<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
SEPTEMBER 30, 1997
[ ] 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.)
3960 BROADWAY
NEW YORK, NEW YORK 10032
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 740-6999
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE
----------------
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
4,970,691 (as of October 31, 1997).
<PAGE> 2
ORTEC INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED SEPTEMBER 30, 1997
ITEMS IN FORM 10-QSB
<TABLE>
<CAPTION>
Page
----
<S> <C>
Facing page
Part I
Item 1. Financial Statements. 1
Item 2. Plan of Operation. 11
Part II
Item 1. Legal Proceedings and Claims. None
Item 2. Changes in Securities and Use
of Proceeds. 13
Item 3. Default Upon Senior Securities. None
Item 4. Submission of Matters to 15
a Vote of Security Holders.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. 16
Signatures
</TABLE>
<PAGE> 3
PART I
Item 1. FINANCIAL STATEMENTS
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $4,505,094 $7,453,229
Prepaid expenses 6,507 7,616
Other current assets 4,560 1,958
---------- ----------
Total current assets 4,516,161 7,462,803
---------- ----------
Property and equipment, at cost:
Laboratory equipment 593,656 578,530
Office furniture and equipment 308,502 170,830
Leasehold improvements 601,224 462,995
---------- ----------
1,503,382 1,212,355
Accumulated depreciation and
amortization 533,297 321,646
---------- ----------
970,085 890,709
---------- ----------
Other assets:
Patent application costs net of
accumulated amortization of $23,456
at September 30, 1997 and $1,210 at
December 31, 1996 399,453 409,147
Deposits 30,914 29,266
---------- ----------
Total other assets 430,367 438,413
---------- ----------
Total Assets $5,916,613 $8,791,925
========== ==========
</TABLE>
See notes to condensed unaudited financial statements.
1
<PAGE> 4
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 489,399 $ 570,397
Capital lease obligations - current 44,507 5,738
Loan payable - current 37,373 38,018
------------ ------------
Total current liabilities 571,279 614,153
------------ ------------
Long-term liabilities:
Capital lease obligations - noncurrent 45,037 9,846
Loan payable - noncurrent 422,621 450,928
------------ ------------
Total long-term liabilities 467,658 460,774
------------ ------------
Total liabilities 1,038,937 1,074,927
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value;
authorized, 10,000,000 shares;
issued and outstanding shares -
4,673,216 at September 30, 1997
and 4,601,963 at December 31, 1996 4,673 4,602
Additional paid-in capital 15,704,365 15,573,183
Deficit accumulated during the
development stage (10,831,362) (7,860,787)
------------ ------------
Total stockholders' equity 4,877,676 7,716,998
------------ ------------
Total Liabilities and
Stockholders' Equity $ 5,916,613 $ 8,791,925
============ ============
</TABLE>
See notes to condensed unaudited financial statements.
2
<PAGE> 5
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months Cumulative from
Quarter ended September 30, ended September 30, March 12, 1991
(inception) to
1997 1996 1997 1996 September 30, 1997
---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C>
Revenue
Interest income $ 63,824 $ 33,865 $ 221,603 $ 105,650 $ 459,818
----------- ----------- ----------- ------------ ------------
Expenses
Research and development 309,901 203,720 823,455 591,572 4,177,871
Rent 49,153 48,676 153,949 63,314 316,898
Consulting 149,223 24,548 265,464 219,991 1,022,860
Personnel 391,752 198,418 1,001,419 463,907 2,876,817
General and administrative 321,449 152,501 912,804 414,389 2,747,176
Other expense, net 11,531 10,879 35,087 39,056 149,558
----------- ----------- ----------- ------------ ------------
1,233,009 638,742 3,192,178 1,792,229 11,291,180
----------- ----------- ----------- ------------ ------------
Net loss $(1,169,185) $ (604,877) $(2,970,575) $ (1,686,579) $(10,831,362)
----------- ----------- ----------- ------------ ------------
Net loss per share $ (.26) $ (.17) $ (.65) $ (.47) $ (3.99)
----------- ----------- ----------- ------------ ------------
Weighted average common and
common equivalent shares
outstanding 4,655,401 3,623,932 4,631,679 3,619,910 2,720,319
=========== =========== =========== ============ ============
</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:
Initial public offering 1,200,000 1,200 5,998,800 6,000,000
Exercise of warrants 33,885 34 33,851 33,885
Fifth private placement 959,106 959 6,219,838 6,220,797
Share issuance expenses (1,580,690) (1,580,690)
Stock options issued for
services 152,000 152,000
Net loss for the year ended
December 31, 1996 (2,649,768) (2,649,768)
--------- ------ ------------ ----------- -----------
Balance - December 31, 1996 4,601,963 $4,602 $ 15,573,183 $(7,860,787) $ 7,716,998
========= ====== ============ =========== ===========
</TABLE>
See notes to condensed unaudited financial statements.
