (14,031) (14,031)
---------------------------------------- ----------------------------------------------------------------------------------
Balance - December 31, 1998 30,480 305 124,342 (101,017) 40 (391) 23,239
---------------------------------------- ----------------------------------------------------------------------------------
Issuance of common stock upon
exercise of stock options and in
connection with employee stock
purchase plan 120 1 812 813
Issuance of warrants with
convertible debt 2,318 2,318
Series C convertible preferred
stock to be redeemed in cash (6,180) (6,180)
Issuance of common stock for
interest on convertible debt 89 1 704 705
Issuance of stock options and
warrants to consultants 432 432
Purchase of incomplete
technology 462 (50) 538 1,000
Purchase of treasury stock 95 (951) (951)
Net loss (28,350) (28,350)
---------------------------------------- ----------------------------------------------------------------------------------
Balance - December 31, 1999 30,689 307 122,890 (129,367) 85 (804) (6,974)
---------------------------------------- ----------------------------------------------------------------------------------
Issuance of common stock upon
exercise of stock options and in
connection with employee stock
purchase plan 2,534 25 12,242 12,267
Issuance of common stock for
interest on convertible debt 90 1 1,372 1,373
Issuance of common stock for
convertible debt 172 2 2,223 2,225
Sale of common stock 1,089 11 15,919 15,930
Net loss (28,605) (28,605)
---------------------------------------- ----------------------------------------------------------------------------------
Balance - December 31, 2000 34,574 $346 $154,646 $(157,972) 85 $(804) $ (3,784)
---------------------------------------- ----------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
27
ORGANOGENESIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS
Organogenesis Inc. - a tissue engineering company - designs, develops and
manufactures medical products containing living cells and/or natural connective
tissue. We are the developer and manufacturer of the only mass-produced product
containing living human cells to gain FDA marketing approval. Our product
development focus includes living tissue replacements, a cell-based organ assist
device and other tissue-engineered products.
Our lead product, Apligraf living skin substitute, gained FDA marketing
approval for use in the treatment of healing-resistant venous leg ulcers in
1998. In June 2000, Apligraf was approved for use in the treatment of healing-
resistant diabetic foot ulcers. Novartis Pharma AG ("Novartis") has exclusive
global Apligraf marketing rights. In addition to being marketed in the US,
Apligraf is also available in select international markets. Novartis expects to
submit for marketing approval across the European Union in the Spring of 2001.
Our research and development pipeline includes a living dermal replacement
product candidate, Vitrix, which we anticipate beginning human pivotal clinical
trials in Spring 2001, a coronary vascular graft and a liver assist device.
Additionally, a business unit - Technology Ventures - has been formed in 2000 to
commercialize, through partnerships and distributorships, our engineered
collagen and conditioned medium technologies. Transactions through Technology
Ventures have not been significant to date.
We have a wholly-owned subsidiary, ECM Pharma/TM/, Inc. ECM Pharma was
established to discover, develop and commercialize human therapeutics based on
the extracellular matrix. We also have a wholly-owned investment subsidiary,
Dan Capital Corporation, which holds a substantial portion of our cash, cash
equivalents and investments.
We are subject to risks common to entities in the biotechnology industry,
including, but not limited to, the following uncertainties:
. Continued operating losses and the time required to achieve profitability;
. Market acceptance of our products and successful marketing and selling of
Apligraf by Novartis;
. Development by competitors of new technologies or products that are more
effective than ours;
. Dependence on our strategic relationships to market our products;
. Compliance with FDA regulations and similar foreign regulatory bodies;
. Protection of proprietary technology through patents and risks of
infringement claims by third parties;
. Manufacture and sale of products in sufficient volume to realize a
satisfactory margin;
. Continued availability of raw material for products;
. Dependence on and retention of key personnel;
. Availability of sufficient product liability insurance;
. Adequate third-party reimbursement for products;
. Stock price volatility and fluctuation;
. Availability of additional capital on acceptable terms, if at all;
. Affect of anti-takeover measures on the value of our stock;
. Affect of outstanding options, warrants and convertible debt on the value
of our stock; and
. Risk of failure of clinical trials for future indications of Apligraf and
for Vitrix and other products.
28
Based upon our current plans, we believe existing working capital at
December 31, 2000, together with the proceeds of product and other revenues in
2001 and proceeds available from exercising a portion or all of a $20,000,000
equity security put with Novartis, which is at our discretion, will be
sufficient to finance operations through at least the first quarter of 2002. We
expect to raise additional funds in 2001 through equity financing. 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:
. Sales volume forecasts not achieved;
. Delays in obtaining regulatory approvals of products in different
countries, if needed, 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 adverse effect on our financial condition and results of operations.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany activity has been
eliminated. Certain reclassifications have been made for consistent
presentation. These reclassifications have no impact on financial position or
results of operations. We prepare our financial statements under generally
accepted accounting principles that require us to make estimates and assumptions
that affect amounts reported and the related disclosures. Actual results could
differ from those estimates.
REVENUE RECOGNITION
We previously recognized up front non-refundable research and development
support payments as revenue when received. During the year ended December 31,
2000, the Company changed its method of accounting for up front non-refundable
research and development support payments to recognize such amounts over the
term of the related collaboration with Novartis. This change in accounting
principle is in accordance with guidance provided in SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
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. We adopted SAB 101 in the fourth quarter of 2000,
effective January 1, 2000, and recorded a cumulative effect of a change in
accounting principle related to all up front non-refundable research and
development support payments recognized in prior periods of $6,342,000. Of this
amount, $1,057,000 was recognized as revenue in 2000, and the remainder will be
recognized ratably through December 2005, in accordance with SAB 101's guidance.
29
Revenues from non-refundable milestone payments are recognized when
proceeds are received and the related costs and effort are considered
substantial. During the second quarter of 2000, we recognized $5,000,000 of
milestone support revenue.
Revenue from product sales are recognized upon shipment or, in certain
cases, after fulfillment of firm purchase orders in accordance with the
Manufacturing and Supply Agreement with Novartis and after risk of ownership
passes to the buyer, collection is probable and we have no performance
obligations. 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.
