<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-QSB
-------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
MARCH 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ________________ TO _________________
COMMISSION FILE NUMBER 0-27368
ORTEC INTERNATIONAL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3068704
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8000 COOPER AVENUE, BLDG. 28
GLENDALE, NY 11385
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 326-4698
----------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
----------
The number of shares outstanding of the Issuer's common stock is 3,621,838 (as
of May 2, 1996).
================================================================================
<PAGE> 2
ORTEC INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED MARCH 31, 1996
ITEMS IN FORM 10-QSB
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Facing page
Part I
Item 1. Financial Statements. 1
Item 2. Plan of Operation. 10
Part II
Item 1. Legal Proceedings and Claims. 12
Item 2. Changes in Securities. None
Item 3. Default Upon Senior Securities. None
Item 4. Submission of Matters to
a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. 13
Signatures
</TABLE>
<PAGE> 3
PART I
Item 1. FINANCIAL STATEMENTS
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 3,684,274 $ 2,364
Other current assets 71 57
----------- ----------
Total current assets 3,684,345 2,421
----------- ----------
Property and equipment, at cost:
Laboratory equipment 234,596 223,888
Office furniture and equipment 58,997 54,527
Construction in progress 251,118 49,847
----------- ----------
544,711 328,262
Accumulated depreciation and
amortization 185,245 171,075
----------- ----------
359,466 157,187
----------- ----------
Other assets:
Patent application costs 373,380 369,600
Deferred offering costs 314,697
Organization costs, net of
amortization 509
Deposits 4,387 4,056
----------- ----------
Total other assets 377,767 688,862
----------- ----------
Total Assets $ 4,421,578 $ 848,470
=========== ==========
</TABLE>
See notes to condensed unaudited financial statements.
1
<PAGE> 4
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 510,979 $ 790,869
Notes payable 515,500
----------- ----------
Total current liabilities 510,979 1.306,369
----------- ----------
Deferred occupancy costs 1,327
----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value;
authorized, 10,000,000 shares;
issued and outstanding shares -
3,621,838 at March 31, 1996 and
2,408,972 at December 31, 1995 3,622 2,409
Additional paid-in capital 9,620,243 4,749,384
Deficit accumulated during the
development stage (5,713,266) (5,211,019)
----------- ----------
Total stockholders' equity 3,910,599 ( 459,226)
----------- ----------
Total Liabilities and
Stockholders' Equity $ 4,421,578 $ 848,470
=========== ===========
</TABLE>
See notes to condensed unaudited financial statements.
2
<PAGE> 5
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative from
March 12, 1991
Quarter ended March 31, (inception) to
----------------------- March 31, 1996
--------------
1996 1995
---- ----
<S> <C> <C> <C>
Revenue
Interest income $ 34,471 $ 6,172 $ 101,629
--------- --------- -----------
Expenses
Research and development 221,455 115,269 2,611,007
Rent 6,443 5,433 84,316
Consulting 40,933 25,835 536,696
Personnel 140,016 69,321 1,285,057
General and administrative 126,844 37,948 1,234,024
Other expense, net 1,027 63,795
--------- --------- -----------
536,718 253,806 5,814,895
--------- --------- -----------
Net loss $(502,247) $(247,634) $(5,713,266)
--------- --------- -----------
Net loss per share $ (.14) $ (.09) $ (2.35)
--------- --------- -----------
Weighted average common and
common equivalent shares
outstanding 3,670,195 2,720,208 2,428,413
--------- --------- ---------
</TABLE>
See notes to condensed unaudited financial statements.
3
<PAGE> 6
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Common Stock accumulated
------------------- Additional in the
Paid-in development
Shares Amount Capital stage Total
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of stock:
Founders 1,553,820 $1,554 $ (684) $ 870
First private placement 217,440 217 64,783 65,000
The Director 149,020 149 249,851 250,000
Second private placement 53,020 53 499,947 500,000
Share issuance expenses (21,118) (21,118)
Net loss for the period from
March 12, 1991 (inception) to
December 31, 1991 $ (281,644) (281,644)
--------- ------ ---------- ----------- -----------
Balance - December 31, 1991 1,973,300 1,973 792,779 (281,644) 513,108
Issuance of stock:
Second private placement 49,320 49 465,424 465,473
Stock purchase agreement with
The Director 31,820 32 299,966 299,998
Share issuance expenses (35,477) (35,477)
Net loss for the year ended
December 31, 1992 (785,941) (785,941)
--------- ------ ---------- ----------- -----------
Balance - December 31, 1992 2,054,440 2,054 1,522,692 (1,067,585) 457,161
Issuance of stock:
Third private placement 132,150 132 1,321,368 1,321,500
Stock purchase agreement with
Home Insurance Company 111,111 111 999,888 999,999
Stock purchase agreement with
The Director 21,220 21 199,979 200,000
Shares issued in exchange
for commissions earned 600 1 5,999 6,000
Share issuance expenses (230,207) (230,207)
Net loss for the year ended
December 31, 1993 (1,445,624) (1,445,624)
--------- ------ ---------- ----------- -----------
Balance - December 31, 1993 2,319,521 $2,319 $3,819,719 $(2,513,209) $ 1,308,829
--------- ------ ---------- ----------- -----------
</TABLE>
See notes to condensed unaudited financial statements.