5
<PAGE> 8
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) 4,601,963 $4,602 $ 15,573,183 $(7,860,787) $ 7,716,998
Issuance of stock:
Exercise of warrants 71,253 71 71,182 71,253
Stock options issued for
services 60,000 60,000
Net loss for the nine months
ended September 30, 19997 (2,970,575) (2,970,575)
--------- ------ ------------ ------------ -----------
Balance - September 30, 1997 4,673,216 $4,673 $ 15,704,365 $(10,831,362) $ 4,877,676
========= ====== ============ ============ ===========
</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>
Nine months Cumulative from
Quarter ended September 30, ended September 30, March 12, 1991
(inception) to
1997 1996 1997 1996 Septemver 30, 1997
---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss $(1,169,185) $ (604,877) $(2,970,575) $(1,686,579) $(10,831,362)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Deferred occupancy costs (1,327)
Depreciation and amortization 84,131 44,348 233,897 74,556 566,991
Unrealized loss on marketable
securities 67,204
Realized loss on marketable
securities 5,250
Sock options issued for
services 60,000 152,000 60,000 152,000 212,000
Rent forgiveness 40,740
Changes in operating assets and
liabilities
Prepaid expenses (487) 1,109 (6,507)
Other current assets (2,757) 1 (2,602) (12) (4,560)
Accounts payable and accrued
liabilities (468) 108,590 (80,998) (345,284) 489,399
---------- ----------- ----------- ----------- ------------
Net cash used in operating
activities (1,028,766) (451,938) (2,759,169) (1,806,646) (9,460,845)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment (14,638) (455,200) (291,027) (822,235) (1,503,382)
Payments for patent application 537 (9,969) (12,552) (34,971) (422,909)
Organization costs (10,238)
Deposits (857) 8 (1,648) (2,057) (30,914)
Purchases of marketable securities (594,986)
Sale of marketable securities 522,532
----------- ----------- ------------ ----------- ------------
Net cash (used in) provided by
investing activities (14,958) (465,161) (305,227) (859,263) (2,039,897)
----------- ----------- ----------- ----------- ------------
</TABLE>
See notes to condensed unaudited financial statements.
7
<PAGE> 10
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months Cumulative from
Quarter ended September 30, ended September 30, March 12, 1991
(inception) to
1997 1996 1997 1996 September 30, 1997
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Proceeds from issuance of notes
payable $ 302,882 $ 500,000 $ 515,500
Repayment of notes payable (5,490) (520,990) (515,500)
Proceeds from issuance of common
stock $ 30,689 $ 71,253 6,014,960 17,332,487
Share issuance expenses (825,977) (1,876,189)
Proceeds from loan payable 500,000
Repayment of loan payable (8,888) (28,952) (40,006)
Proceeds from capital lease
obligations 100,367 31,815 118,903
Repayment of capital lease
obligations (8,332) (452) (26,407) (452) (29,359)
------------ ----------- ----------- ----------- ------------
Net cash provided by financing
activities 13,469 296,940 116,261 5,199,356 16,005,836
------------ ----------- ----------- ----------- ------------
Net increase (decrease) in cash (1,030,255) (620,159) (2,948,135) 2,533,447 4,505,094
Cash at beginning of period 5,535,349 3,155,970 7,453,229 2,364
------------ ----------- ----------- ----------- ------------
Cash at end of period $ 4,505,094 $ 2,535,811 $ 4,505,094 $ 2,535,811 $ 4,505,094
------------ ----------- ----------- ----------- ------------
</TABLE>
See notes to condensed unaudited financial statements.