RESEARCH AND DEVELOPMENT
All research and development costs aimed at the development of new products
are expensed as incurred. In addition to research and development, this cost
category includes clinical costs and operations support. Prior to 1999,
commercial sales were not significant and the full cost of low volume production
was included in this cost category.
PATENTS
As a result of our research and development programs, we have a proprietary
portfolio of patent rights and patent applications for a number of patents in
the US and abroad. Such patent rights are of significant importance to protect
our products and processes. For financial reporting purposes, all costs in
connection with patent rights and patent applications have been expensed as
incurred.
INCOME TAXES
Research and development and other tax credits are recognized for financial
reporting purposes when they are realized. Deferred taxes are determined based
on the difference between the financial reporting and the tax bases of assets
and liabilities using enacted income tax rates in effect in the years in which
the differences are expected to reverse. However, the realizability of these
deferred tax assets is not assured as it depends upon future taxable income.
Accordingly, we have recorded a 100% valuation allowance against these assets.
Tax credits will be recorded as a reduction in income taxes when utilized.
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 December 31, 2000 include: stock options outstanding to
purchase 3,737,019 common shares; warrants to purchase 900,000 common shares;
and debt convertible into 1,694,968 common shares; however, such securities have
not been included in the net loss per common share calculation because their
effect would be antidilutive. Potentially dilutive securities at December 31,
1999 included: stock options outstanding to purchase 7,449,874 common shares;
warrants to purchase 900,000 common shares; Series C preferred stock convertible
into 213,638 common shares; and debt convertible into 1,957,384 common shares;
however, such securities have not been included in the net loss per common share
calculation because their effect would be antidilutive.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and money market funds that 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.
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.
30
PROPERTY AND EQUIPMENT
Equipment, furniture and fixtures, office equipment and leasehold
improvements are stated at cost. Depreciation is provided using the straight-
line method over three to ten years. Leasehold improvements are being amortized
using the straight-line method over the term of the lease. Construction in
progress represents costs incurred to date in connection with facility expansion
activities and are capitalized until such facilities become operational. These
costs are then amortized using the straight-line method over the remaining lease
term. Interest cost incurred during the period of construction in progress
relating to expansion of our main facility is capitalized. The interest cost
capitalized for the period ended December 31, 1999 and 2000 was $150,000 and
$197,000, respectively. No interest was capitalized in 1998.
Maintenance and repairs are charged to expense as incurred and betterments
are capitalized. Upon retirement or sale, the cost of assets disposed of and
their related accumulated depreciation are removed from the accounts. Any
resulting gain or loss is credited or charged to operations.
LONG-LIVED ASSETS
Our policy regarding long-lived assets is to evaluate the recoverability or
usefulness of these assets when the facts and circumstances suggest that these
assets may be impaired. This analysis relies on a number of factors, including
changes in strategic direction or market emphasis, business plans, regulatory
developments, economic and budget projections, and operating results. The test
of recoverability or usefulness is a comparison of the asset value to its
expected cumulative net operating cash flow or the assets usefulness in research
and development programs or operations over the remaining life of the asset. Any
write-downs would be treated as permanent reductions in the carrying amount of
the asset and an operating loss would be recognized.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," allows us to continue to account for stock-based
compensation arrangements under the provisions of Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees," and disclose in a footnote
the pro forma effects to net loss and net loss per share assuming the fair value
accounting method of SFAS 123 was adopted. Accordingly, no compensation cost
has been recognized from stock-based employee awards. Compensation expense for
stock awards granted to non-employees is determined by assessing the fair value
of the options granted (using an option-pricing model).
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash, cash equivalents, high grade
investments and receivable from Novartis. The Company has established guidelines
that relate to credit quality, diversification, and maturity, and that limit
exposure to any one issue of securities.
RESEARCH AGREEMENTS
We have entered into various collaborative research agreements that are
generally funded over a one or two-year period. Each agreement is reviewed at
least annually and the amounts to be funded for the next period are then
determined. Either party may cancel the agreement upon advance written notice.
Total payments made by us to third parties under these agreements were $648,000,
$662,000 and $542,000 for 1998, 1999 and 2000, respectively. All our research
agreements are early stage today, but have the potential to develop into more
material relationships in the future.
In April 1999, we purchased specific equipment and intellectual property,
consisting of patents and laboratory documentation, from Baxter Healthcare
Corporation relating to the research and development for the design and
manufacturing of key mechanical components of an extracorporeal liver assist
device. The purchase price consisted of the reissuance of 50,000 shares of
common stock held in treasury. In May 1999, we filed a registration statement
registering all 50,000 of these shares, 25,000 of which were subject to a one-
year lock-up agreement. Additionally, we may be required to make a future cash
payment that is contingent on the average closing price of our common stock over
the twenty consecutive trading days immediately prior to the earlier of the date
we receive FDA approval of an Investigational Device Exemption for a liver
assist device or January 1, 2003. We will have no obligation to make such
future cash payment if at any time during the period between April 2000 and the
date such cash payment is otherwise payable by us, the value of the shares of
common stock issued to Baxter is equal to or greater than $1,000,000. If this
contingent payment is required in the future, such cash payment will reduce the
value of the 50,000 shares issued. Total consideration is $1,000,000, of which
$900,000 was recorded as purchase of incomplete technology and is included in
research and development expenses and the remaining $100,000 capitalized to
property and equipment. The purchase was made to strengthen our resources to our
liver assist device program. The charge to purchase of incomplete technology was
due to the early stage of the technology which has not provided proof of
principle. Additionally, the time and cost to prove this principle is not known.
We expect it will cost millions of dollars and take a minimum of 4 to 6 years
before we could develop a product which might be approved for commercial sale.
It is our intent that if proof of principle is established, we will seek a
partnership for the project.
31
INVESTMENTS
The investments held are classified as available-for-sale and are carried
at cost plus accrued interest, which approximates fair market value and,
accordingly, there was no adjustment to stockholders' equity. We use a specific
identification cost method to determine the gross realized gains and losses on
the sale of our securities. We also classify investments in accordance with
their intended use. At December 31, 2000, the intended use of all investments
is to fund working capital and plant expansion in the coming year. We invest
excess cash in securities that have an A or A1 rating or better with a maximum
maturity of two years.