4
<PAGE> 7
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Common Stock accumulated
------------------- Additional in the
Paid-in development
Shares Amount Capital stage Total
--------- ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(brought forward) 2,319,521 $2,319 $ 3,819,719 $(2,513,209) $ 1,308,829
Issuance of stock:
Fourth private placement 39,451 40 397,672 397,712
Stock purchase agreement with
Home Insurance Company 50,000 50 499,950 500,000
Share issuance expenses (8,697) (8,697)
Net loss for the year ended
December 31, 1994 (1,675,087) (1,675,087)
--------- ------ ----------- ----------- -----------
Balance - December 31, 1994 2,408,972 2,409 4,708,644 (4,188,296) 522,757
Rent forgiveness 40,740 40,740
Net loss for the year ended
December 31, 1995 (1,022,723) (1,022,723)
--------- ------ ----------- ----------- -----------
Balance - December 31, 1995 2,408,972 2,409 4,749,384 (5,211,019) (459,226)
Issuance of stock:
Public offering 1,200,000 1,200 5,998,800 6,000,000
Exercise of warrants 12,866 13 12,853 12,866
Share issuance expenses (1,140,794) (1,140,794)
Net loss for the quarter ended
March 31, 1996 (502,247) (502,247)
--------- ------ ----------- ----------- -----------
Balance - March 31, 1996 3,621,838 $3,622 $ 9,620,243 $(5,713,266) $ 3,910,599
--------- ------ ----------- ----------- -----------
</TABLE>
See notes to condensed unaudited financial statements.
5
<PAGE> 8
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative from
March 12, 1991
Quarter ended March 31, (inception) to
-------------------------- March 31, 1996
---------------
1996 1995
---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(502,247) $(247,634) $(5,713,266)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Deferred occupancy costs (1,327) (2,302)
Depreciation and amortization 14,679 14,432 195,483
Unrealized loss on marketable
securities 67,204
Realized loss on marketable
securities 5,250 5,250
Changes in operating assets and
liabilities
Other current assets (14) 9,197 (71)
Accounts payable and accrued
liabilities (279,890) (40,526) 551,719
--------- --------- -----------
Net cash used in operating activities (768,799) (261,583) (4,893,681)
--------- --------- -----------
Cash flows from investing activities:
Purchases of property and equipment (216,449) (544,711)
Payments for patent application (3,780) (35,414) (373,380)
Organization costs (10,238)
Deposits (331) 38 (4,387)
Purchases of marketable securities (398) (594,986)
Sale of marketable securities 153,163 522,532
--------- --------- -----------
Net cash (used in) provided by
investing activities (220,560) 117,389 (1,005,170)
--------- --------- -----------
</TABLE>
See notes to condensed unaudited financial statements.
6
<PAGE> 9
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative from
March 12, 1991
Quarter ended March 31, (inception) to
--------------------------- March 31, 1996
---------------
1996 1995
----------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of notes payable $ 50,000 $ 515,500
Repayment of notes payable $ (515,500) (515,500)
Proceeds from issuance of common stock 6,012,866 11,013,418
Share issuance expenses (826,097) (1,430,293)
----------- --------- ------------
Net cash provided by financing activities 4,671,269 50,000 9,583,125
----------- --------- ------------
Net increase (decrease) in cash 3,681,910 (94,194) 3,684,274
Cash at beginning of period 2,364 226,154
----------- --------- ------------
Cash at end of period $ 3,684,274 $ 131,960 $ 3,684,274
----------- --------- ------------
</TABLE>
See notes to condensed unaudited financial statements.
7
<PAGE> 10
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STATE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995 AND 1996
NOTE 1 - FINANCIAL STATEMENTS
The condensed balance sheet as of March 31, 1996, the statements of operations,
shareholders' equity and cash flows for the three months ended March 31, 1996
and 1995 and for the period from March 12, 1991 (inception) to March 31, 1996
have been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring accrual adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at March 31, 1996 and for all periods presented have been made.
Certain information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto in the Company's December 31, 1995 annual report on Form 10-KSB filed
with the Securities and Exchange Commission. The results of operations for the
quarter ended March 31, 1996 are not necessarily indicative of the operating
results for the full year.