8
<PAGE> 11
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1997
NOTE 1 - FINANCIAL STATEMENTS
The condensed balance sheet as of September 30, 1997 and the statements
of operations, shareholders' equity and cash flows for the three and nine month
periods ended September 30, 1997 and 1996 and for the period from March 12, 1991
(inception) to September 30, 1997 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 September 30, 1997 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, 1996
annual report on Form 10-KSB filed with the Securities and Exchange Commission.
The results of operations for the quarter and nine months ended September 30,
1997 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 September 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.
9
<PAGE> 12
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 (i) one share of the Company's
common stock, (ii) one Class A warrant to purchase one share of common stock at
$10, originally scheduled to expire in July 1997 but extended on two separate
occasions, to November 3, 1997 and then to December 31, 1997, by the Board of
Directors of the Company (see Part II, Item 2, hereof, "Changes in Securities")
and (iii) one Class B warrant to purchase one share of common stock at $15,
expiring January 17, 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 $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 has used and
intends to use the proceeds for continued research and development of composite
cultured skin, performing human clinical trials and general corporate purposes.
1996 PRIVATE PLACEMENT
In November 1996, the Company completed a private placement of its
securities from which it received gross proceeds of $6,220,797 and net proceeds
of approximately $5,733,000 (after deducting approximately $487,000 in placement
fees and other expenses of such private placement). The Company sold 959,106
shares of Common Stock in such private placement at an average price of $6.49
per share. In addition, the Company granted five-year warrants to placement
agents to purchase such number of shares equal to 10% of the number of shares of
common stock sold by such placement agent, exercisable at prices equal to 120%
of the prices paid for such shares. Pursuant to the purchasers' demand, the
Company has registered all of such 959,106 shares.
The Company intends to use the net proceeds it has received in such
private placement offering for continued research and development of its
composite cultured skin, performing human clinical trials and for general
corporate purposes.
10
<PAGE> 13
EXERCISE OF CLASS A WARRANTS
Between September 29, 1997 and October 31, 1997, 297,475 (out of
1,200,000) of the Company's Class A Warrants were exercised. The Company issued
an additional 297,475 shares of its common stock and received net proceeds of
$2,774,750 which it plans to use for continued research and development,
performing human clinical trials and for general corporate purposes. $200,000 of
the proceeds received from exercise of the Class A Warrants were paid to
Patterson Travis, Inc., the underwriter of the Company's IPO as provided in the
underwriting agreement.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE, which
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for the period.
Diluted earnings per share reflects the weighted-average common shares
outstanding plus the potential dilutive effect of securities or contracts which
are convertible to common shares, such as options, warrants, and convertible
preferred stock. The adoption of this new standard is not expected to have a
material impact on the disclosure of earnings per share in the Company's
financial statements.
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 has recruited and intends to continue
to recruit hospital burn centers which will provide the necessary patients.
Human clinical trials are also presently being conducted at Rockefeller
University Hospital in New York City for the application of the Company's
Composite Cultured Skin in treating dermal ulcers in patients suffering from a
unique disease called Epidermolysis Bullosa ("EB"). The wounds resulting from EB
are very similar to those caused by burns and require similar treatment. In
addition, the Company in conjunction with the hospitals at which certain other
clinical trials are expected to be conducted, is currently working on programs
to initiate human clinical trials for the application of the Company's
Composite Cultured Skin for the treatment of venous and diabetic ulcers, donor
sites and dermal scar revisions in burn patients.
11
<PAGE> 14
CASH REQUIREMENTS
The Company estimates that it has sufficient funds necessary to operate
through approximately July 1999. By October 31, 1997 the Company had already
received net proceeds of $2,774,750 as a result of the exercise of 297,475 of
its publicly-traded Class A Warrants. The Company extended the expiration date
of the 902,525 Class A Warrants still outstanding to December 31, 1997. The
Company may have to secure additional funds prior to July 1999 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. See "Forward Looking
Information May Prove Inaccurate."