The aggregate cost and fair market value of investments are as follows (in
thousands):
December 31, 1999 December 31, 2000
---------------------------------- ----------------------------------
Amortized Market Amortized Market
Maturity Cost Value Cost Value
--------------------------------------------------------------------------------------------------------------
Less than one year:
US Government and Agency bonds $2,082 $2,098 $ - $ -
Corporate and other debt securities 503 503 1,015 1,013
Certificates of deposit 1,099 1,094 624 624
Greater than one year:
US Government and Agency bonds 1,005 972 1,005 1,001
Corporate and other debt securities 2,023 2,013 - -
------ ------ ------ ------
Total Investments $6,712 $6,680 $2,644 $2,638
====== ====== ====== ======
Inventory
Inventory, at net realizable value, consisted of the following (in
thousands):
December 31, December 31,
1999 2000
------------------------------------------------------------------------------------------------------------
Raw materials $ 348 $ 488
Work in process 558 889
----- ------
$ 906 $1,377
===== ======
Property and Equipment
Property and equipment consisted of the following (in thousands):
Estimated Useful December 31,
----------------------------------------
Life (Years) 1999 2000
-------------------------------------------------------------------------------------------------------------------
Equipment 3-10 $ 11,471 $ 12,439
Furniture, fixtures and office equipment 3-5 2,042 2,765
Leasehold improvements Lease term 4,277 11,004
Construction-in-progress 5,021 -
-------- --------
22,811 26,208
Less accumulated depreciation (11,080) (13,600)
-------- --------
$ 11,731 $ 12,608
======== ========
Construction-in-progress begins to depreciate when it is put into service.
32
ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
December 31,
--------------------------
1999 2000
------------------------------------------------------------------------------------------
Compensation and employee benefits $1,402 $1,869
Professional services 825 734
Accrued interest 361 368
Other 850 611
------ ------
$3,438 $3,582
====== ======
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 for
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). During 2000, we exercised our option to redeem all outstanding shares
of Series C convertible preferred stock for cash and we did not maintain
compliance with the liquidity covenant as of December 31, 1999. The bank
granted a waiver from this covenant. After raising additional capital
subsequent to December 31, 1999, we were in compliance with all covenants. At
December 31, 1999, we borrowed approximately $4,728,000 against this term loan
to finance certain research, manufacturing and office equipment and leasehold
improvements. We had $4,334,000 outstanding at December 31, 2000. The weighted
average interest rate paid during this period was 8.90%. This borrowing is
collateralized by a security interest in the fixed assets financed.
Effective December 29, 2000, we amended our covenants for the period
through July 1, 2001, to include the effect of exercising a portion or all of
the $20,000,000 equity security put with Novartis in the financial covenants
calculation. We anticipate raising additional funds that may be available
through equity or debt financing, strategic alliances with corporate partners,
capital lease arrangements, or other sources of financing in the future.
However, if we fail to meet any of the financial covenants after April 30, 2001,
we are required to exercise a portion or all of the equity security put with
Novartis to maintain compliance.
The current portion of this term loan is $1,576,000 at December 31, 2000
and is included in current liabilities. Long-term future minimum term loan
payments at December 31, 2000 are as follows (in thousands):
2002 $1,576
2003 1,182
------
$2,758
======
33
COMMITMENTS
Lease Obligations
We occupy our main office 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
100,000 square feet of space.
Future minimum lease payments are as follows (in thousands):
Rent of approximately $562,000, $800,000 and $1,065,000 was charged to
expense during the years ended December 31, 1998, 1999 and 2000, respectively.
34
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 of which we have
received $769,000 in payments 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 research and
development grant revenue of $101,000 and $1,065,000, during the years ended
December 31, 1999 and 2000 respectively, relating to these research and
development grants.
INCOME TAXES
The approximate tax effect of each type of temporary difference and
carryforward is reflected in the following table (in thousands):
December 31,
------------------------------
1999 2000
----------------------------------------------------------------------------------------------
Deferred tax assets and (liabilities):
Net operating loss carryforwards $ 39,507 $ 53,053
Research and development credits and other credits 4,782 5,516
Depreciation 8,669 13,215
Other 2,813 2,976
-------- --------
Net deferred tax assets before valuation allowance 55,771 74,760
Valuation allowance (55,771) (74,760)
-------- --------
Net deferred assets after valuation allowance $ 0 $ 0
======== ========
Since inception, the Company has generated net losses for which no related
tax benefit has been realized.
As of December 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $139,955,000 and $91,139,000 respectively,
which may be available to offset future federal and state income tax liabilities
and expire at various dates throughout 2019. The Company has recorded a deferred
tax asset of approximately $22,513,000 reflecting the benefit of deductions from
the exercise of stock options. This deferred tax asset has been fully reserved
until it is more likely than not that the benefit from the exercise of stock
options will be realized. The benefit from this $22,513,000 deferred tas asset
will be recorded as a credit to additional paid-in-capital when realized. At
December 31, 2000, the Company had federal and state tax credit carryforwards of
approximately $3,769,000 and $2,648,000, respectively, which expire beginning in
2001 and 2006, respectively.
As required by Statement of Financial Accounting Standards No. 109,
management of Organogenesis, Inc. has evaluated the positive and negative
evidence bearing upon the realizability of its deferred tax assets, which are
comprised principally of net operating loss and research and experimentation
credit carryforwards. Management has determined that it is more likely than not
that Organogenesis, Inc. will be unable to recognize the benefits of federal and
state deferred tax assets and, as a result, a valuation allowance of
approximately $74,760,000 has been established at December 31, 2000.
Ownership changes, as defined in Internal Revenue Code, may have limited
the amount of net operating losses and research and development tax credit
carryforwards that can be utilized annually to offset future taxable income.
Subsequent ownership changes could further affect the limitation in future
years.
35
Related Party Transactions and Other Agreements
In January 1996, we entered into a collaborative agreement with Novartis
granting Novartis exclusive global marketing rights to Apligraf. Under the
agreement, we have received equity investments, non-refundable research,
development and milestone support payments, product payments and other payments.
