<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
-------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
JUNE 30, 1999
[ ] 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 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 6,562,753 (as
of August 5, 1999)
<PAGE> 2
ORTEC INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED JUNE 30, 1999
ITEMS IN FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Facing page
Part I
Item 1. Financial Statements. 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 10
Item 3. Quantitative and Qualitative Disclosures About None
Market Risk
Part II
Item 1. Legal Proceedings and Claims. None
Item 2. Changes in Securities and Use
of Proceeds. 17
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. 17
Signatures 18
</TABLE>
<PAGE> 3
PART I
Item 1. FINANCIAL STATEMENTS
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 8,597,305 $ 9,449,679
Marketable securities 2 765,660
Other current assets 3,224 1,662
----------- -----------
Total current assets 8,600,531 10,217,001
----------- -----------
Property and equipment, at cost:
Laboratory equipment 1,030,077 891,109
Office furniture and equipment 733,713 611,624
Leasehold improvements 1,217,339 1,199,407
----------- -----------
2,981,129 2,702,140
Accumulated depreciation and
amortization 1,264,137 1,011,713
----------- -----------
1,716,992 1,690,427
----------- -----------
Other assets:
Patent application costs net of
accumulated amortization of $84,868
at June 30, 1999 and $64,355 at
December 31, 1998 484,858 451,914
Deposits 35,818 31,697
----------- -----------
Total other assets 520,676 483,611
----------- -----------
Total Assets $10,838,199 $12,391,039
----------- -----------
</TABLE>
See notes to condensed unaudited financial statements.
1
<PAGE> 4
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 954,717 $ 706,170
Capital lease obligations - current 13,236 30,341
Loans payable - current 116,187 111,589
------------ ------------
Total current liabilities 1,084,140 848,100
------------ ------------
Long-term liabilities:
Capital lease obligations - noncurrent 5,516
Loans payable - noncurrent 1,087,398 1,146,664
------------ ------------
Total long-term liabilities 1,087,398 1,152,180
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value;
authorized, 25,000,000 shares;
6,575,453 shares issued,
6,562,753 shares outstanding,
at June 30, 1999 and 6,182,220
shares issued, 6,175,620
outstanding at December 31, 1998 6,575 6,182
Additional paid-in capital 34,585,517 31,550,954
Deficit accumulated during the
development stage (25,801,325) (21,099,105)
Treasury stock, at cost (12,700 shares
at June 30, 1999 and 6,600 shares at
December 31, 1998) (124,106) (67,272)
------------ ------------
Total shareholders' equity 8,666,661 10,390,759
------------ ------------
Total Liabilities and
Shareholders' Equity $ 10,838,199 $ 12,391,039
------------ ------------
</TABLE>
See notes to condensed unaudited financial statements.
2
<PAGE> 5
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months Cumulative from
Quarter ended June 30, ended June 30, March 12, 1991
(inception) to
1999 1998 1999 1998 June 30, 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue
Interest income $ 106,198 $ 150,593 $ 218,092 $ 318,486 $ 1,320,458
------------ ------------ ------------ ------------ ------------
Expenses
Research and development 741,907 405,515 1,518,597 787,430 7,985,726
Rent 108,013 66,381 233,265 106,546 815,109
Consulting 232,863 131,615 413,129 237,378 2,553,928
Personnel 905,406 1,061,104 1,678,409 2,077,256 9,515,845
General and administrative 546,603 380,629 1,025,832 680,700 5,905,893
Interest and other expense 25,147 32,451 51,080 49,465 345,282
------------ ------------ ------------ ------------ ------------
2,559,939 2,077,695 4,920,312 3,938,775 27,121,783
------------ ------------ ------------ ------------ ------------
Net loss $ (2,453,741) $ (1,927,102) $ (4,702,220) $ (3,620,289) $(25,801,325)
------------ ------------ ------------ ------------ ------------
Net loss per share $ (.37) $ (.33) $ (.73) $ (.62) $ (7.51)
------------ ------------ ------------ ------------ ------------
Weighted average common stock
outstanding (basic and diluted) 6,562,625 5,869,588 6,433,597 5,817,797 3,434,335
------------ ------------ ------------ ------------ ------------
</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
accumulated
Common Stock Additional in the
Paid-in development Treasury
Shares Amount Capital stage Stock Total
--------- ------ ------------ ------------ ---------- ------------
<S> <C> <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 5 499,947 500,000
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
accumulated
Common Stock Additional in the
Paid-in development Treasury
Shares Amount Capital stage Stock Total
--------- ------ ------------ ------------ ---------- ------------
<S> <C> <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)
