<PAGE>
================================================================================
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, 2000
[ ] 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)
<TABLE>
<S> <C>
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)
</TABLE>
(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 9,677,283 (as
of November 7, 2000)
================================================================================
<PAGE>
ORTEC INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED SEPTEMBER 30, 2000
ITEMS IN FORM 10-Q
<TABLE>
<CAPTION>
Page
----
Facing page
<S> <C> <C>
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. 16
Item 3. Default Upon Senior Securities. None
Item 4. Submission of Matters to
a Vote of Security Holders. 16
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. 18
Signatures 18
</TABLE>
<PAGE>
PART I
Item 1. FINANCIAL STATEMENTS
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 13,097,056 $ 12,604,027
Prepaid expenses 90,826
Other current assets 2,397 1,701
----------- ------------
Total current assets 13,190,279 12,605,728
----------- ------------
Property and equipment, at cost:
Laboratory equipment 1,651,760 1,345,367
Office furniture and equipment 845,144 778,364
Leasehold improvements 1,321,284 1,283,686
------------ ------------
3,818,188 3,407,417
Accumulated depreciation and
amortization 2,052,549 1,566,002
------------ ------------
Property and equipment - net 1,765,639 1,841,415
------------ ------------
Other assets:
Patent application costs net of
accumulated amortization of $146,485
at September 30, 2000 and $107,594 at
December 31, 1999 541,474 533,592
Deposits 35,505 30,910
------------ ------------
Total other assets 576,979 564,502
------------ ------------
Total Assets $ 15,532,897 $ 15,011,645
============ ============
</TABLE>
See notes to condensed unaudited financial statements.
1
<PAGE>
ORTEC INTERNATIONAL, INC.
(DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
liabilities $ 1,828,880 $ 1,468,820
Capital lease obligations - current 5,151
Loans payable - current 129,722 122,097
------------ ------------
Total current liabilities 1,958,602 1,596,068
------------ ------------
Long-term liabilities:
Loans payable - noncurrent 946,590 1,044,857
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value;
authorized, 25,000,000 shares;
9,711,608 shares issued, 9,691,608
shares outstanding, at September 30, 2000
and 8,221,843 shares issued, 8,206,143
outstanding at December 31, 1999 9,712 8,222
Additional paid-in capital 52,805,829 43,644,902
Deficit accumulated during the
development stage (40,010,191) (31,139,614)
Treasury stock, at cost (20,000 shares
at September 30, 2000 and 15,700 shares at
December 31, 1999) (177,645) (142,790)
------------ ------------
Total shareholders' equity 12,627,705 12,370,720
------------ ------------
Total Liabilities and
Shareholders' Equity $ 15,532,897 $ 15,011,645
============ ============
</TABLE>
See notes to condensed unaudited financial statements.
2
<PAGE>
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months
Quarter ended September 30, ended September Cumulative from
--------------------------- --------------- March 12, 1991
(inception) to
2000 1999 2000 1999 September 30, 2000
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Revenue
Interest income $ 103,810 $ 90,981 $ 407,605 $ 309,073 $ 1,878,682
----------- ----------- ----------- ----------- -------------
Expenses
Research and development 1,249,911 877,608 3,043,908 2,396,205 12,617,945
Rent 138,600 117,914 396,417 351,179 1,451,271
Consulting 236,761 176,150 659,377 589,279 3,634,356
Personnel 1,230,195 944,141 3,405,313 2,622,550 14,985,381
General and administrative 634,312 763,059 1,704,916 1,788,891 8,737,945
Interest and other expense 22,128 24,472 68,251 75,552 461,975
----------- ----------- ----------- ----------- -------------
3,511,907 2,903,344 9,278,182 7,823,656 41,888,873
----------- ----------- ----------- ----------- -------------
Net loss $(3,408,097) $(2,812,363) $(8,870,577) $(7,514,583) $(40,010,191)
=========== =========== =========== =========== =============
Net loss per share $(.38) $(.43) $(1.02) $(1.16) $(9.97)
===== ===== ====== ====== ======
Weighted average common stock
outstanding (basic and diluted) 8,860,231 6,562,753 8,732,524 6,476,649 4,013,419
========= ========= ========= ========= =========
</TABLE>
See notes to condensed unaudited financial statements.