During 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 support revenue
when achievement of the milestone was met upon FDA approval of Apligraf for use
in diabetic foot ulcers. The following table summarizes by year all equity
investments, non-refundable research, development and milestone support payments
received to date. Product and other payments are included under the captions
"Product sales to related party" and "Other revenues" in our financial
statements.
1996 1997 1998 1999 2000
----------- ---------- ----------- ----- ----------
Equity investments $ 5,000,000 $ - $ 6,000,000 $ - $ -
Up front non-refundable research
and development support payments 6,500,000 2,500,000 750,000 - -
Non-refundable milestone payments - - 6,000,000 - 5,000,000
----------- ---------- ----------- ----- ----------
Total $11,500,000 $2,500,000 $12,750,000 $ - $5,000,000
=========== ========== =========== ===== ==========
During February 2001, we amended our collaborative agreement with Novartis,
effective January 2, 2001. The amended agreement:
. Grants Novartis the right to purchase an exclusive option to negotiate
terms to license Organogenesis's product Vitrix, soon to commence human
pivotal trials, and also for a second living dermal replacement product
currently in Organogenesis research;
. Provides Organogenesis with significantly higher payments for units of
Apligraf;
. Grants Organogenesis the right for three years to sell, at its discretion,
to Novartis up to $20 million in equity;
. Includes funding support from Novartis to upgrade Organogenesis's
manufacturing facility and for the facility investment needed for approval
and sale of Apligraf in the European Union;
. Includes funding support for Apligraf clinical development activities
(e.g., to further broaden its approved uses); and
. Includes development funding support for each living dermal replacement
product for which Novartis purchases an option to commence licensing
negotiations.
We supply Novartis's global requirements for Apligraf and receive a product
payment based on net product sales. Receivable from related party consists of
manufacturing and royalty amounts due on product sales to Novartis, funding of
certain programs by Novartis and reimbursement of certain test costs related to
the manufacturing of the product. Novartis is billed weekly for payments due on
product sales and on an as incurred basis for other billings.
We received $6,000,000 from Novartis in 1998 for approximately 240,000
shares of common stock. As a result of these equity investments and a prior
equity investment of $5,000,000 for approximately 418,000 shares made in January
1996, Novartis holds approximately 1.9% of outstanding shares as of December 31,
2000.
During the first quarter of 1999, Novartis agreed to provide funding for
certain programs to be conducted by us. We have recorded $572,000 and $162,000
for the period ended December 31, 1999 and 2000, respectively, relating to the
initiation of these programs, which is included in other revenues.
36
In 1994, we signed a license agreement with Toyobo Ltd. granting Toyobo a
license to manufacture and market TestSkin in Japan in exchange for royalty
payments. Additionally, Toyobo may, but is not obligated to, purchase collagen
and other products from us. Revenues under this arrangement are included in
other revenues. This agreement is co-terminous with certain patents.
LICENSE AGREEMENT
Certain of our technologies are licensed under an exclusive patent license
agreement with the Massachusetts Institute of Technology ("MIT"). The agreement
with MIT covers certain US patents and corresponding patents in European and Far
East countries. Pursuant to the MIT agreement, we have been granted an
exclusive, worldwide license to make, use and sell the products covered by the
patents and to practice the procedures covered by the patents. The MIT
agreement requires us to pay to MIT a royalty on the cumulative net sales of
licensed products ranging from 3% to 4.5% of annual sales.
CONVERTIBLE DEBT
On March 31, 1999, we completed a financing of $20,000,000 through the
private placement of five-year convertible debentures and 400,000 warrants to
purchase common stock. The debentures are convertible at a fixed price of
$14.50 per share at any time on or after March 30, 2000. Interest on the
debentures accrues at 7% annually, payable in cash, common stock (at the average
trading price for the twenty trading days preceding the due date) or any
combination thereof, at our option, semi-annually on September 30 and March 31
or on the date any of the principal outstanding under the notes has been
converted into common stock. At our option, at any time on or after March 30,
2002, the debentures may be prepaid by conversion of the principal into common
stock at the conversion price of $14.50, cash or any combination thereof and
payment of any accrued interest as described above, provided that the average
per share market value for the twenty consecutive trading days immediately
preceding the date of prepayment equals or exceeds $38.67 per share. The notes
mature on March 29, 2004 and are payable in cash. The warrants grant the right
to purchase one share of common stock at the exercise price of $21.75 for each
$50.00 in face value of the convertible notes at any time before March 30, 2004.
Approximately $2,318,000 of the $20,000,000 financing was allocated to the
estimated fair value of the warrants and is included in additional paid in
capital. This amount is amortized as a non-cash charge to interest expense over
the life of the debentures. Debt issuance costs are included in other assets
and are amortized to interest expense over the life of the debentures.
In May 1999, we filed a registration statement for 2,096,333 shares of
common stock issuable as follows: (1) 1,646,333 shares of common stock which may
become issuable by reason of the conversion of the convertible debt, and accrued
interest, (2) 400,000 shares which may become issuable upon the exercise of the
warrants issued in the financing, and (3) 50,000 shares issued in connection
with an asset purchase transaction. All shares have been reserved for issuance.
In May 1999, the Securities and Exchange Commission declared this registration
statement effective.
In August 2000, we issued 176,536 shares of common stock for $2,500,000
face value convertible notes, plus accrued interest. This conversion was a non-
cash transaction.
37
STOCKHOLDERS' EQUITY
PREFERRED STOCK
We have authorized 1,000,000 shares of preferred stock at December 31,
2000, comprised of the following designations:
. 250,000 shares Series A convertible preferred stock;
. 50,000 shares Series B Junior participating preferred stock;
. 200 shares Series C convertible preferred stock; and
. 699,800 shares authorized and unissued.
In March 1998, we completed a placement of 200 shares of Series C
convertible preferred stock and warrant financing with two institutional
investors at a price of $100,000 per share. Proceeds from the offering, net of
placement agent fees and expenses, were approximately $19,117,000. In addition,
the investors received three-year warrants to purchase an aggregate of 200,000
shares of common stock at $31.20 per share. The warrants may be exercised at
any time prior to April 2001. In July 1998, the investors exercised their right
to receive additional warrants to purchase 150,000 shares of common stock at
$17.45 per share with an expiration date of March 26, 2001. We also issued a
warrant to purchase an aggregate of 50,000 shares of common stock at $28.80 per
share to the placement agent that expires March 25, 2001. The total fair value
of all warrants was estimated to be approximately $2,509,000 and is included in
additional paid-in capital.