Non-cash stock compensation
and interest 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
accumulated
Common Stock Additional in the
Paid-in development Treasury
Shares Amount Capital stage Stock Total
--------- ------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
(brought forward) 4,601,963 $4,602 $ 15,573,183 $( 7,860,787) $ 7,716,998
Exercise of warrants 1,158,771 1,159 10,821,632 10,822,791
Share issuance costs ( 657,508) ( 657,508)
Stock options and warrants
issued for services 660,000 660,000
Net loss for the year ended
December 31, 1997 ( 4,825,663) ( 4,825,663)
--------- ------ ------------ ------------ ------------
Balance - December 31, 1997 5,760,734 5,761 26,397,307 (12,686,450) 13,716,618
Exercise of warrants 221,486 221 1,281,736 1,281,957
Stock options and warrants
issued for services 1,920,111 1,920,111
Sixth private placement 200,000 200 1,788,498 1,788,698
Warrants issued in Sixth
private placement 211,302 211,302
Share issuance costs ( 48,000) ( 48,000)
Purchase of treasury stock
(at cost) $( 67,272) ( 67,272)
Net loss for the year ended
December 31, 1998 ( 8,412,655) ( 8,412,655)
--------- ------ ------------ ------------ --------- ------------
Balance - December 31, 1998 6,182,220 6,182 31,550,954 (21,099,105) ( 67,272) 10,390,759
Exercise of warrants 4,077 4 4,073 4,077
Stock options issued for
services ( 17,604) ( 17,604)
Seventh private placement 389,156 389 3,400,396 3,400,785
Warrants issued in Seventh
private placement 236,291 236,291
Share issuance costs ( 588,593) ( 588,593)
Purchase of treasury stock
(at cost) ( 56,834) ( 56,834)
Net loss for the six months
ended June 30, 1999 ( 4,702,220) ( 4,702,220)
--------- ------ ------------ ------------ --------- ------------
Balance - June 30, 1999 6,575,453 $6,575 $ 34,585,517 $(25,801,325) $(124,106) $ 8,666,661
--------- ------ ------------ ------------ --------- ------------
</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>
Six months Cumulative from
Quarter ended June 30, ended June 30, March 12, 1991
(inception) to
1999 1998 1999 1998 June 30, 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,453,741) $ (1,927,102) $ (4,702,220) $ (3,620,289) $(25,801,325)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 139,808 120,516 272,937 201,715 1,359,242
Unrealized loss on marketable
securities 11,404
Realized loss on marketable
securities 5,250
Non cash stock compensation and
interest (1,041) 556,247 (17,604) 1,082,500 2,714,507
Purchases of marketable
securities (3,670,356) (6,298) (13,795,622) (19,075,122)
Sales of marketable securities 4,045,000 771,956 5,622,000 19,130,920
Changes in operating assets and
liabilities
Other current assets (161) (129,621) (1,562) (126,012) (3,224)
Accounts payable and accrued
liabilities 16,216 (88,921) 248,547 (166,065) 1,042,544
------------ ------------ ------------ ------------ ------------
Net cash used in operating
activities (2,298,919) (1,094,237) (3,434,244) (10,801,773) (20,615,804)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment,
excluding capital leases (180,559) (735,107) (278,989) (797,717) (2,894,063)
Payments for patent application (21,618) (13,545) (53,457) (16,087) (569,726)
Organization costs (10,238)
Deposits (2,548) 38,300 (4,121) 19,820 (33,835)
Purchases of marketable securities (594,986)
Sales of marketable securities 522,532
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities (204,725) (710,352) (336,567) (793,984) (3,580,316)
------------ ------------ ------------ ------------ ------------
</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>
Six months Cumulative from
Quarter ended June 30, ended June 30, March 12, 1991
(inception) to
1999 1998 1999 1998 June 30, 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of notes
payable $ 515,500
Repayment of notes payable (515,500)
Proceeds from issuance of common
stock $ 1,983 $ 402,110 $ 3,409,153 $ 444,203 34,769,136
Share issuance expenses (40,000) (20,000) (356,593) (20,000) (2,932,290)
Purchase of treasury stock (9,529) (56,834) (124,106)
Proceeds from issuance of loans
payable 600,000 600,000 1,425,850
Repayment of loans payable (27,610) (35,779) (54,668) (40,884) (251,197)
Repayment of capital lease
obligations (9,127) (10,431) (22,621) (19,657) (93,968)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (84,283) 935,900 2,918,437 963,662 32,793,425
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (2,587,927) (868,689) (852,374) (10,632,095) 8,597,305
Cash and cash equivalents at
beginning of period 11,185,232 2,187,287 9,449,679 11,950,693
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at
end of period $ 8,597,305 $ 1,318,598 $ 8,597,305 $ 1,318,598 $ 8,597,305
------------ ------------ ------------ ------------ ------------
Supplemental disclosure of cash
flow information:
Non-cash financing activities
Share issuance expenses - warrants $ 232,000 $ 232,000
------------ ------------
</TABLE>
See notes to condensed unaudited financial statements.
