<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
SEPTEMBER 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 November 1, 1999)
<PAGE> 2
ORTEC INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED SEPTEMBER 30, 1999
ITEMS IN FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Facing page
Part I
Item 1. Financial Statements. 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk None
Part II
Item 1. Legal Proceedings and Claims. None
Item 2. Changes in Securities and Use
of Proceeds. 19
Item 3. Default Upon Senior Securities. None
Item 4. Submission of Matters to
a Vote of Security Holders. 19
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. 21
Signatures 22
</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,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 5,812,909 $ 9,449,679
Marketable securities 2 765,660
Other current assets 229 1,662
----------- -----------
Total current assets 5,813,140 10,217,001
----------- -----------
Property and equipment, at cost:
Laboratory equipment 1,197,004 891,109
Office furniture and equipment 772,027 611,624
Leasehold improvements 1,224,406 1,199,407
----------- -----------
3,193,437 2,702,140
Accumulated depreciation and
Amortization 1,398,986 1,011,713
----------- -----------
Property and equipment - net 1,794,451 1,690,427
----------- -----------
Other assets:
Patent application costs net of
accumulated amortization of $96,601
at September 30, 1999 and $64,355 at
December 31, 1998 526,154 451,914
Deposits 33,680 31,697
----------- -----------
Total other assets 559,834 483,611
----------- -----------
Total Assets $ 8,167,425 $12,391,039
=========== ===========
</TABLE>
See notes to condensed unaudited financial statements.
1
<PAGE> 4
ORTEC INTERNATIONAL, INC.
(DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 1,040,676 $ 706,170
Capital lease obligations - current 8,259 30,341
Loans payable - current 118,557 111,589
------------ ------------
Total current liabilities 1,167,492 848,100
------------ ------------
Long-term liabilities:
Capital lease obligations - noncurrent 5,516
Loans payable - noncurrent 1,056,855 1,146,664
------------ ------------
Total long-term liabilities 1,056,855 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 September 30, 1999 and 6,182,220 shares issued, 6,175,620
outstanding at December 31, 1998 6,575 6,182
Additional paid-in capital 34,674,297 31,550,954
Deficit accumulated during the
development stage (28,613,688) (21,099,105)
Treasury stock, at cost (12,700 shares
at September 30, 1999 and 6,600 shares at
December 31, 1998) (124,106) (67,272)
------------ ------------
Total shareholders' equity 5,943,078 10,390,759
------------ ------------
Total Liabilities and
Shareholders' Equity $ 8,167,425 $ 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>
Nine months Cumulative from
Quarter ended September 30, ended September 30, March 12, 1991
--------------------------- ------------------- (inception) to
1999 1998 1999 1998 September 30, 1999
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Revenue
Interest income $ 90,981 $ 147,889 $ 309,073 $ 466,375 $ 1,411,439
------------ ------------ ------------ ------------ ------------
Expenses
Research and development 877,608 494,016 2,396,205 1,281,446 8,863,334
Rent 117,914 64,907 351,179 171,453 933,023
Consulting 176,150 338,226 589,279 575,604 2,730,078
Personnel 944,141 683,732 2,622,550 2,760,988 10,459,986
General and administrative 763,059 405,298 1,788,891 1,085,998 6,668,952
Interest and other expense 24,472 27,617 75,552 77,082 369,754
------------ ------------ ------------ ------------ ------------
2,903,344 2,013,796 7,823,656 5,952,571 30,025,127
------------ ------------ ------------ ------------ ------------
Net loss $ (2,812,363) $ (1,865,907) $ (7,514,583) $ (5,486,196) $(28,613,688)
============ ============ ============ ============ ============
Net loss per share $ (.43) $ (.32) $ (1.16) $ (.94) $ (8.12)
============ ============ ============ ============ ============
Weighted average common stock
outstanding (basic and diluted) 6,562,753 5,894,123 6,476,649 5,843,239 3,525,454
============ ============ ============ ============ ============
</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>
Common Stock Additional Deficit accumulated
Paid-in in the 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 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
========= =========== =========== ============ ===========
</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>
Common Stock Additional Deficit accumulated
Paid-in in the development Treasury
Shares Amount Capital stage Stock Total
------ ------ ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
(brought forward) 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
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
========= =========== =========== ============ ===========
</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>
Common Stock Additional Deficit accumulated
Paid-in in the development Treasury
Shares Amount Capital stage Stock Total
------ ------ ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
(brought forward) 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.