In May, September and November 1998, an aggregate of $13,800,000 face
amount of the Series C preferred stock was converted into common stock resulting
in the issuance of approximately 1,136,000 shares of common stock. These
conversions are non-cash transactions.
During March 2000, we redeemed for cash all outstanding shares of Series C
convertible preferred stock for approximately $6,180,000.
COMMON STOCK
We have authorized 80,000,000 shares of common stock, of which there were
30,604,019 and 34,489,459 shares outstanding as of December 31, 1999 and 2000,
respectively.
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 and March 2000, we completed private placements for 1,088,925 shares of
common stock under this shelf registration yielding net proceeds of
approximately $15,930,000.
In April 2000, we issued 44,035 shares of common stock for payment of
interest on our long-term convertible debt. In October 2000, we issued 41,845
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 $2,500,000
face value convertible notes, plus accrued interest
The following one-for-four stock split accounted for as a stock dividend
was declared by the Board of Directors during the past three years:
Stock Dividend Record Date Payable Date Common Shares Issued
-------------- ----------- ------------ --------------------
25% April 22, 1998 April 29, 1998 5,826,000
All related share and per share data in the consolidated financial
statements reflect all stock dividends for all periods presented, except for the
Statements of Changes in Stockholders' Equity.
38
WARRANTS ISSUED TO A CONSULTANT
In October 1999, we executed an agreement granting warrants to purchase
100,000 shares of common stock at an exercise price of $10.00 per share to a
consultant. These warrants were fully vested at December 31, 1999, with an
expiration of five years. We recorded approximately $411,000 of expense as of
December 31, 1999 relating to the fair value of these warrants (using an option-
pricing model).
Treasury Stock
In September 1998, the Board of Directors authorized a common stock
repurchase program. Repurchases are allowed through open-market transactions for
up to 500,000 shares that will provide us with treasury shares for general
corporate purposes. For the periods ended December 31, 1998 and 1999, we
repurchased 40,000 and 95,000 shares of common stock for an aggregate purchase
price of approximately $391,000 and $951,000, respectively. In April 1999, we
reissued 50,000 shares of common stock held in treasury related to the purchase
of technology (see "Purchase of Technology" note). We had in treasury 85,000
shares of common stock at a cost of $804,000 at December 31, 1999 and December
31, 2000, respectively.
In December 2000, the Board of Directors authorized a second common stock
repurchase program for up to 500,000 additional shares. Subsequent to December
31, 2000, we repurchased 165,000 shares of common stock for an aggregate
purchase price of approximately $1,367,000. The stock repurchase program may be
discontinued at any time.
STOCKHOLDER RIGHTS PLAN
In August 1995, the Board of Directors adopted a Stockholder Rights Plan
and declared a dividend of one right for each outstanding share of common stock
to stockholders of record on September 1, 1995. After adjusting for two one-
for-four stock dividends distributed during 1997 and one one-for-four stock
dividend distributed during 1998, there is approximately 0.51 of a right for
each outstanding share of common stock. Each right only becomes exercisable and
transferable apart from the common stock at the earlier of: (1) ten days after a
person or group acquires beneficial ownership of 15% or more of outstanding
common stock; or (2) ten business days following an announcement of a tender or
exchange offer of 30% or more of outstanding stock.
Initially, each right, upon becoming exercisable, would entitle the holder
to purchase one-thousandth of a share of Series B Junior participating preferred
stock at an exercise price of $85, subject to adjustment. If a person or group
acquires beneficial ownership of 15% or more of the outstanding shares of common
stock, then each holder of a right (other than rights held by the acquiring
person or group) would have the right to receive that number of shares of common
stock which equals the exercise price of the right divided by one-half of the
current market price of the common stock.
The rights may be redeemed for $0.01 per right at any time until the tenth
day following the stock acquisition date. The rights will expire on September
1, 2005.
STOCK-BASED COMPENSATION
At December 31, 2000, we had five stock-based compensation plans
(collectively, Stock Option Plans), as described below. Consistent with the
provisions prescribed by SFAS 123, the following are the pro forma net loss and
net loss per common share (basic and diluted) for the years ended December 31,
1998, 1999 and 2000, respectively, had compensation cost for the Stock Option
Plans been determined based on the fair value at the grant date for grants made
in 1998, 1999 and 2000 (in thousands, except per share data):
39
1998 1999 2000
----------------------- ----------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
-------------------------------------------------------------------------------------------------------
Net loss $(14,031) $(17,985) $(28,350) $(33,335) $(28,605) $(34,990)
Net loss per common
share (basic and $ (0.48) $ (0.61) $ (0.93) $ (1.09) $ (0.85) $ (1.04)
diluted)
The effects on 1998, 1999 and 2000 pro forma net loss and net loss per
common share (basic and diluted) of expensing the estimated fair value of stock
options may not be representative of the effects on reporting pro forma results
for future years.
The weighted average fair value of options granted under the Stock Option
Plans was estimated using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because our
employee stock options have characteristics significantly different from those
of traded options and changes in the subjective input assumptions may materially
affect the fair value estimate, in our opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of employee
stock options.
The assumptions used to calculate the weighted average fair value of
options granted during 1998, 1999 and 2000 are as follows:
1998 1999 2000
---------------------------------------------------------------------------------------------------------------------------
Assumed life for options issued to employees (years) 5.0 5.0 5.0
Assumed life for options issued to directors and officers (years) 7.0 7.0 7.0
Risk-free interest rate 5.3% 5.8% 5.9%
Volatility 65.0% 68.0% 72.0%
Dividend yield - - -
Weighted average fair value per common share of options granted during the year $14.48 $5.93 $8.17
THE STOCK OPTION PLANS
In March 1999, the Board of Directors adopted the 1999 Nonqualified Stock
Option Plan (the "1999 Plan") providing for the issuance of up to 1,000,000
shares of common stock subject to adjustment for any dividend, stock split or
other relevant changes in capitalization. The Board of Directors' primary
reason for adopting the 1999 Plan was to enhance our ability to retain and
motivate key qualified persons who are officers, directors, and consultants.