8
<PAGE> 11
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 1 - FINANCIAL STATEMENTS
The condensed balance sheet as of June 30, 1999 and the statements of
operations, shareholders' equity and cash flows for the three and six month
periods ended June 30, 1999 and 1998 and for the period from March 12, 1991
(inception) to June 30, 1999 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 June 30, 1999 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, 1998 annual report on Form 10-K
filed with the Securities and Exchange Commission. The results of operations for
the six months ended June 30, 1999 is 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 had granted Ortec a license for a term of
ten years, with automatic renewals by Ortec for two additional ten-year periods,
to commercially use and exploit the Technology for the development of products.
In April, 1998, Dr. Eisenberg assigned his patent for the Technology to Ortec.
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 Company's Composite Cultured Skin to be used in skin
replacement procedures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
This Quarterly Report on Form 10-Q 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 discussion and elsewhere in this Quarterly
Report on Form 10-Q. 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.
General
Since its inception the Company has been principally engaged in the
research and development of its skin regeneration product for use in the
treatment of chronic and acute wounds, such as venous and diabetic skin ulcers,
burns, donor site wounds and chronic skin ulcers in Epidermolysis Bullosa ("EB")
patients. The Company has not had any revenues from operations since its
founding in 1991 since the Company cannot make any sales of its product until it
receives approval from the Food and Drug Administration ("FDA") to do so. The
Company has incurred a cumulative net loss of approximately $25.8 million as of
June 30, 1999. The Company expects to continue to incur substantial and
increasing losses for the next several years due to continued and increased
spending on research and development programs, the funding of preclinical and
clinical testing and trials and regulatory activities and the costs of
manufacturing, marketing, sales, distribution and administrative activities.
The Company's revenues consist only of interest income. To date, the
Company has received no revenue from the sale of its product, and the Company is
not permitted to engage in commercial sales of its product until such time, if
ever, as the Company receives
10
<PAGE> 13
requisite FDA and/or other foreign regulatory approvals. As a result, the
Company does not expect to record significant product sales until such approvals
are received.
The Company anticipates that future revenues and results of operations
may continue to fluctuate significantly depending on, among other factors, the
timing and outcome of applications for regulatory approvals, the Company's
ability to successfully manufacture, market and distribute its product and/or
the establishment of collaborative arrangements for the manufacturing, marketing
and distribution of its product. The Company anticipates its operating
activities will result in substantial net losses for several years more.
The Company is currently conducting clinical trials of its product in
the treatment of autograft donor site wounds and venous stasis ulcers, and
expects to file, during the third quarter of 1999, an application for FDA
approval to conduct a clinical trial to use its product in the treatment of
diabetic ulcers. The Company has completed a clinical trial for the use of its
product in the treatment of chronic ulcers in patients with EB and expects to
file, during the third quarter of 1999, an application with the FDA for a
Humanitarian Device Exemption which, if approved, will allow commercial sales of
the Company's product for the treatment of EB patients. The Company recently
filed an application with the FDA for approval to proceed with a multi-center
pivotal trial using a cryopreserved version of the Company's product on human
donor site wounds. If the application is approved by the FDA the Company expects
to begin the clinical trial during the third quarter of 1999.
Results of Operations
Three Months Ended June 30, 1999 and June 30, 1998
Revenues. The Company has had no revenues from operations other than
interest income from its inception in 1991 to date. Interest income decreased by
approximately $44,000 from approximately $150,000 for the three months ended
June 30, 1998 to approximately $106,000 for the three months ended June 30,
1999, because of smaller average cash and marketable securities balances in the
1999 quarter resulting from cash used by the Company in its operations.