CLINICAL TRIALS AND PRODUCT RESEARCH AND DEVELOPMENT
The Company has spent an aggregate of approximately $4,177,871 from its
inception through September 30, 1997 for the human clinical trials and for
research and development. That amount includes the salaries of its employees
involved in producing the Composite Cultured Skin, performing quality control,
securing hospitals to participate in the human clinical trials, monitoring the
progress of the patients thereafter and to prepare reports to be filed with the
FDA. The Company anticipates that it will be required to continue to spend
additional funds for such purposes in the twelve months ending September 30,
1998 in order to continue its human clinical trials now being conducted, to
conduct human clinical trials for other applications of the Company's Composite
Cultured Skin, continue its efforts to secure FDA pre-market approval for
commercial sales and thereafter to produce and market its Composite Cultured
Skin in commercial quantities. See "Forward Looking Information May Prove
Inaccurate."
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements and information relating to the Company that are based on the beliefs
of Management, as well as assumptions made by and information currently
available to the Company. When used in this document, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions, as they relate to
the Company, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including those described in this Quarterly Report on Form 10-QSB. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
12
<PAGE> 15
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Class A Warrants.
As of November 1, 1997, the Company still had outstanding 902,525
publicly traded Class A Warrants (the "Class A Warrants"), each Class A Warrant
entitling the holder thereof to purchase one (1) share of Common Stock of the
Company at an exercise price of $10.00 per share. The Class A Warrants were
scheduled to expire, pursuant to their original terms, on July 19, 1997. On July
1, 1997 such expiration date was extended to November 3, 1997. Prior to November
1, 1997, 297,475 of the 1,200,000 outstanding Class A Warrants had already been
exercised.
On October 29, 1997, the Board of Directors of the Company extended the
term of the remaining 902,525 outstanding Class A Warrants a second time so that
the Class A Warrants will expire at 5:00 p.m., Eastern Standard Time, on
December 31, 1997. The Board took such action for the following reasons: (i)
communications concerning the expiration date of the Class A Warrants from
brokers to their customers did not make clear that the holders of the Class A
Warrants had the option to sell their warrants as well as exercise them or let
them expire; (ii) notices distributed to Class A Warrant holders warning of the
November 3, 1997 expiration date did not reach many of such holders; (iii) in
the opinion of the Board, turmoil in the stock markets shortly before the
November 3, 1997 expiration date prevented Class A Warrant holders from making
decisions to exercise their Class A Warrants that they would otherwise make in a
less turbulent market; and (iv) in the opinion of the Board, recent increased
interest in the Company in the financial community indicated a greater
probability that more Class A Warrants would be exercised as a result of this
short extension of the expiration date, thereby providing the Company with
additional capital.
Other then the extension of the expiration date, the directors did not
change the exercise price, the redemption provisions or any other provisions of
the Class A Warrants. The Board stated that there will not be any further
extensions of the expiration date of the Class A Warrants beyond December 31,
1997.
(c) Recent Sales of Unregistered Securities.
During the third quarter of 1997 the Company granted fifteen employees
and one non-employee director five year options under its Employee Stock Option
Plan to purchase an aggregate of 73,000 shares of Common Stock, at exercise
prices ranging from $9.25 to $10.00 per share. Such grants were in consideration
for services rendered to the Company.
13
<PAGE> 16
During the third quarter of 1997 the Company granted to one person and
its seven designees four year warrants to purchase an aggregate of 37,500 shares
of Common Stock, at an exercise price of $12.00 per share. Such warrants are not
exercisable until July 18, 1998 and were granted in consideration for consulting
services rendered to the Company.
During the third quarter of 1997 the Company granted to one person a
one year warrant to purchase an aggregate of 625 shares of Common Stock, at an
exercise price of $12.00 per share. Such warrants were granted in consideration
for consulting services rendered to the Company.
On January 20, 1996, the Company granted "lock-up warrants" to 63
persons, entitling them to purchase an aggregate of 389,045 shares of the
Company's Common Stock at a price of $1.00 per share. The issuance of such
lock-up warrants was in consideration for such 63 persons' signing lock-up
agreements agreeing not to sell or transfer shares of the Company's Common
Stock, purchased by them in private placements at prices of $9.00 or more per
share, until January 20, 1997. All such warrants expire on January 18, 2000. At
different times during the third quarter of 1997, eight persons exercised such
warrants and purchased an aggregate of 21,210 shares of Common Stock at the
$1.00 per share exercise price. There were no underwriting discounts or
commissions given or paid in connection with any of the foregoing warrant
exercises.