Under the 1999 Plan, the Compensation Committee of the Board of Directors may
grant non-qualified stock options to officers, directors, and consultants. The
Committee selects the individuals to whom options are granted and determines:
(1) the number of shares of common stock covered by the option; (2) when the
option becomes exercisable; (3) the duration of the option, which may not exceed
ten years; and (4) the vesting period, which, for officers, will generally occur
ratably over a five-year period beginning one year from the date of grant. All
stock options held under this 1999 Plan fully vest upon a change in control, as
defined in the plan.
In May 1995, a stock option plan was approved by shareholders providing for
the issuance of up to 5,000,000 shares of common stock options to enable us to
attract and retain key employees and consultants. Under the 1995 Plan, we may
grant incentive and non-qualified stock options to officers, employees,
consultants and advisors. The 1995 Plan, which took effect upon the expiration
of the 1986 Stock Option Plan in August 1996, is administered by the
compensation committee of the Board of Directors. This Committee selects the
individuals to whom options are granted and determines: (1) the type of option
to be granted; (2) the number of shares of common stock covered by the option;
(3) when the option becomes exercisable; and (4) the duration of the option
which, in the case of incentive stock options, may not exceed ten years. Vesting
generally occurs ratably over a five-year period beginning one year from the
date of
40
grant. No one person may be issued options to purchase more than 500,000 shares
of common stock in any one calendar year. Stock options granted under the 1995
Plan may not be granted at an exercise price less than 100% of the fair market
value of the common stock on the date of grant (or 110% of fair market value in
the case of incentive stock options granted to employees holding 10% or more of
voting stock). The aggregate fair market value (determined at the time of
grant) of shares issuable pursuant to incentive stock options which first become
exercisable in any calendar year by an employee may not exceed $100,000.
Our 1986 Stock Option Plan provided for the issuance of an aggregate of
4,882,812 shares of common stock for the granting of incentive and non-qualified
stock. The 1986 Plan was also administered by a committee of the Board of
Directors and had substantially the same terms and conditions as described under
the 1995 Plan. In August 1996, the 1986 Plan expired and no further grants were
made. All options outstanding on the expiration date remain in effect.
In 1994, a stock option plan for non-employee directors was approved by
shareholders. Under the 1994 Director Plan, non-qualified stock options to
purchase up to 488,281 shares of common stock may be granted to non-employee
directors. The 1994 Director Plan provides that the option price per share be
at fair market value and vest ratably over a five-year period beginning one year
from the date of grant, with a duration not to exceed ten years.
The 1991 Director Stock Option Plan provided for the granting of options to
purchase 244,141 shares of common stock by non-employee directors and terminated
upon the adoption of the 1994 Director Plan. The options were granted at fair
market value and were immediately exercisable, subject to repurchase, at the
option price, in the event the optionee ceased to be a director. This
repurchase right terminates and the shares vest ratably over a five-year period
beginning one year from the date of grant. All options outstanding on the
termination date remain in effect.
The following table presents the combined activity of all Stock Option
Plans for the years ended December 31, 1998, 1999 and 2000:
1998 1999 2000
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------------------------------
Outstanding at beginning of period 5,320,206 $ 6.83 6,006,138 $ 9.10 7,449,874 $ 9.09
Granted 954,889 22.00 1,721,400 9.20 713,862 12.19
Exercised (148,413) 6.39 (110,262) 6.59 (2,520,763) 4.82
Cancelled (120,544) 12.56 (167,402) 12.38 (1,905,954) 14.14
--------- --------- ----------
Outstanding at end of period 6,006,138 9.10 7,449,874 9.09 3,737,019 10.02
========= ========= ==========
Exercisable at year end 3,297,005 5.18 3,987,847 6.39 1,666,137 8.64
========= ========= ==========
Shares available for granting
of options at end of period 371,105 1,832,702 2,950,274
========= ========= ==========
41
The following table presents weighted average price and life information
about significant option
groups outstanding at December 31, 2000 for the Stock Option Plans:
Under the 1991 Employee Stock Purchase Plan, a total of 366,211 shares of
common stock are reserved for issuance (up to 30,000 shares may be issued in any
one year). The purchase plan allows eligible employees the option to purchase
common stock during two six-month periods of each year at 85% of the lower of
the fair market value of the shares at the time the option is granted or is
exercised. The term of this plan ends December 31, 2004. During 1998, 1999 and
2000, we issued a total of 5,046, 10,089 and 13,336 shares of common stock,
respectively, under this purchase plan. Remaining shares available under this
purchase plan were 294,910 as of December 31, 2000.
EMPLOYEE SAVINGS PLAN
We have a 401(k) savings plan covering full-time employees who are eligible
to participate upon hire. Under this savings plan, we may match employee
contributions at management's discretion. Contributions made under the savings
plan were approximately $62,000, $80,000 and $105,000 as of December 31, 1998,
1999 and 2000, respectively.
FOURTH QUARTER RECLASSIFICATION
We reclassified $968,000 to cost of product sales during the fourth
quarter of 2000, due to higher actual costs compared to standard costs. This
adjustment had no effect on our net loss.
42
UNAUDITED QUARTERLY DATA
During the year ended December 31, 2000, we changed our method of
accounting for up front non-refundable research and development support payments
in accordance with the guidance provided by SAB 101 (see "Revenue Recognition"
note). The cumulative effect of adopting SAB 101 at January 1, 2000 amounted to
$6,342,000 of additional loss and equivalent amount of deferred revenue;
$1,057,000 of this amount was recognized as revenue in 2000 and $5,285,000 will
be recognized as revenue in future periods.
The as Adjusted column reflects the cumulative effect of adopting SAB 101.