3
<PAGE>
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>
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>
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>
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>
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 14,103 14 14,089 14,103
Stock options issued for services 64,715 64,715
Seventh private placement 389,156 389 3,168,396 3,168,785
Warrants issued in seventh
private placement 468,291 468,291
Eighth private placement 1,636,364 1,637 8,998,365 9,000,002
Share issuance costs (619,908) (619,908)
Purchase of treasury stock (at cost) (75,518) (75,518)
Net loss for the year ended
December 31, 1999 (10,040,509) (10,040,509)
--------- ------ ----------- ------------ --------- -----------
Balance - December 31, 1999 8,221,843 8,222 43,644,902 (31,139,614) (142,790) 12,370,720
Exercise of options and warrants 175,532 175 327,107 327,282
Stock options issued for services 25,910 25,910
Ninth private placement 66,667 67 999,938 1,000,005
Warrants issued in ninth
private placement 23,000 23,000
Tenth private placement 1,247,566 1,248 8,419,823 8,421,071
Share issuance costs (634,851) (634,851)
Purchase of treasury stock (at cost) (34,855) (34,855)
Net loss for the nine months
ended September 30, 2000 (8,870,577) (8,870,577)
--------- ------ ----------- ------------ --------- -----------
Balance - September 30, 2000 9,711,608 $9,712 $52,805,829 $(40,010,191) $(177,645) $12,627,705
========= ====== =========== ============ ========= ===========
</TABLE>
See notes to condensed unaudited financial statements.
8
<PAGE>
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
2000 1999 2000 1999 September 30, 2000
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,408,097) $(2,812,363) $(8,870,577) $ (7,514,583) $(40,010,191)
Adjustments to reconcile
net loss to net cash used in
operating activities:
Depreciation and amortization 183,206 146,582 525,438 419,519 2,209,271
Unrealized loss on marketable securities 11,404
Realized loss on marketable securities 5,250
Non cash stock compensation and interest 93,780 25,910 76,176 2,822,736
Purchases of marketable securities (6,298) (19,075,122)
Sales of marketable securities 771,956 19,130,920
Changes in operating assets and
liabilities
Other current assets 1,249 2,995 (91,522) 1,433 (93,221)
Accounts payable and accrued
liabilities 953,036 85,959 360,060 334,506 1,916,707
----------- ----------- ----------- ----------- ------------
Net cash used in operating activities (2,270,606) (2,483,047) (8,050,691) (5,917,291) (33,082,246)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment,
excluding capital leases (162,968) (212,308) (410,771) (491,297) (3,731,122)
Payments for patent application 2,482 (53,029) (46,773) (106,486) (687,959)
Organization costs (10,238)
Deposits 17,179 2,138 (4,595) (1,983) (33,522)
Purchases of marketable securities (594,986)
Sales of marketable securities 522,532
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
investing activities (143,307) (263,199) (462,139) (599,766) (4,535,295)
----------- ----------- ----------- ----------- ------------
</TABLE>
See notes to condensed unaudited financial statements.
9
<PAGE>
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
2000 1999 2000 1999 September 30, 2000
---- ---- ---- ---- ------------------
<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 $ 8,421,071 $9,748,358 $ 3,409,153 53,527,522
Share issuance expenses (568,482) $ (5,000) (611,851) (361,593) (3,575,456)
Purchase of treasury stock (14,813) (34,855) (56,834) (177,645)
Proceeds from issuance of
loans payable 1,446,229
Repayment of loans payable (30,826) (28,173) (90,642) (82,841) (398,849)
Repayment of capital lease
obligations (4,977) (5,151) (27,598) (107,204)
----------- --------- ---------- ----------- -----------
Net cash provided by (used in)
financing activities 7,806,950 (38,150) 9,005,859 2,880,287 50,714,597
----------- --------- ---------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 5,393,037 (2,784,396) 493,029 (3,636,770) 13,097,056
Cash and cash equivalents at
beginning of period 7,704,019 8,597,305 12,604,027 9,449,679
----------- ----------- ---------- ----------- -----------
Cash and cash equivalents at
end of period $13,097,056 $ 5,812,909 $13,097,056 $ 5,812,909 $13,097,056
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Non-cash financing activities
Share issuance
expenses - warrants $ 23,000 $ 232,000 $ 255,000
=========== =========== ===========
</TABLE>
See notes to condensed unaudited financial statements.
