<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
MARCH 31, 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 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 6,561,770 (as
of May 6, 1999)
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<PAGE> 2
ORTEC INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED MARCH 31, 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 10
Part II
Item 1. Legal Proceedings and Claims. None
Item 2. Changes in Securities and Use
of Proceeds. 16
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. 16
Signatures 17
</TABLE>
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,185,232 $ 9,449,679
Marketable securities 2 765,660
Other current assets 3,063 1,662
---------- ------------
Total current assets 11,188,297 10,217,001
---------- ------------
Property and equipment, at cost:
Laboratory equipment 926,985 891,109
Office furniture and equipment 674,678 611,624
Leasehold improvements 1,198,907 1,199,407
---------- ------------
2,800,570 2,702,140
Accumulated depreciation and
amortization 1,134,868 1,011,713
---------- ------------
1,665,702 1,690,427
---------- ------------
Other assets:
Patent application costs, net of
accumulated amortization of $74,329
at March 31, 1999 and $64,355 at
December 31, 1998 473,779 451,914
Deposits and other assets 33,270 31,697
---------- ------------
Total other assets 507,049 483,611
---------- ------------
Total Assets $13,361,048 $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>
MARCH 31, DECEMBER 31,
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 938,501 $ 706,170
Capital lease obligations - current 20,718 30,341
Loan payable - current 113,865 111,589
----------- -----------
Total current liabilities 1,073,084 848,100
----------- -----------
Long-term liabilities:
Capital lease obligations - noncurrent 1,645 5,516
Loan payable - noncurrent 1,117,330 1,146,664
----------- -----------
Total long-term liabilities 1,118,975 1,152,180
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value;
authorized, 25,000,000 shares;
6,573,470 shares issued, 6,561,970
shares outstanding, at
March 31, 1999 and 6,182,220 shares
issued, 6,175,620 shares outstanding,
at December 31, 1998 6,573 6,182
Additional paid-in capital 34,624,577 31,550,954
Deficit accumulated during the
development stage (23,347,584) (21,099,105)
Treasury stock, at cost (11,500 shares
at March 31, 1999 and 6,600 shares at
December 31, 1998) ( 114,577) ( 67,272)
----------- -----------
Total shareholders' equity 11,168,989 10,390,759
----------- -----------
Total Liabilities and
Shareholders' Equity $ 13,361,048 $ 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>
Cumulative
Quarter ended March 31, March 12, 1991
--------------------------- (inception) to
1999 1998 March 31, 1999
-------- -------- --------------
<S> <C> <C> <C>
Revenue
Interest income $ 111,894 $ 167,893 $ 1,214,260
----------- ----------- ------------
Expenses
Research and development 776,690 381,915 7,243,819
Rent 125,252 40,165 707,096
Consulting 180,266 105,763 2,321,065
Personnel 773,003 1,016,152 8,610,439
General and administrative 479,229 300,071 5,359,290
Interest and other expense 25,933 17,014 320,135
----------- ----------- ------------
2,360,373 1,861,080 24,561,844
----------- ----------- ------------
Net loss $(2,248,479) $(1,693,187) $(23,347,584)
----------- ----------- ------------
Net loss per share $(.36) $(.29) $(7.00)
----- ----- ------
Weighted average common
stock outstanding (basic
and diluted) 6,304,568 5,766,005 3,337,584
--------- --------- ---------
</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 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
Shares 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
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)
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 2,094 2 2,092 2,094
Stock options issued for
services (16,563) (16,563)
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 (548,593) (548,593)
Purchase of treasury stock
(at cost) (47,305) (47,305)
Net loss for the quarter ended
March 31, 1999 (2,248,479) (2,248,479)
---------- ------- ----------- ------------ -------- ----------
Balance - March 31, 1999 6,573,470 $6,573 $34,624,577 $(23,347,584) $(114,577) $11,168,989
---------- ------- ----------- ------------ -------- -----------
</TABLE>
See notes to condensed unaudited financial statements.