6
<PAGE> 9
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Deficit accumulated
Paid-in in the 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
========= =========== =========== ============ ========= ===========
</TABLE>
See notes to condensed unaudited financial statements.
7
<PAGE> 10
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Deficit accumulated
Paid-in in the development Treasury
Shares Amount Capital stage Stock Total
------ ------ ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
(brought forward) 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 76,176 76,176
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 (593,593) (593,593)
Purchase of treasury stock
(at cost) (56,834) (56,834)
Net loss for the nine months
ended September 30, 1999 (7,514,583) (7,514,583)
--------- ----------- ----------- ------------ --------- -----------
Balance - September 30, 1999 6,575,453 $ 6,575 $34,674,297 $(28,613,688) $(124,106) $ 5,943,078
========= =========== =========== ============ ========= ===========
</TABLE>
See notes to condensed unaudited financial statements.
8
<PAGE> 11
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
1999 1998 1999 1998 September 30, 1999
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,812,363) $ (1,865,907) $ (7,514,583) $ (5,486,196) $(28,613,688)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 146,582 109,364 419,519 311,079 1,505,824
Unrealized loss on marketable securities 11,404
Realized loss on marketable securities 5,250
Non cash stock compensation and interest 93,780 33,750 76,176 1,116,250 2,808,287
Purchases of marketable securities (3,686,128) (6,298) (17,481,750) (19,075,122)
Sales of marketable securities 4,499,000 771,956 10,121,000 19,130,920
Changes in operating assets and liabilities
Other current assets 2,995 130,130 1,433 4,118 (229)
Accounts payable and accrued
liabilities 85,959 318,888 334,506 152,823 1,128,503
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (2,483,047) (460,903) (5,917,291) (11,262,676) (23,098,851)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment,
excluding capital leases (212,308) (107,289) (491,297) (905,006) (3,106,371)
Payments for patent application (53,029) (40,295) (106,486) (56,382) (622,755)
Organization costs (10,238)
Deposits 2,138 282 (1,983) 20,102 (31,697)
Purchases of marketable securities (594,986)
Sales of marketable securities 522,532
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities (263,199) (147,302) (599,766) (941,286) (3,843,515)
------------ ------------ ------------ ------------ ------------
</TABLE>
See notes to condensed unaudited financial statements.
9
<PAGE> 12
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
1999 1998 1999 1998 September 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 $ 82,299 $ 3,409,153 $ 526,502 34,769,136
Share issuance expenses $ (5,000) (361,593) (20,000) (2,937,290)
Purchase of treasury stock (10,312) (56,834) (10,312) (124,106)
Proceeds from issuance of loans payable 600,000 1,425,850
Repayment of loans payable (28,173) (25,988) (82,841) (66,872) (279,370)
Repayment of capital lease obligations (4,977) (10,969) (27,598) (30,626) (98,945)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (38,150) 35,030 2,880,287 998,692 32,755,275
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (2,784,396) (573,175) (3,636,770) (11,205,270) 5,812,909
Cash and cash equivalents at
beginning of period 8,597,305 1,318,598 9,449,679 11,950,693
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at
end of period $ 5,812,909 $ 745,423 $ 5,812,909 $ 745,423 $ 5,812,909
============ ============ ============ ============ ============
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.
10
<PAGE> 13
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 1 - FINANCIAL STATEMENTS
The condensed balance sheet as of September 30, 1999 and the statements
of operations, shareholders' equity and cash flows for the three and nine month
periods ended September 30, 1999 and 1998 and for the period from March 12, 1991
(inception) to September 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 September 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 nine months ended September 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.