10
<PAGE>
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 1 - FINANCIAL STATEMENTS
The condensed balance sheet as of September 30, 2000 and the condensed
statements of operations, shareholders' equity and cash flows for the three and
nine month periods ended September 30, 2000 and 1999 and for the period from
March 12, 1991 (inception) to September 30, 2000 have been prepared by the
Company and are unaudited. In the opinion of management, all adjustments (which
include only normal recurring accrual adjustments) necessary to present fairly
the financial position at September 30, 2000, results of operations and cash
flows for all periods presented have been made. Certain information and footnote
disclosures normally included in the annual 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, 1999 annual report on Form 10-K filed with the Securities and
Exchange Commission. The results of operations for the three and nine months
ended September 30, 2000 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 regeneration 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>
BASIS OF PRESENTATION
Ortec 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 Ortec's Composite Cultured Skin to be used for the repair,
replacement and regeneration of human skin.
NOTE 3 - NET LOSS PER SHARE
As of September 30, 2000, an aggregate of 3,132,773 outstanding
warrants and options were excluded from the weighted average share calculations
as the effect was antidilutive. As of September 30, 1999 an aggregate of
2,808,873 outstanding warrants and options were excluded from the weighted
average share calculations for the same reason.
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 Ortec that are based on the beliefs of
management, as well as assumptions made by and information currently available
to us. When used in this document, the words "anticipate," "believe,"
"estimate," and "expect" and similar expressions, as they relate to Ortec, are
intended to identify forward looking statements. Such statements reflect our
current views 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. We do not intend to update these
forward looking statements.
General
Since its inception Ortec 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, donor site
wounds and chronic skin ulcers in persons suffering from epidermolysis bullosa.
We have not had any revenues from operations since Ortec's founding in 1991
since we cannot make any sales of our product until we receive approval from the
Food and Drug Administration ("FDA") and/or other similar foreign regulatory
bodies to do so. Accordingly, we do not expect to record any product sales until
we receive such approvals. We have incurred a cumulative net loss of
approximately $40 million as of September 30, 2000.
12
<PAGE>
We expect to continue to incur substantial losses until at least 2003 due to
continued spending on research and development programs, the funding of clinical
testing and trials and regulatory activities and the costs of manufacturing,
marketing, sales, distribution and administrative activities.
We anticipate 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, our ability to
successfully manufacture, market and distribute our product and/or the
establishment of collaborative arrangements for the manufacturing, marketing and
distribution of our product. We anticipate that our operating activities will
result in substantial net losses until at least 2003.
We are currently conducting clinical trials of our product in the
treatment of venous stasis ulcers and diabetic ulcers. We have completed
clinical trials for the use of our product in the treatment of autograft donor
sites and chronic ulcers in patients with epidermolysis bullosa. We are
compiling information of the results of our donor site clinical trial required
to be included in our application to the FDA, which we are now preparing, for
permission to make commercial sales of our product for the treatment of donor
site wounds. Our application to be permitted to make commercial sales of our
product for the treatment of the chronic skin ulcers caused by epidermolysis
bullosa is currently pending before the FDA.
Venous stasis ulcers are open lesions on the legs which result from the
poor circulation of blood returning from the legs to the heart. An autograft
donor site is an area of a patient's body from which the patient's skin was
taken to cover a wound at another part of such patient's body. Epidermolysis
bullosa is a disease with a small patient population.
Results of Operations
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 AND THREE MONTHS
ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Revenues. We have had no revenues from operations other than interest
income from our inception in 1991 to date. Interest income increased by
approximately $98,500 from approximately $309,100 for the nine months ended
September 30, 1999 to approximately $407,600 for the nine months ended September
30, 2000, and by approximately $13,000 from approximately $91,000 in the 1999
quarter to approximately $104,000 in the 2000 quarter, because of larger average
cash and marketable securities balances in the 2000 periods resulting from cash
received by us from the sales of our securities.