Research and Development. The Company's research and development
expenses for the three months ended June 30, 1999 increased to approximately
$742,000 from approximately $405,000 for the three months ended June 30, 1998,
which amounts do not include consulting expenses, a significant portion of which
was also paid for the Company's research and development. The consulting
expenses, substantially all of which is for research and development, amounted
to approximately $233,000 for the three months ended June 30, 1999 as opposed to
approximately $132,000 for the three months ended June 30, 1998. The increase in
research and development expenses relates primarily to the costs associated with
the increase in clinical trial activity, cryopreservation research and for
enhancement and other applications of the Company's product. In addition,
research and development expenses continue to increase in conjunction with the
Company's progression
11
<PAGE> 14
through the various stages of preclinical and clinical trials and the increased
costs associated with the purchase of raw materials and supplies for the
production of the Company's product used in those trials. Future research and
development expenses may increase depending on the continued expenses incurred
in clinical trials and the costs associated with the Company's manufacturing
scale-up and the expansion of its research and development programs, which
includes the increased hiring of personnel and continued expansion of
preclinical and clinical testing.
General and Administrative. The Company's general and administrative
expenses for the three months ended June 30, 1999 increased to approximately
$547,000 from approximately $381,000 for the three months ended June 30, 1998.
The increase in general and administrative expenses is a result of the increased
overhead costs resulting from the increase in personnel, professional fees,
depreciation, filing fees and investor and public relations expenses. Future
general and administrative expenses may increase as additional personnel are
employed, there are increases in corporate development, use of professional
services, compensation expense associated with stock options, use of financial
consultants and other general corporate matters.
Personnel. The Company's personnel expenses for the three months ended
June 30, 1999 decreased by approximately $156,000 from $1.1 million for the
three months ended June 30, 1998. The cash compensation paid by the Company for
personnel actually increased in the second quarter of 1999 compared to the
second quarter of 1998, as a result of the increase in the number of persons
employed in the second quarter of 1999. However, non cash compensation in the
grant of warrants amounted to approximately $556,000 in the second quarter of
1998 compared to a negative figure resulting from a reversal of compensation
expense, of approximately $1,000 in the second quarter of 1999, due to a
remeasurement of the value of an outstanding option. Future personnel costs are
expected to increase since the Company intends to expand its clinical trial
program for the use of its product in treating different medical indications,
possible increase in its other research and development activities, compensation
expense associated with the grant of stock options and for corporate
administrative personnel.
Rent. The Company's expenses for rent for the three months ended June
30, 1999 increased to approximately $108,000 from approximately $66,000 for the
three months ended June 30, 1998. The increase in rent expense is the result of
the Company increasing the amount of space occupied by it at Columbia
University's Audubon Biomedical Science and Technology Park in New York City for
additional laboratories built for the Company's research and development, and to
accommodate the additional personnel employed by the Company in 1999.
Six Months Ended June 30, 1999 and June 30, 1998
Revenues. Interest income decreased by approximately $100,000 from
approximately $318,000 for the six months ended June 30, 1998 to approximately
$218,000 for the six
12
<PAGE> 15
months ended June 30, 1999, because of smaller average cash and marketable
securities balances in the 1999 period.
Research and Development. The Company's research and development
expenses for the six months ended June 30, 1999 increased to $1.5 million from
$0.8 million for the six months ended June 30, 1998, which amounts do not
include consulting expenses, substantially all of which was also paid for the
Company's research and development. Such consulting expenses amounted to
approximately $413,000 for the six months ended June 30, 1999 as opposed to
approximately $237,000 for the six months ended June 30, 1998. The increase in
research and development expenses relates primarily to the costs associated with
the increase in clinical trial activity, cryopreservation research and for
enhancement and other applications of the Company's product.
General and Administrative. The Company's general and administrative
expenses for the six months ended June 30, 1999 increased to $1.0 million from
$0.7 million for the six months ended June 30, 1998. The increase in general and
administrative expenses is a result of the increased overhead costs resulting
from the increase in personnel, professional fees, depreciation, filing fees and
investor and public relations expenses.