11
<PAGE> 14
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 persons suffering from
epidermolysis bullosa, erythema multiforme, Stevens-Johnson syndrome and toxic
epidermal necrolysis. 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") and/or
other similar foreign regulatory bodies to do so. Accordingly, the Company does
not expect to record significant product sales until it receives such approvals.
The Company has incurred a cumulative net loss of approximately $28.6 million as
of September 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.
12
<PAGE> 15
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, venous stasis ulcers and diabetic
ulcers. The Company has completed a clinical trial for the use of its product in
the treatment of chronic ulcers in patients with epidermolysis bullosa and
expects to file, during the fourth 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 patients suffering from
epidermolysis bullosa, erythema multiforme, Stevens-Johnson syndrome and toxic
epidermal necrolysis. The Company recently received FDA approval to proceed with
a multi-center pilot trial using a cryopreserved version of its product on human
donor site wounds. The Company is in the process of starting that clinical
trial.
Results of Operations
Three Months Ended September 30, 1999 and September 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 $57,000 from approximately $148,000 for the three months ended
September 30, 1998 to approximately $91,000 for the three months ended September
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 September 30, 1999 increased to
approximately $878,000 from approximately $494,000 for the three months ended
September 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, much of which is for research and
development, amounted to approximately $176,000 for the three months ended
September 30, 1999 as opposed to approximately $338,000 for the three months
ended September 30, 1998. The increase in research and development expenses
relates primarily to the costs associated with the increase in clinical trial
activity, cryopreservation research, for enhancement and other applications of
the Company's product and in connection with the preparation of filings with the
FDA of the Company's application for a humanitarian device exemption to permit
it to make commercial sales of its product for treatment of persons suffering
from epidermolysis bullosa, erythema multiforme, Stevens-Johnson syndrome and
toxic epidermal necrolysis. Future research and development expenses will most
likely continue to increase because of the continued expenses incurred in
clinical trials and the costs
13
<PAGE> 16
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 September 30, 1999 increased to
approximately $763,000 from approximately $405,000 for the three months ended
September 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
September 30, 1999 increased by approximately $260,000 from approximately
$684,000 for the three months ended September 30, 1998, because of an increase
in personnel. 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
September 30, 1999 increased to approximately $118,000 from approximately
$65,000 for the three months ended September 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.
Nine Months Ended September 30, 1999 and September 30, 1998
Revenues. Interest income decreased by approximately $157,000 from
approximately $466,000 for the nine months ended September 30, 1998 to
approximately $309,000 for the nine months ended September 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 nine months ended September 30, 1999 increased to approximately
$2.4 million from approximately $1.3 million for the nine months ended September
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 $351,000 for the nine months ended September
30, 1999 as opposed to approximately $171,000 for the nine months ended
September 30, 1998. The increase in research and
14
<PAGE> 17
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 and in connection
with the preparation of filings with the FDA of the Company's application for a
humanitarian device exemption to permit it to make commercial sales of its
product for treatment of persons suffering from epidermolysis bullosa, erythema
multiforme, Stevens-Johnson syndrome and toxic epidermal necrolysis.
General and Administrative. The Company's general and administrative
expenses for the nine months ended September 30, 1999 increased to approximately
$1.8 million from approximately $1.1 million for the nine months ended September
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 nine months ended
September 30, 1999 decreased by approximately $140,000 from approximately $2.8
million for the nine months ended September 30, 1998. The cash compensation paid
by the Company for personnel actually increased in the first nine months of 1999
compared to the first nine months of 1998, as a result of the increase in the
number of persons employed in the first nine months of 1999. However, non cash
compensation in the grant of warrants amounted to approximately $1.1 million in
the first nine months of 1998 compared to a negative figure resulting from a
reversal of compensation expense, of approximately $18,000, in the first nine
months of 1999, due to a remeasurement of the value of an outstanding option.
Rent. The Company's expenses for rent for the nine months ended
September 30, 1999 increased to approximately $351,000 from approximately
$171,000 for the nine months ended September 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.