NOTE 2 - FORMATION OF THE COMPANY AND BASIS OF PRESENTATION
Formation of the Company
Ortec International, Inc. ("Ortec" or the "Company") was incorporated in March
1991 as a Delaware corporation to secure and provide funds for the further
development of the technology developed by Dr. Mark Eisenberg of Sydney,
Australia, to replicate in the laboratory, composite cultured skin for use in
skin replacement procedures (the "Technology"). Pursuant to a license agreement
dated June 7, 1991, Dr. Eisenberg has granted Ortec a license for a term of ten
years, which may be automatically renewed by Ortec for two additional ten-year
periods, to commercially use and exploit the Technology for the development of
products, subject to certain limitations. At the expiration or earlier
termination of the agreement, Dr. Eisenberg is entitled to the exclusive rights
in the Technology, and Ortec is entitled to the exclusive rights to all
improvements to the Technology developed during the license period.
The Skin Group, Ltd. (the "Skin Group") also was formed as a Delaware
corporation, in March 1991, to raise funds for
8
<PAGE> 11
development of the Technology. On July 27, 1992, the Skin Group was merged with
and into Ortec. Owners of Skin Group shares were given .83672 of an Ortec share
for each Skin Group share. The merger was accounted for as if it were a pooling
of interests and, accordingly, the accompanying financial statements include the
accounts of Skin Group for all periods presented.
Basis of Presentation
The Company is a development stage enterprise, and has neither realized any
operating revenue nor has any assurance of realizing any future operating
revenue. Successful future operations depend upon the successful development and
marketing of the composite cultured skin to be used in skin replacement
procedures.
Initial Public Offering
On January 19, 1996, the Company completed an initial public offering ("IPO") of
1,200,000 units. Each unit consists of one share of the Company's common stock,
one Class A warrant to purchase one share of common stock at $10, expiring July
1997 and one Class B warrant to purchase one share of common stock at $15,
expiring January 1999. The Class A and B warrants will be redeemable by the
Company at $.01 per warrant, if the market price of the Company's common stock
equals or exceeds $10 for 10 consecutive trading days during a specified period,
as defined.
The IPO raised gross proceeds of approximately $6,000,000, of which $800,000,
$515,500 and approximately $341,000 were used to pay underwriting commissions,
notes payable and deferred offering costs, respectively, thereby providing the
Company with net proceeds of approximately $4,343,500. The Company intends to
use the proceeds for continued research and development of composite cultured
skin replacements, performing human clinical trials and general corporate
purposes.
9
<PAGE> 12
Item 2. PLAN OF OPERATION
OPERATIONS FOR THE NEXT TWELVE MONTHS
For the next twelve months the Company will continue to conduct human
clinical trials. To that end, the Company intends to continue to recruit
hospital burn centers which will provide the necessary patients.
The Company estimates that the cost to it of each human clinical trial
will be approximately $8,000, which includes testing for pathogens, payments to
the hospital and the salary of one employee to coordinate the human clinical
trials.
The Company employs Dr. Melvin Silberklang on a full time basis to
supervise the Company's laboratory operations in New York City. When the
Company's new laboratory in New York City is operational, the Company will
initially employ three additional persons to work in the laboratory with Dr.
Silberklang.
CASH REQUIREMENTS
The Company anticipates that the net proceeds received by it on January
19, 1996 from the public offering of its Common Stock, Class A Warrants and
Class B Warrants will be sufficient to fund its operations until approximately
October, 1997. The Company will have to secure additional funds prior thereto or
thereafter to complete its human clinical trials, if not then already completed,
to secure FDA pre market approval for commercial sales and thereafter to produce
and market its composite cultured skin in commercial quantities.
CLINICAL TRIALS AND PRODUCT RESEARCH AND DEVELOPMENT
The Company has used and intends to use approximately $1,105,000 of the
net proceeds from the recent public Offering of its securities to continue the
human clinical trials and approximately $2,506,000 for research and development.
These amounts include the salaries of its officers and employees and payments to
consultants who will be involved in producing the composite cultured skin and in
research and development and regulatory matters, payments to members of the
Company's Scientific Advisory board, performing quality control, securing
hospital burn centers to participate in the human clinical trials, monitoring
the progress of the patients thereafter and to prepare reports to be filed with
the FDA.
10
<PAGE> 13
NEW LABORATORY
In March 1996 the Company entered into a five-year lease with Columbia
University for the Company's new laboratory and offices in Columbia's new
Audubon Biomedical Science and Technology Park in New York City. Construction of
the new laboratory and office facility and installation of the equipment
necessary to make the laboratory operational is expected to be completed in
June, 1996. Columbia has provided a $400,000 grant and a $250,000 loan to the
Company for the Company's construction costs, an additional loan of up to an
additional $100,000 for the Company's architectural and engineering costs in
building its new laboratory and office, and a third loan of up to $250,000 for
equipment to be installed in the new laboratory. The Company expects that it
will have to spend approximately $100,000 in addition to the $250,000 loan from
Columbia to equip its new laboratory.