6
<PAGE> 9
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative from
Quarter ended March 31, March 12, 1991
------------------------- (inception) to
1999 1998 March 31, 1999
-------- -------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,248,479) $( 1,693,187) $(23,347,584)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 133,129 81,199 1,219,434
Unrealized loss on marketable
securities 11,404
Realized loss on marketable
securities 5,250
Non-cash stock compensation and
interest (16,563) 526,253 2,715,548
Purchases of marketable securities (6,298) (10,125,266) (19,075,122)
Sales of marketable securities 771,956 1,577,000 19,130,920
Changes in operating assets and
liabilities
Other current assets (1,401) 3,609 (3,063)
Accounts payable and accrued
liabilities 232,331 (77,144) 1,026,328
----------- ------------ ------------
Net cash used in operating activities (1,135,325) (9,707,536) (18,316,885)
----------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment,
excluding capital leases (98,430) (62,610) (2,713,504)
Payments for patent application (31,839) (2,542) (548,108)
Organization costs (10,238)
Deposits (1,573) (18,480) (31,287)
Purchases of marketable securities (594,986)
Sale of marketable securities 522,532
----------- ------------ ------------
Net cash used in investing activities (131,842) (83,632) (3,375,591)
=========== ============ ============
</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>
Cumulative from
Quarter ended March 31, March 12, 1991
------------------------- (inception) to
1999 1998 March 31, 1999
-------- -------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Proceeds from issuance of notes payable $ 515,500
Repayment of notes payable (515,500)
Proceeds from issuance of common stock $ 3,407,170 $ 42,093 34,767,153
Share issuance expenses (316,593) (2,892,290)
Purchase of treasury stock (47,305) (114,577)
Proceeds from issuance of loans payable 1,425,850
Repayment of loans payable (27,058) (5,105) (233,587)
Repayment of capital lease obligations (13,494) (9,226) (84,841)
----------- ----------- ------------
Net cash provided by financing
activities 3,002,720 27,762 32,877,708
----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents 1,735,553 (9,763,406) 11,185,232
Cash and cash equivalents at beginning
of period 9,449,679 11,950,693
----------- ----------- ------------
Cash and cash equivalents at end of
period $11,185,232 $ 2,187,287 $ 11,185,232
----------- ----------- ------------
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
MARCH 31, 1999 AND 1998
NOTE 1 - FINANCIAL STATEMENTS
The condensed balance sheet as of March 31, 1999 and the statements of
operations, shareholders' equity and cash flows for the three month periods
ended March 31, 1999 and 1998 and for the period from March 12, 1991 (inception)
to March 31, 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 March 31, 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 three months ended March 31, 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.
NOTE 3 - SALE OF SECURITIES
Effective March 26, 1999 the Company sold an aggregate of 389,156 shares
of its Common Stock to twenty accredited investors. Each investor also received
a three year warrant to purchase 20% of the number of shares of the Company's
Common Stock such investor purchased in such private placement. The prices at
which such warrants are exerciseable are $12.50 per share for one half, and
$14.50 per share for the other half, of the number of shares issuable upon the
exercise of such warrants. The shares and such 1/5 of a warrant were sold at a
price of $8.75 per unit. The Company received an aggregate of $3,405,076 gross
proceeds from the sale of such shares and warrants. Oscar Gruss & Son,
Incorporated ("Gruss") acted as placement agent in such private placement. For
its services as placement agent, the Company paid Gruss $272,406 (8% of the
gross proceeds), granted Gruss a five year warrant (valued at $232,000) to
purchase an aggregate of 38,915 shares of the Company's Common Stock at an
exercise price of $10.50 per share and agreed to pay legal expenses incurred by
Gruss in such private placement of up to a maximum of $40,000.
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.
10
<PAGE> 13
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 $23.3 million as of
March 31, 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 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, venous stasis ulcers and partial
thickness burns, and is proceeding to secure 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 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.
Results of Operations
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 $56,000 from approximately $168,000 for the three months ended
March 31, 1998 to approximately $112,000 for the three months ended March 31,
1999, because of smaller average cash and marketable securities balances in the
1999 quarter.