15
<PAGE> 18
Liquidity and Capital Resources
Since inception (March 12, 1991) through September 30, 1999, the
Company has accumulated a deficit of approximately $28.6 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. From inception to
September 30, 1999 the Company had received proceeds from the sale of equity
securities, net of share issuance expenses, of approximately $34.7 million.
For the nine months ended September 30, 1999 the Company used net cash
for operating activities of approximately $5.9 million compared to approximately
$11.3 million for the comparable nine months in 1998. The decrease in cash used
in operating activities resulted primarily from (i) a net cash outlay in the
first nine months of 1998 of approximately $7.4 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 nine months ended September 30,
1999, (ii) a decrease of approximately $1.0 million attributable to non cash
expense consisting of grants of stock options and warrants ($1.1 million in the
first nine months of 1998 and $76,000 in the first nine months of 1999) (iii)
increases in accounts payable and accrued liabilities and depreciation and
amortization, and (iv) an increase of approximately $2.0 million in the net loss
in the first nine months of 1999 compared to the first nine months of 1998.
In the nine months ended September 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 nine months ended September 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 $491,000 in property,
plant and equipment during the nine months ended September 30, 1999 compared to
approximately $905,000 in the nine months ended September 30, 1998. Since
inception, the Company has spent approximately $3.1 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.
16
<PAGE> 19
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 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 September
30, 1999 (approximately $5.8 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. All of the Company's 50 stand-alone computers
are Year 2000 compliant.
17
<PAGE> 20
- Embedded Technology. The computer system that monitors the conditions
in the Company's two clean rooms where it produces its Composite Cultured Skin
is Year 2000 compliant. All of the other manufacturing and quality assurance
computer related systems the Company uses for direct support of its production
operations are also Year 2000 compliant, except for one computer which the
Company is modifying so that it will be Year 2000 compliant. 53% of the
laboratory instruments used for research and development have been certified as
Year 2000 compliant and no determination as to Year 2000 compliance has been
made as to the remaining laboratory equipment. The Company's instruments which
it uses for research and development are not critical because they are not
needed to produce and test the Company's Composite Cultured Skin. The Company
continues to work with the manufacturers of such equipment to determine if they
are Year 2000 compliant. Such equipment can continue to be used even if they are
not Year 2000 compliant. All the Company's administrative support systems
(telephone, facsimile transmission and copiers) are Year 2000 compliant.
- Contract Research Organizations, Suppliers and Hospitals. In response
to the Company's written inquiries, both of the contract research organizations
it employs, 43% of the vendors who supply it with goods and other services and
47% of the hospitals and clinics in which its clinical trials are being
conducted, have advised the Company that they are Year 2000 compliant. The
remaining suppliers and hospitals have not answered or have advised the Company
that they have not yet completed their assessment. In the worst case scenario,
some of the Company's suppliers might not be able to continue to supply it with
adequate amounts of materials and some of the hospitals at which the Company's
clinical trials are being conducted might not be able to continue to conduct
such clinical trials. While the Company has not developed contingency plans to
handle such Year 2000 problems if they occur, the Company intends to mitigate
the effects of third party failures to remediate their Year 2000 problems by
seeking alternative sources of supply and other hospitals or medical clinics to
conduct its clinical trials. Such change of suppliers or hospitals could result
in significant interruptions or delays in the conduct of the Company's clinical
trials.
18
<PAGE> 21
PART II
ITEM 2. CHANGES IN SECURITIES
(c) Recent Sales of Unregistered Securities.
During the third quarter of 1999 the Company granted to one employee a
seven year option under its Employee Stock Option Plan to purchase 10,000 shares
of Common Stock, at an exercise price of $10.4375 per share. Such grant was in
consideration for services rendered to the Company. The grant of such option was
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual Meeting of Shareholders was held on
August 3, 1999 at the Russ Berrie Medical and Science Pavilion, 1150 St.
Nicholas Avenue, New York, New York. At the meeting, the shareholders voted on
five matters and all of such matters were approved.