Expenses. Our expenses for the nine months ended September 30, 2000
increased by approximately $1,455,000 from approximately $7.8 million for the
nine months ended September 30, 1999, and by approximately $600,000 in the 2000
quarter from approximately
13
<PAGE>
$2.9 million in the 1999 quarter. Such increased expenses consist primarily of
an approximately $780,000 increase in the nine month period and an approximately
$286,000 increase in the quarter in the cost of personnel required by our
clinical trial programs, our other research and development activities and for
corporate administrative personnel, and an increase of approximately $648,000 in
the nine month period and approximately $372,000 increase in the quarter, for
other research and development costs, most of which were costs incurred in
connection with the conduct of our clinical trials. There was also an increase
of approximately $70,000 for consulting expenses in the nine month period,
consisting mostly of an approximately $60,000 increase in the quarter, almost
all of which increases were also incurred in connection with the conduct of our
clinical trials. In the 2000 nine month period compared to the 1999 nine month
period there was a modest increase in expenses for rent ($45,000) but a
reduction in general and administrative ($84,000) and interest and other
($7,300) expenses. Comparable figures for the 2000 quarter as compared to the
1999 quarter was an increase of approximately $20,700 for rent, a reduction of
approximately $129,000 in general and administrative expenses and a reduction of
approximately $2,000 in interest and other expenses. The reduction in general
and administrative expenses in the 2000 quarter as compared with the 1999
quarter was the result of the differences in legal fees incurred, financial
consulting fees incurred in the 1999 quarter only, offset to some extent by an
increase in accounting fees incurred and depreciation and amortization.
Liquidity and Capital Resources
Since inception (March 12, 1991) through September 30, 2000, Ortec had
accumulated a deficit of approximately $40 million and we expect to continue to
incur substantial operating losses until at least 2003. We have financed our
operations primarily through private placements of our common stock, our initial
public offering and the exercise of our publicly traded Class A warrants at the
end of 1997. From inception to September 30, 2000 we received cash proceeds from
the sale of equity securities, net of share issuance expenses, of approximately
$50 million.
For the nine months ended September 30, 2000 Ortec used net cash for
operating activities of approximately $8.1 million compared to approximately
$5.9 million for the comparable nine months in 1999. The increase in cash used
in operating activities resulted primarily because of an increase of
approximately $1.4 million in our net loss in the first nine months of 2000
compared to the first nine months of 1999. The difference in the net cash used
for operating expenses in these two nine month periods was also the result of
(i) net cash received by us from our sale of marketable securities in the first
nine months of 1999 of approximately $766,000 as opposed to none in the first
nine months of 2000, (ii) an increase in accounts payable and accrued
liabilities of approximately $360,000 in the first nine months of 2000 as
opposed to an increase of approximately $334,500 in the first nine months of
1999, and (iii) an increase in other current assets of approximately $91,500
compared to a decrease of approximately $1,400 in the first nine months of 2000
and 1999 respectively. In the nine months ended September 30, 2000 we had non
cash depreciation and amortization expense of
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<PAGE>
approximately $525,500 compared to approximately $419,500 in the nine months
ended September 30, 1999 and a non cash stock compensation and interest expense
of approximately $76,000 in the 1999 period as compared to approximately $26,000
in the 2000 period.
In the nine months ended September 30, 2000 we received net cash from
our financing activities of approximately $9 million as compared to net cash
from our financing activities of approximately $2.9 million in the nine months
ended September 30, 1999. The larger amount of cash received from financing
activities in the 2000 period is almost entirely accounted for by approximately
$9.1 million of net proceeds received by us from sale of our common stock in the
2000 period, as opposed to approximately $3.0 million net proceeds received by
us from sale of our common stock in the 1999 period.
We invested a total of approximately $462,000 in property, plant,
equipment, patent application costs and deposits during the nine months ended
September 30, 2000, compared to approximately $600,000 for those same items in
the nine months ended September 30, 1999. Since inception, we have spent
approximately $4.5 million for property, plant and equipment, excluding capital
lease agreements, but including payments for patent applications, deposits and
organization costs. The capital lease agreements consist primarily of laboratory
equipment.
Our capital funding requirements will depend on numerous factors,
including the progress and magnitude of our 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, competitive and market conditions, our ability to
establish and maintain collaborative arrangements, our cost of manufacturing
scale up and the cost and effectiveness of commercialization activities and
arrangements.