11
<PAGE> 14
Research and Development. The Company's research and development expenses
for the three months ended March 31, 1999 increased to $777,000 from $382,000
for the three months ended March 31, 1998, which amounts do not include
consulting expenses, a significant portion of which was paid for the Company's
research and development. Such consulting expenses for research and development
amounted to approximately $180,000 for the three months ended March 31, 1999 as
opposed to approximately $106,000 for the three months ended March 31, 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 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 March 31, 1999 increased to $479,000 from
$300,000 for the three months ended March 31, 1998. The increase in general and
administrative expenses is a result of the increased overhead costs resulting
from the increase in personnel and increased investor 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
March 31, 1999 decreased by approximately $243,000 from $1.0 million for the
three months ended March 31, 1998. The cash compensation paid by the Company for
personnel actually increased in the first quarter of 1999 compared to the first
quarter of 1998, as a result of the increase in the larger number of persons
employed in the first quarter of 1999. However, non cash compensation in the
grant of warrants amounted to $526,000 in the first quarter of 1998 compared to
a negative figure resulting from a reversal of compensation expense, of
approximately $17,000 in the first 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 March 31,
1999 increased to $125,000 from $40,000 for the three months ended March 31,
1998. The increase in rent expense is the result of the Company increasing the
amount of space
12
<PAGE> 15
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 March 31, 1999, the Company has
accumulated a deficit of approximately $23.3 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 March 31, 1999 the
Company had received proceeds from the sale of equity securities, net of share
issuance expenses, of approximately $31.9 million.
For the quarter ended March 31, 1999 the Company used net cash for
operating activities of approximately $1.1 million compared to approximately
$9.7 million for the comparable quarter in 1998. The decrease in cash used in
operating activities resulted primarily from (i) a net cash outlay in the first
quarter of 1998 of approximately $10.1 million which the Company used to
purchase marketable securities with cash it had on hand, as opposed to minus
$6,000 used for that purpose in the quarter ended March 31, 1999, (ii) a
decrease of approximately $543,000 attributable to non cash expense consisting
of grants of stock options and warrants ($526,000 in the first quarter of 1998
and minus $17,000 in the first quarter 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, (iv) a decrease in
proceeds received in the sale of marketable securities in the first quarter of
1999 compared to the first quarter of 1998 and (v) an increase of $555,000 in
the net loss in the first quarter of 1999 compared to the first quarter of 1998.
In the three months ended March 31, 1999 the Company realized cash
provided by its financing activities of approximately $3.0 million as compared
to cash provided by its financing activities of only $28,000 in the three months
ended March 31, 1998. The larger amount of cash received from financing
activities is accounted for by $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 $98,000 in property, plant
and equipment during the three months ended March 31, 1999 compared to
approximately $63,000 in the three months ended March 31, 1998. The increase is
directly related to costs incurred for the expansion of the Company's laboratory
and office space as well as the purchase of equipment for this space. Since
inception, the Company has spent $2.7 million for property, plant and equipment
excluding capital lease agreements. The capital lease agreements consist
primarily of laboratory equipment.
13
<PAGE> 16
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 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 on hand at March 31, 1999 (approximately
$11.2 million) will enable the Company to continue its operations another
approximately 15 months.
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
14
<PAGE> 17
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 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 is
awaiting the other service supplier's response. While the Company is in the
process of seeking 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.
15
<PAGE> 18
PART II
ITEM 2. CHANGES IN SECURITIES
(c) Recent Sales of Unregistered Securities.
Effective March 26, 1999 the Company sold an aggregate of 389,156 shares
of its Common Stock to twenty accredited investors. Each investor also received
a three year warrant to purchase 20% of the number of shares of the Company's
Common Stock such investor purchased in such private placement. The prices at
which such warrants are exerciseable are $12.50 per share for one half, and
$14.50 per share for the other half, of the number of shares issuable upon the
exercise of such warrants. The shares and such 1/5 of a warrant were sold at a
price of $8.75 per unit. The Company received an aggregate of $3,405,076 gross
proceeds from the sale of such shares and warrants. Oscar Gruss & Son,
Incorporated ("Gruss") acted as placement agent in such private placement. For
its services as placement agent, the Company paid Gruss $272,406 (8% of the
gross proceeds), granted Gruss a five year warrant to purchase an aggregate of
38,915 shares of the Company's Common Stock at an exercise price of $10.50 per
share and agreed to pay legal expenses incurred by Gruss in such private
placement of up to a maximum of $40,000. Such private placement offering was
exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Rule 506 of Regulation D.
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.
16
<PAGE> 19
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K in the three month period
ended March 31, 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: May 13, 1999 By: /s/ Steven Katz
-----------------------------------------------
Steven Katz, PhD
President and Chief
Executive Officer
(Principal Executive Officer)
Date: May 13 1999 By: /s/ Ron Lipstein
-----------------------------------------------
Ron Lipstein
Chief Financial Officer
(Principal Financial Officer)
17
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,185,232
<SECURITIES> 2
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<PP&E> 2,800,570
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<COMMON> 6,573
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<SALES> 0
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