Personnel. The Company's personnel expenses for the six months ended
June 30, 1999 decreased by approximately $400,000 from $2.1 million for the six
months ended June 30, 1998. The cash compensation paid by the Company for
personnel actually increased in the first half of 1999 compared to the first
half of 1998, as a result of the increase in the number of persons employed in
the first half of 1999. However, non cash compensation in the grant of warrants
amounted to $1.1 million in the first half of 1998 compared to a negative figure
resulting from a reversal of compensation expense, of approximately $18,000 in
the first half of 1999, due to a remeasurement of the value of an outstanding
option.
Rent. The Company's expenses for rent for the six months ended June 30,
1999 increased to approximately $233,000 from approximately $107,000 for the six
months ended June 30, 1998. The increase in rent expense is the result of the
Company increasing the amount of space occupied by it at Columbia University's
Audubon Biomedical Science and Technology Park in New York City for additional
laboratories built for the Company's research and development, and to
accommodate the additional personnel employed by the Company in 1999.
Liquidity and Capital Resources
Since inception (March 12, 1991) through June 30, 1999, the Company has
accumulated a deficit of approximately $25.8 million and expects to continue to
incur substantial and increasing operating losses for the next several years.
The Company has financed its operations primarily through private placements of
its Common Stock, its initial public offering and the exercise of its publicly
traded Class A warrants at the end of 1997.
13
<PAGE> 16
From inception to June 30, 1999 the Company had received proceeds from the sale
of equity securities, net of share issuance expenses, of approximately $34.6
million.
For the first half ended June 30, 1999 the Company used net cash for
operating activities of approximately $3.4 million compared to approximately
$10.8 million for the comparable half in 1998. The decrease in cash used in
operating activities resulted primarily from (i) a net cash outlay in the first
half of 1998 of approximately $8.2 million which the Company used to purchase
marketable securities with cash it had on hand, as opposed to net sales of
approximately $766,000 in the first half ended June 30, 1999, (ii) a decrease of
approximately $1.1 million attributable to non cash expense consisting of grants
of stock options and warrants ($1.1 million in the first half of 1998 and minus
$17,600 in the first half of 1999 for the reasons set forth in the discussion of
personnel expenses above), (iii) increases in accounts payable and accrued
liabilities and depreciation and amortization, and (iv) an increase of
approximately $1.1 million in the net loss in the first half of 1999 compared to
the first half of 1998.
In the six months ended June 30, 1999 the Company realized cash
provided by its financing activities of approximately $2.9 million as compared
to cash provided by its financing activities of approximately $1.0 million in
the six months ended June 30, 1998. The larger amount of cash received from
financing activities is primarily accounted for by approximately $3.1 million of
net proceeds received by the Company from issuance of its Common Stock in 1999.
The Company invested a total of approximately $279,000 in property,
plant and equipment during the six months ended June 30, 1999 compared to
approximately $798,000 in the six months ended June 30, 1998. Since inception,
the Company has spent $2.9 million for property, plant and equipment excluding
capital lease agreements. The capital lease agreements consist primarily of
laboratory equipment.
The Company's capital funding requirements will depend on numerous
factors, including the progress and magnitude of the Company's research and
development programs and preclinical testing and clinical trials, the time
involved in obtaining regulatory approvals, the cost involved in filing and
maintaining patent claims, technological advances, competitor and market
conditions, the ability of the Company to establish and maintain collaborative
arrangements, the cost of manufacturing scale-up and the cost and effectiveness
of commercialization activities and arrangements.
The Company is likely to require substantial funding to continue its
research and development activities, preclinical testing and clinical trials and
manufacturing scale up, marketing, sales, distribution, and administrative
activities. The Company has raised funds in the past through the public or
private sale of securities, and may raise funds in the future through public or
private financings, collaborative arrangements or from other sources. The
success of such efforts will depend in large part upon continuing developments
in the Company's clinical trials. The Company continues to explore and, as
appropriate, enter into
14
<PAGE> 17
discussions with other companies regarding the potential for equity investment,
collaborative arrangements, license agreements or development or other funding
programs with the Company in exchange for manufacturing, marketing, distribution
or other rights to the Company's product. However, there can be no assurance
that discussions with other companies will result in any investments,
collaborative arrangements, agreements or funding, or that the necessary
additional financing through debt or equity financing will be available to the
Company on acceptable terms, if at all. Further, there can be no assurance that
any arrangements resulting from these discussions will successfully reduce the
Company's funding requirements. If additional funding is not available to the
Company when needed, the Company will be required to scale back its research and
development programs, preclinical testing and clinical trials and administrative
activities and the Company's business and financial results and condition would
be materially adversely affected. At its current rate of spending the Company's
cash and cash equivalents on hand at June 30, 1999 (approximately $8.6 million)
will enable the Company to continue its operations through March of 2000.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Failure of a
computer program to recognize a date using "00" as 2000 instead of 1900 could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to operate equipment,
process accounting, payroll, database, network, and software transactions,
possible disruption of environmental, lighting, and security controls, possible
disruption of copier and fax capabilities, and loss of telephone voicemail
messages, in addition to other similar normal business activities.