The Company will use its new laboratory when it is completed and
operational to produce its composite cultured skin for use in the remaining FDA
approved human clinical trials and for further research to develop the Company's
proprietary technology for treatment of other wounds. The Company intends to
further equip its new laboratory as a pilot production facility for its
composite cultured skin. Audubon's new center will be a dedicated biomedical
research facility and the Company, as a tenant, will be entitled to utilize the
resources of Columbia University's Health Sciences Research facility at the
Center as well as those at Columbia University-Presbyterian Medical Center
across the street from the Center.
NUMBER OF EMPLOYEES
The Company presently employs eight persons, including its four
executive officers. Only one executive officer is employed on a full time basis.
The Company also retains three consultants, one of whom will be employed on a
full time basis commencing July 1, 1996. The Company intends to employ at least
four additional full time employees when its new laboratory is operational,
three of whom will be involved in the clinical trials and in research and
development. The Company expects that it will employ additional persons as its
needs may otherwise require.
11
<PAGE> 14
PART II
ITEM 1. LEGAL PROCEEDINGS AND CLAIMS
The Company is not a party to any legal proceedings. However, the
University of Minnesota has advised the Company that it has a claim against the
Company for $82,970 allegedly owed pursuant to a contract requiring the
University of Minnesota to perform research for cryopreservation of the
Company's product. The Company has denied any liability.
12
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
3.1 Agreement of Merger of the Skin Group, Ltd. and the Company
dated July 9, 1992 (1)
3.2 Original Certificate of Incorporation (1)
3.3 By-Laws (1)
4.1 Form of Certificate evidencing shares of Common Stock (1)
4.2 Form of Underwriter's Option (1)
4.3 Form of Warrant Agreement for the public Class A and Class B
Common Stock Purchase Warrants (1)
4.4 Form of Certificate for the public Class A Common Stock
Purchase Warrants filed as Exhibit A to Exhibit 4.3 (1)
4.6 Form of Certificate for public Class B Warrants filed as
Exhibit B to Exhibit 4.3 (1)
10.1 Agreement by and between the Company and Cornell University
Medical College dated as of October 6, 1992 (1)
10.2 License Agreement dated as of June 7, 1991, by and between the
Company and Dr. Mark Eisenberg (1)
10.3 Agreement for Consulting Services dated as of June 7, 1991 by
and between the Company and Dr. Mark Eisenberg (1)
10.4 Modification of Exhibit 10.2 (1)
10.5 Lease dated May 28, 1992 by and between the Company as lessee
and Isaac Eisenberg as lessor for 147-155 Queen Street,
Alexandria, Australia (1)
10.5.1 Waiver by Isaac Eisenberg of certain rental payments required
to be paid by the Company under such lease (1)
13
<PAGE> 16
Exhibit No. Description
10.6 Stock Purchase Agreement dated June 19, 1992, by and among the
Company, Joseph Stechler, Dr. Steven Katz, Alain Klapholz, and
Ron Lipstein, plus modifications thereto dated November 30,
1992 and August 5, 1993 (1)
10.7 Stock Option Agreement dated August 5, 1993, by and among Drs.
Eisenberg and Katz and Messrs. Klapholz and Lipstein with Mr.
Stechler (1)
10.8 Further modification, dated as of July 15, 1994, of agreements
listed as Exhibits numbered 10.6 and 10.7 (1)
10.9 Agreement with Oxford Research International Corp. (1)
10.10 Lease with Columbia University dated March 14, 1996, for space
in 3960 Broadway, New York, New York (2)
28 FDA approval for human clinical trials (1)
- --------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form
SB-2 (File No. 33-96090), or Amendment 1 thereto, and incorporated
herein by reference.
(2) Filed as an Exhibit to the Company's Annual Report of Form 10-KSB for
the year ended December 31, 1995, and incorporated herein by reference.
(b) REPORT ON FORM 8-K
No reports on Form 8-K were filed during the first quarter of 1996.
14
<PAGE> 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereto duly authorized.
Registrant:
ORTEC INTERNATIONAL, INC.
By: /s/Ron Lipstein
------------------------------
Secretary and
Chief Financial Officer
Dated: May 10, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,684,274
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 71
<PP&E> 544,711
<DEPRECIATION> (185,245)
<TOTAL-ASSETS> 4,421,578
<CURRENT-LIABILITIES> 510,979
<BONDS> 0
0
0
<COMMON> 3,622
<OTHER-SE> 3,906,977
<TOTAL-LIABILITY-AND-EQUITY> 4,421,578
<SALES> 0
<TOTAL-REVENUES> 34,471
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 536,718
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (502,247)
<INCOME-TAX> 0
<INCOME-CONTINUING> (502,247)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (502,247)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
</TABLE>