We are likely to require substantial funding to continue our research
and development activities, clinical trials, manufacturing scale up, marketing,
sales, distribution, and administrative activities. We have 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 our clinical trials. We continue 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 us in exchange for manufacturing,
marketing, distribution or other rights to our product. However, we can give 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 us on
acceptable terms, if at all. Further, we can give no assurance that any
arrangements resulting from these discussions will successfully reduce our
funding requirements. If additional funding is not available to us when needed,
we will be required to scale back our research and development programs,
clinical trials and administrative activities and our business and financial
results and condition would be
15
<PAGE>
materially adversely affected. At our current rate of spending our cash and cash
equivalents on hand at September 30, 2000 (approximately $13.1 million) will
enable us to continue our operations through approximately December, 2001.
PART II
ITEM 2. CHANGES IN SECURITIES
(c) Recent Sales of Unregistered Securities.
1. During the third quarter of 2000 we sold to ten accredited investors
an aggregate of 1,247,566 shares of our common stock at a price of $6.75 per
share. We received $8,421,070 in aggregate from such sale. The average closing
price for our common stock on the Nasdaq SmallCap Market for the thirty trading
days immediately prior to September 15, 2000, the date when the purchase price
for such shares was agreed to, was $7.74. The placement agent was Stephens Inc.
of Little Rock, Arkansas. We paid Stephens Inc. $505,264 plus its expenses for
Stephens' services in this placement. Such private placement was exempt from the
registration requirements of the Securities Act of 1933, as amended (the "Act"),
pursuant to Rule 506 of Regulation D.
2. During the third quarter of 2000 we granted nine employees seven
year options under our Employee Stock Option Plan to purchase an aggregate of
13,600 shares of our common stock, at exercise prices of $7.00 and $7.125 per
share. Such grants were in consideration for services rendered to Ortec. The
grant of such options was exempt from the registration requirements of 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
Our 2000 annual meeting of shareholders was held on August 15, 2000 at
the Russ Berrie Medical and Science Pavilion, 1150 St. Nicholas Avenue, New
York, New York. At the meeting, our shareholders voted on three matters and all
of such matters were approved.
The first matter was the election of the members of our Board of
Directors. All six of our directors were re-elected and the tabulation of the
votes (both in person and by proxy) was as follows:
16
<PAGE>
<TABLE>
<CAPTION>
NOMINEES FOR
DIRECTORS FOR WITHHELD AGAINST
--------- --- -------- -------
<S> <C> <C> <C>
Steven Katz 7,483,092 467 0
Mark Eisenberg 7,483,092 467 0
Ron Lipstein 7,483,092 467 0
Alain Klapholz 7,483,092 467 0
Joseph Stechler 7,483,092 467 0
Steven Lillien 7,483,092 467 0
</TABLE>
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 our shareholders voted was the proposal to
ratify the appointment by the Board of Directors of Grant Thornton LLP as
independent certified public accountants for Ortec for 2000. The tabulation of
the votes (both in person and by proxy) was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
--- ------- -----------
<S> <C> <C>
7,456,234 11,775 15,550
</TABLE>
There were no broker held non-voted shares represented at the meeting
with respect to this matter.
The third matter upon which our shareholders voted was the proposal to
ratify and approve the second amendment to Ortec's Amended and Restated 1996
Stock Option Plan increasing the number of shares of Ortec's common stock for
which options have been or could be granted under the Plan from 1,550,000 to
3,000,000 shares. The tabulation of the votes (both in person and by proxy) was
as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
--- ------- -----------
<S> <C> <C>
4,455,468 39,041 22,000
</TABLE>
There were 2,967,050 broker held non-voted shares represented at the
meeting with respect to this matter.
17
<PAGE>
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
We filed one report on Form 8-K in the third quarter of 2000.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereto duly authorized.
Registrant:
ORTEC INTERNATIONAL, INC.
Date: November 13, 2000 By: /s/ Steven Katz
_________________________________
Steven Katz, PhD
President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 13, 2000 By: /s/ Ron Lipstein
_________________________________
Ron Lipstein
Chief Financial Officer
(Principal Financial Officer)
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