The Company has utilized both internal and external resources to assess
whether it needs any Year 2000 remediation for its information technology or its
embedded technology and to ascertain whether its suppliers of goods and services
and the hospitals at which the clinical trials of its Composite Cultured Skin
are conducted, are Year 2000 compliant. The Company does not anticipate any Year
2000 problem significantly affecting its operations.
-Information Technology. The Company has been advised by computer
consultants that its 50 stand alone computers are Year 2000 compliant. The
Company is in the process of installing a local area network, which the Company
expects will cost $125,000, to connect its stand alone computers, standardize
its software, facilitate communications and improve their file back-up system.
-Embedded Technology. The computer driven system which monitors the
conditions in the Company's two clean rooms where it produces, and the
laboratory instruments used for quality assurance testing of, its Composite
Cultured Skin, are all Year 2000 compliant. Other instruments which are used for
research and development, and therefore are not critical in that they are not
needed to produce and test Ortec's Composite Cultured Skin, can be used
15
<PAGE> 18
even if they are not Year 2000 compliant. They are being reviewed to determine
if they are Year 2000 compliant. The Company's administrative support systems
(telephone, facsimile transmission and copier) are Year 2000 compliant.
-Suppliers. The Company is in the process of requesting its suppliers
of materials and services to advise it as to whether they are Year 2000
compliant. The supplier of one of two services critical to the conduct of the
human clinical trials in which the Company's Composite Cultured Skin is being
tested has advised the Company that it is Year 2000 compliant and the Company
has been advised that the other supplier's response should be received by the
end of September, 1999. The Company continues to seek written confirmation from
the vendors from whom it purchases the collagen and the media culture used in
the production of its Composite Cultured Skin. Any negative response will not
affect the Company's ability to produce its Composite Cultured Skin because
there are other suppliers of such materials selling them at comparable cost.
-Hospitals. While the Company does not anticipate that patient
treatment will be affected at hospitals because of Year 2000 problems, the
Company has been advised by one hospital which is conducting, and which the
Company anticipates will in the future conduct, an important number of the
clinical trials of the Company's Composite Cultured Skin, that such hospital is
in the process of insuring that its equipment is Year 2000 compliant. There are
a large number of hospitals and clinics in the United States at which such
clinical trials can be conducted.
The Company expects to substantially complete its Year 2000 assessment
by September 30, 1999.
16
<PAGE> 19
PART II
ITEM 2. CHANGES IN SECURITIES
(c) Recent Sales of Unregistered Securities.
During the second quarter of 1999 the Company granted to four employees
and one non-employee consultant five to seven year options under its Employee
Stock Option Plan to purchase an aggregate of 8,500 shares of Common Stock, at
an exercise price of $9.00 per share. Such grants were in consideration for
services rendered to the Company. The grant of such options were exempt from the
registration requirements of the Securities Act of 1933, as amended (the "Act"),
pursuant to the provisions of Section 4(2) of the Act, as not involving any
public offering.
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
One report on Form 8-K was filed by the Company in the second
quarter of 1999 reporting the action taken by the Company's Board of Directors
extending the expiration date of the Company's publicly traded Class B Warrants
from May 28, 1999 to November 30, 1999. No financial statements were included in
that report.
17
<PAGE> 20
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: August 6, 1999 By: /s/ Steven Katz
---------------------------------
Steven Katz, PhD
President and Chief
Executive Officer
(Principal Executive Officer)
Date: August 6, 1999 By: /s/ Ron Lipstein
---------------------------------
Ron Lipstein
Chief Financial Officer
(Principal Financial Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,597,305
<SECURITIES> 2
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,600,531
<PP&E> 2,981,129
<DEPRECIATION> 1,264,137
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0
0
<COMMON> 6,575
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<TOTAL-LIABILITY-AND-EQUITY> 10,838,199
<SALES> 0
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<CGS> 0
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