The first matter was the election of the members of the Board of
Directors. The six 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 5,032,815 7,990 8,966
Mark Eisenberg 4,866,679 7,990 175,102
Ron Lipstein 4,866,679 7,990 175,102
Alain Klapholz 4,866,679 7,990 175,102
Joseph Stechler 5,032,815 7,990 8,966
Steven Lillien 4,866,679 7,990 175,102
</TABLE>
19
<PAGE> 22
There were no broker held non-voted shares represented at the meeting
with respect to this matter. There was no other director whose term of office as
a director continued after the meeting.
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 1999. The
tabulation of the votes (both in person and by proxy) was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
--- ------- -----------
<S> <C> <C>
5,020,612 10,819 18,340
</TABLE>
There were 113,142 broker held non-voted shares represented at the
Meeting with respect to this matter.
The third matter upon which the shareholders voted was the proposal to
ratify Management's execution of a Placement Agreement with Roberts Mitani
Capital LLC ("Roberts Mitani"), engaging Roberts Mitani as the Company's
exclusive agent, with certain listed exceptions, for a period of not less than
one nor more than twelve months, for the private placement of the Company's
Common Stock and other equity securities in private placements at prices which
are below the then current market value of such Common Stock or other equity
securities, provided (a) such prices are not less than a price which is then
thirty (30%) percent below the then current market value of the Company's Common
Stock or other such equity securities and (b) no more than 1,900,000 shares of
the Company's Common Stock are issuable in all transactions entered into by the
Company pursuant to such Placement Agreement. The tabulation of the votes (both
in person and by proxy) was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
--- ------- -----------
<S> <C> <C>
2,226,192 18,790 19,820
</TABLE>
There were 2,898,111 broker held non-voted shares represented at the
meeting with respect to this matter.
The fourth matter upon which the shareholders voted was to authorize
the President or Secretary of the Company, subject to approval by the Company's
Board of Directors, to enter into a placement agreement with any other placement
agent for a period that will expire not later than one year after the adoption
of this resolution, for the sale of shares of the Company's Common Stock or
other equity securities in private placements at prices which are then below the
then current value of the Company's Common Stock or such other equity
securities, provided (a) such prices are not less than a price which is then
thirty (30%) percent below the then current market value of the Company's Common
Stock or such other
20
<PAGE> 23
equity securities and (b) no more than an aggregate of 1,900,000 shares of the
Company's Common Stock are issuable in all such transactions and in the
transactions through Roberts Mitani. The tabulation of the votes (both in person
and by proxy) was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
--- ------- -----------
<S> <C> <C>
2,193,276 43,550 27,976
</TABLE>
There were 2,898,111 broker held non-voted shares at the meeting with
respect to this matter.
The fifth matter upon which the shareholders voted was the proposal to
authorize the Company's Board of Directors to reduce the exercise price of the
Company's Class B Warrants from an exercise price of $15 per share to such lower
price as the Board of Directors determines to be in the best interests of the
Company, provided such reduced exercise price is no less than a price which is
thirty (30%) percent below the market value of the Company's Common Stock at the
time of such reduction. The tabulation of the votes (both in person and by
proxy) was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
--- ------- -----------
<S> <C> <C>
4,806,560 19,544 57,531
</TABLE>
There were 113,142 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.
21
<PAGE> 24
(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
No report on Form 8-K was filed by the Company in the third
quarter of 1999.
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 12, 1999 By: /s/ Steven Katz
-----------------------------------------------
Steven Katz, PhD
President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 By: /s/ Ron Lipstein
-----------------------------------------------
Ron Lipstein
Chief Financial Officer
(Principal Financial Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,812,909
<SECURITIES> 2
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,813,140
<PP&E> 3,193,437
<DEPRECIATION> 1,398,986
<TOTAL-ASSETS> 8,167,425
<CURRENT-LIABILITIES> 1,169,492
<BONDS> 0
0
0
<COMMON> 6,575
<OTHER-SE> 5,936,503
<TOTAL-LIABILITY-AND-EQUITY> 8,167,425
<SALES> 0
<TOTAL-REVENUES> 309,073
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,823,656
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,514,583)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,514,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,514,583)
<EPS-BASIC> (1.16)
<EPS-DILUTED> 0
</TABLE>