The grant, offer and sale of all of the securities listed above were
sold without registration under the Securities Act of 1933, as amended (the
"Act"), as they did not involve any public offering, pursuant to the provisions
of Section 4(2) of the Act.
(d) Use of Proceeds.
The Company's initial public offering of its securities (the "IPO") was
completed January 20, 1996. The Company realized net proceeds from its IPO,
after payment of all expenses with respect thereto, of $4,850,769. Such net
proceeds were used in the period from January 20, 1996 through the three-month
period ended September 30, 1997 as follows:
14
<PAGE> 17
<TABLE>
<CAPTION>
PAYMENTS TO
OFFICERS, DIRECTORS
10% SHAREHOLDERS AND PAYMENTS TO
APPLICATION OF PROCEEDS OTHER AFFILIATES OTHERS
----------------------- ---------------- ------
<S> <C> <C>
Research and development $ 101,615 $2,067,261
Human clinical trials 194,446 830,681
Repayment of indebtedness 241,500 274,000
Deferred compensation 113,385 --
Construction of new U.S. laboratory -- 356,340
Prosecution of patent registrations -- 56,009
Working capital and general
corporate purposes 163,830 451,702
---------- ----------
$4,035,993
$ 814,776 814,776
----------
Total $4,850,769
==========
</TABLE>
All of the net proceeds received by the Company from the IPO have now
been used.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Proxy Statement was mailed on or about August 4, 1997 to shareholders
of record of the Company as of July 28, 1997 in connection with the Company's
1997 Annual Meeting of Shareholders, which was held on September 8, 1997 at the
Audubon Biomedical Science and Technology Park, 3960 Broadway, New York, New
York. At the meeting, the shareholders voted on two matters and all of such
matters were approved.
The first matter was the election of the members of the Board of
Directors. The five directors elected and the tabulation of the votes (both in
person and by proxy) was as follows:
<TABLE>
<CAPTION>
NOMINEES FOR DIRECTORS FOR WITHHELD AGAINST
---------------------- --- -------- -------
<S> <C> <C> <C>
Steven Katz 2,988,606 1,550 0
Mark Eisenberg 2,988,606 1,550 0
Ron Lipstein 2,988,606 1,550 0
Alain Klapholz 2,988,606 1,550 0
Joseph Stechler 2,988,606 1,550 0
</TABLE>
15
<PAGE> 18
There were 0 broker held non-voted shares represented at the meeting
with respect to this matter.
The second matter upon which the shareholders voted was the proposal to
ratify the appointment by the Board of Directors of Grant Thornton LLP as
independent certified public accountants for the Company for 1997. The
tabulation of the votes (both in person and by proxy) was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
--- ------- -----------
<S> <C> <C>
2,990,156 950 14,330
</TABLE>
There were 0 broker held non-voted shares represented at the Meeting
with respect to this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibit No. Description
----------- -----------
<S> <C>
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)
27.1 Financial Data Schedule *
- ------------------------
</TABLE>
* Filed herewith.
(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.
(b) Reports on Form 8-K
On July 10, 1997, the Company filed a report on Form 8-K announcing the
extension of the term of the Class A Warrants. See Item 2 hereof, "Changes in
Securities." No other reports on Form 8-K were filed during the second quarter
of 1997.
16
<PAGE> 19
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.
Date: November 13, 1997 By: /s/ Steven Katz
----------------------------------
Steven Katz, PhD
President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 13, 1997 By: /s/ Ron Lipstein
----------------------------------
Ron Lipstein
Chief Financial Officer
(Principal Financial Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,504,094
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,516,161
<PP&E> 1,503,382
<DEPRECIATION> 533,297
<TOTAL-ASSETS> 5,916,613
<CURRENT-LIABILITIES> 571,279
<BONDS> 0
0
0
<COMMON> 4,673
<OTHER-SE> 4,873,003
<TOTAL-LIABILITY-AND-EQUITY> 5,916,613
<SALES> 0
<TOTAL-REVENUES> 221,603
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,192,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,970,575)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,970,575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,970,575)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> 0
</TABLE>