The following summarizes the unaudited quarterly results for the years
ended December 31,
(in thousands, except per share data):
2000 First Second Third Fourth
---- Quarter Quarter Quarter Quarter
---------------------- ----------------------- ---------------------- -------
As As As
Previously as Previously as Previously as
Reported Adjusted Reported Adjusted Reported Adjusted
-------- -------- --------
Revenues $ 897 $1,161 $6,029 $6,293 $1,055 $1,319 $ 1,467
Net loss before cumulative effect of
change in accounting principle 6,686 6,422 2,047 1,783 6,948 6,684 7,374
Cumulative effect of adopting Staff
Accounting Bulletin 101 ("SAB 101") - 6,342 - - - - -
Net loss 6,686 12,764 2,047 1,783 6,948 6,684 7,374
Net loss per common share - basic and
diluted before cumulative effect of
change in accounting principle (0.21) (0.21) (0.06) (0.05) (0.20) (0.19) (0.21)
Cumulative effect of adopting SAB 101 - (0.20) - - - - -
Net loss per common share - basic and
diluted (0.21) (0.41) (0.06) (0.05) (0.20) (0.19) (0.21)
1999 First Second Third Fourth
---- Quarter Quarter Quarter Quarter
-------------------- -------------------- --------------------- --------------------
As As As As
Previously as Previously as Previously as Previously as
Reported Adjusted Reported Adjusted Reported Adjusted Reported Adjusted
-------- -------- -------- -------- -------- -------- -------- --------
Revenues $ 486 $ 750 $ 624 $ 888 $ 708 $ 972 $ 858 $1,123
Net loss 5,926 5,662 7,589 7,325 6,480 6,216 8,355 8,090
Net loss per common share - basic and
diluted (0.19) (0.19) (0.25) (0.24) (0.21) (0.20) (0.27) (0.27)
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in our Proxy Statement
for the 2001 Annual Meeting of Stockholders under the captions "Information
About the Board of Directors", "Information About Executive Officers " and
"ELECTION OF DIRECTORS" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the caption
"Information About Executive Officers" in our 2001 Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is contained in our 2001 Proxy
Statement under the captions, "Information About Principal Stockholders" and
"Information About Executive Officers" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption
"Certain Transactions" in our 2001 Proxy Statement and is incorporated herein by
reference.
45
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following documents are included in this annual report on Form 10-K
(1) and (2). See "Index to Consolidated Financial Statements" at Item
8 to this Annual Report on Form 10-K. Other financial
statement schedules have not been included because they are
not applicable or the information is included in the financial
statements or notes thereto.
(3). Exhibits
The exhibits filed as a part of this Annual Report on Form 10-
K are listed in the Exhibit Index immediately preceding the
exhibits. The Registrant has identified in the Exhibit Index
each management contract and compensatory plan filed as an
exhibit to this Form 10-K in response to Item 14(c) of Form
10-K.
(B) REPORTS ON FORM 8-K
A current report on Form 8-K dated March 8, 2001 was filed by the
Registrant reporting the following:
. An announcement that the federal Health Care Financing
Administration, which administers Medicare, has classified Apligraf
as a biologic for reimbursement purposes when applied in a doctor's
office.
. An announcement of the signing of an amendment, effective
January 2, 2001, to the Registrant's 1996 agreement with
Novartis AG.
. Other matters discussed on a conference call dated
February 27, 2001.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BY: /s/ PHILIP M. LAUGHLIN
Philip M. Laughlin
President and Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE Title Date
--------- ----- ----
/s/ PHILIP M. LAUGHLIN President, Chief Executive Officer and March 30, 2001
------------------------------------------
Philip M. Laughlin Director (Principal executive officer)
/s/ JOHN J. ARCARI Vice President, Finance and March 30, 2001
------------------------------------------ Administration, Chief Financial Officer,
John J. Arcari Treasurer and Secretary (Principal
Financial and Accounting Officer)
/s/ ALBERT ERANI Director and Chairman of the Board March 30, 2001
------------------------------------------
Albert Erani
/s/ JAMES J. APOSTOLAKIS Director March 30, 2001
------------------------------------------
James J. Apostolakis
Director March 30, 2001
------------------------------------------
David A. Gardner
/s/ BERNARD A. MARDEN Director March 30, 2001
------------------------------------------
Bernard A. Marden
Director March 30, 2001
------------------------------------------
Glenn Nussdorf
/s/ BJORN R. OLSEN Director March 30, 2001
------------------------------------------
Bjorn R. Olsen
/s/ MARGUERITE A. PIRET Director March 30, 2001
------------------------------------------
Marguerite A. Piret
/s/ ANTON E. SCHRAFL Director March 30, 2001
------------------------------------------
Anton E. Schrafl
47
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
(3)(a) Restated Certificate of Incorporation of the Company. (1)
(b) Certificate of Amendment to the Restated Certificate of Incorporation of the Company. (8)
(c) Certificate of Stock Designation, Number, Voting Powers, Preferences and Rights of the
Series of the Preferred Stock of Organogenesis Inc. to be Designated Series A Convertible
Preferred Stock. (9)
(d) Certificate of Designation, filed with the Secretary of State of the State of Delaware on
August 29, 1995. (12)
(e) Bylaws of the Company, as amended. (2)
(f) Rights Agreement, dated as of September 1, 1995, between the Company and American Stock
Transfer & Trust Company. (12)
(g) Form of Unit Warrant Agreement. (13)
(h) Form of Investment Agreement. (13)
(i) Restated Certificate of Incorporation of the Company as amended. (22)
(4)(a) Form of Warrant Agreement with respect to Warrants included as part of the Units of the
Company's securities. (1)
(b) Notice of Redemption of the Company's Redeemable Common Stock Purchase Warrants. (3)
(c) Form of Unit Purchase Option, dated December 18, 1986, issued to each of the Company's
Unit Purchase Option holders. (4)
(d) Form of Stock Registration Rights Agreement, dated February 23, 1990, between the Company
and certain security holders. (4)
(e) Form of Common Stock Purchase Warrant, dated February 23, 1990, issued to certain
security holders. (9)
(f) Form of Non-Redeemable Warrant dated as of March 30, 1999. (21)
(g) Form of 7% Convertible Subordinated Note dated as of March 30, 1999. (21)
(h) Securities Purchase Agreement between the Registrant and the Purchasers dated as of March
30, 1999. (21)
(i) Form of Registration Rights Agreement between the Company and the Purchasers dated as of
March 30, 1999. (21)
(10)(a) 1986 Stock Option Plan of the Company, as amended. *(10)
(b) 1991 Director Stock Option Plan of the Company, as amended. *(10)
(c) 1991 Employee Stock Purchase Plan of the Company, as amended. *(23)
(d) 1994 Director Stock Option Plan of the Company, as amended. *(11)
(e) License Agreement among the Company, Eugene Bell and Massachusetts Institute of
Technology dated December 16, 1985 ("MIT License Agreement"). (1)
(f) Amendment to MIT License Agreement, dated October 22, 1986. (1)
(g) Second Amendment to MIT License Agreement, dated as of March 31, 1988. (6)
(k) Subscription Agreement between the Company and a purchaser of the Series A Convertible
Preferred Stock and 10% Subordinated Promissory Notes dated as of July 3, 1986, with a
schedule of additional purchasers. (1)
(l) Indenture of Lease between Canton Commerce Center Limited Partnership and the Company,
dated as of July 27, 1989, as amended. (7)
(m) Lease Agreement between North Queen Street LP and the Company, dated as of May 21, 1999.
(22)
(n) First Amendment to Lease Agreement between North Queen Street LP and the Company, dated
as of June 18, 1999. (22)
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
(o) Asset Purchase Agreement between the Company and Baxter Healthcare Corporation, dated as
of April 14, 1999. (22)
(q) Non-Statutory Stock Option Agreement between the Company and Herbert M. Stein dated April
7, 1987, as amended. *(5)
(r) Manufacturing and Supply Agreement between the Company and Novartis Pharma AG, dated as
of August 11, 1997. **(15)
(s) Letter Agreement between the Company and Dr. David T. Rovee dated September 23, 1991.
*(10)
(u) 1995 Stock Option Plan, as amended. *(14)
(v) The License and Supply Agreement between the Company and Sandoz Pharma Ltd., dated as of
January 17, 1996. **(16)
(w) The Stock Purchase Agreement between the Company and Sandoz Pharma Ltd., dated as of
January 17, 1996. **(16)
(x) 1999 Nonqualified Stock Option Plan. *(20)
(y) Severance Benefits Plan. *(17)
(z) Third amendment to Indenture of Lease between between 150 Canton Office Associates,
Successor as Landlord to Canton Commerce Center Limited Partnership and the Company,
dated as of March 4, 1998. (19)
(aa) Addendum to The License and Supply Agreement between the Company and Novartis Pharma
Ltd., dated March 23, 1998. (19)
(bb) Letter Agreement between the Company and Mr. Philip M. Laughlin dated September 24, 1999.
(24)
(cc) Credit agreement between the Company and Fleet National Bank dated November 12, 1999. (24)
(dd) Addendum to The License and Supply Agreement between the Company and Novartis Pharma
Ltd., dated March 15, 2000. (25)
(ee) Second Amendment to and Partial Termination of Lease Agreement between 85 John Road LLC
and the Company, dated as of June 30, 2000. (26)
(21) Subsidiaries of the Company, filed herewith.
(23) Consent of PricewaterhouseCoopers L.L.P., filed herewith.
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-9832).
(2) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, filed March 31, 1987, amended and incorporated herein
by reference to the exhibits to the Company's Quarterly Report on Form
10-Q, filed May 14, 1999.
(3) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K, filed February 18, 1987.
(4) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-3 (File No. 33-33914).
(5) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, filed March 30, 1988, amended and incorporated herein
by reference to the Exhibit 10 to the Company's Quarterly Report on Form
10-Q, filed August 14, 1997.
(6) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, filed March 31, 1989.
(7) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, filed April 2, 1990.
(8) Incorporated herein by reference to Exhibit 3(a) to the Company's Form
10-K, filed April 1, 1991.
(9) Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-Q, filed August 13, 1991.
(10) Incorporated herein by reference to the exhibits to the Company's Annual
Report Form 10-K, filed March 31, 1993.
(11) Incorporated herein by reference to Appendix A of the Company's Definitive
Proxy Statement filed April 19, 1994.
(12) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K, filed August 29, 1995, amended and incorporated herein
by reference to the exhibits to the Company's Quarterly Report on Form
10-Q, filed May 14, 1999.
(13) Incorporated herein by reference to the exhibits to the Company's Amended
Registration Statement on Form S-3, filed July 5, 1995.
(14) Incorporated herein by reference to Appendix A of the Company's Definitive
Proxy Statement filed April 14, 1995, amended and incorporated herein by
reference to the exhibits to the Company's Quarterly Report on Form 10-Q,
filed November 15, 1999.
(15) Incorporated herein by reference to the exhibits to the Company's Annual
Report Form 10-K, filed March 30, 1998.
(16) Incorporated herein by reference to the exhibits to the Company's Annual
Report Form 10-K, filed March 29, 1996.
(17) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed May 14, 1997.
(18) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed May 13, 1998.
(19) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed May 13, 1998.
(20) Incorporated herein by reference to the exhibits to the Company's Annual
Report Form 10-K, filed March 30, 1999.
(21) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed May 14, 1999.
(22) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed August 16, 1999.
(23) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed November 15, 1999.
(24) Incorporated herein by reference to the exhibits to the Company's Annual
Report Form 10-K, filed March 29, 2000.
(25) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed May 15, 2000.
(26) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed November 14, 2000.
* Management contract or compensatory plan identified pursuant to Item 14(a)3.
**Confidential Treatment has been granted by the Securities and Exchange
Commission.
EXHIBIT 21
LIST OF SUBSIDIARIES
Dan Capital Corp. (Delaware)
ECM Pharma, Inc. (Delaware)
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (File Nos. 33-12761, 33-41862, 33-48888, 33-49236, 33-
49248, 33-48890, 333,83055, 33-86506, 33-86508, 33-48892 and 33-64319) and on
Forms S-3 (File Nos, 33-33914, 33-40287, 33-43648, 33-60381, 33-63393, 33-63397,
333-3995, 333-50755, 333-78577 and 333-93629) of Organogenesis Inc. of our
report dated March 13, 2001 relating to the financial statements, which appears
in this Form 10-K.
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