10-Q 1 a31203.txt ORTEC INTERNATIONAL, INC. 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q ------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2001 [ ] 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 10032 New York, New York (Zip Code) (Address of principal executive offices)
(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 9,691,608 (as of August 8, 2001) ================================================================================ ORTEC INTERNATIONAL, INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q FILED WITH THE SECURITIES AND EXCHANGE COMMISSION QUARTER ENDED JUNE 30, 2001 ITEMS IN FORM 10-Q
Page ---- Facing page Part I Item 1. Financial Statements (Unaudited). 1 Item 2. Management's Discussion and Analysis of 13 Financial Condition and Results of Operation Item 3. Quantitative and Qualitative Disclosures About None Market Risk. Part II Item 1. Legal Proceedings and Claims. 17 Item 2. Changes in Securities and Use of Proceeds. 17 Item 3. Default Upon Senior Securities. None Item 4. Submission of Matters to None a Vote of Security Holders. Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. 17 Signatures 18
PART I Item 1. FINANCIAL STATEMENTS ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS
JUNE 30, DECEMBER 31, 2001 2000* ---- ----- (Unaudited) ASSETS Current assets: Cash and equivalents $ 2,517,947 $ 9,292,478 Other current assets 70,687 88,878 ----------- ----------- Total current assets 2,588,634 9,381,356 ----------- ----------- Property and equipment, at cost: Laboratory equipment 1,985,682 1,768,872 Office furniture and equipment 929,153 857,031 Leasehold improvements 1,362,895 1,333,144 ----------- ----------- 4,277,730 3,959,047 Accumulated depreciation and amortization 2,549,257 2,223,064 ----------- ----------- Property and equipment - net 1,728,473 1,735,983 ----------- ----------- Other assets: Patent application costs, net of accumulated amortization of $185,946 at June 30, 2001 and $159,460 at December 31, 2000 570,750 572,089 Deposits 27,510 30,332 ----------- ----------- Total other assets 598,260 602,421 ----------- ----------- Total Assets $ 4,915,367 $11,719,760 =========== ===========
* Derived from audited financial statements. See notes to condensed unaudited financial statements. 1 ORTEC INTERNATIONAL, INC. (DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS
JUNE 30, DECEMBER 31, 2001 2000* ---- ----- (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 1,622,247 $ 1,282,577 Loans payable - current 137,824 132,369 ------------ ------------ Total current liabilities 1,760,071 1,414,946 ------------ ------------ Long-term liabilities: Loans payable - noncurrent 842,184 912,489 ------------ ------------ 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 June 30, 2001 and December 31, 2000 9,712 9,712 Additional paid-in capital 52,997,925 52,829,535 Deficit accumulated during the development stage (50,516,880) (43,269,277) Treasury stock, at cost (20,000 shares at June 30, 2001 and December 31, 2000) (177,645) (177,645) ------------ ------------ Total shareholders' equity 2,313,112 9,392,325 ------------ ------------ Total Liabilities and Shareholders' Equity $ 4,915,367 $ 11,719,760 ============ ============
* Derived from audited financial statements. See notes to condensed unaudited financial statements. 2 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (Unaudited)
Six months Cumulative from Quarter ended June 30, ended June 30, March 12, 1991 ---------------------- -------------- (inception) to 2001 2000 2001 2001 June 30, 2001 ---- ---- ---- ---- ------------- Revenue Interest income $ 49,509 $ 139,328 $ 163,009 $ 303,795 $ 2,220,709 ----------- ----------- ----------- ------------ ------------ Expenses Research and development 1,073,288 952,726 2,328,635 1,793,997 16,093,989 Rent 147,334 138,665 291,208 257,817 1,881,505 Consulting 405,205 209,830 540,563 422,616 4,353,925 Personnel 1,504,077 1,086,546 3,000,229 2,175,118 19,343,959 General and administrative 652,579 540,827 1,209,006 1,070,604 10,539,804 Interest and other expense 20,156 22,683 40,971 46,123 524,407 ----------- ----------- ----------- ------------ ------------ 3,802,639 2,951,277 7,410,612 5,766,275 52,737,589 ----------- ----------- ----------- ------------ ------------ Net loss $(3,753,130) $(2,811,949) $(7,247,603) $ (5,462,480) $(50,516,880) =========== =========== =========== ============ ============ Net loss per share Basic and diluted $(.39) $(.33) $(.75) $(.65) $(11.41) ===== ===== ===== ===== ======= Weighted average shares outstanding Basic and diluted 9,691,608 8,447,109 9,691,608 8,418,670 4,425,545 =========== =========== =========== ============ ============
See notes to condensed unaudited financial statements. 3 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Common Stock Additional Deficit accumulated ------------ Paid-in in the development Treasury Shares Amount Capital stage Stock Total ------ ------ ------- ----- ----- ----- 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 ========= ====== ========== =========== ========
See notes to condensed unaudited financial statements. 4 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Common Stock Additional Deficit accumulated ------------ Paid-in in the development Treasury Shares Amount Capital stage Stock Total ------ ------ ------- ----- ----- ----- (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 ========= ====== ========== =========== ===========
See notes to condensed unaudited financial statements. 5 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Common Stock Additional Deficit accumulated ------------ Paid-in in the development Treasury Shares Amount Capital stage Stock Total ------ ------ ------- ----- ----- ----- (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 ========= ====== =========== =========== ===========
See notes to condensed unaudited financial statements. 6 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Common Stock Additional Deficit accumulated ------------ Paid-in in the development Treasury Shares Amount Capital stage Stock Total ------ ------ ------- ----- ----- ----- (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 ========= ====== =========== ============ ======== ===========
See notes to condensed unaudited financial statements. 7 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Common Stock Additional Deficit accumulated ------------ Paid-in in the development Treasury Shares Amount Capital stage Stock Total ------ ------ ------- ----- ----- ----- (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 ========= ====== =========== ============ ========= ============
See notes to condensed unaudited financial statements. 8 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Common Stock Additional Deficit accumulated ------------ Paid-in in the development Treasury Shares Amount Capital stage Stock Total ------ ------ ------- ----- ----- ----- (brought forward) 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 and warrants issued for services 56,265 56,265 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 (641,500) (641,500) Purchase of treasury stock (at cost) (34,855) (34,855) Net loss for the year ended December 31, 2000 (12,129,663) (12,129,663) --------- ------ ----------- ------------ --------- ------------ Balance - December 31, 2000 9,711,608 9,712 52,829,535 (43,269,277) (177,645) 9,392,325 Stock options issued for services 168,390 168,390 Net loss for the six months ended June 30, 2001 (7,247,603) (7,247,603) --------- ------ ----------- ------------ --------- ------------ Balance - June 30, 2001 9,711,608 $9,712 $52,997,925 $(50,516,880) $(177,645) $ 2,313,112 ========= ====== =========== ============ ========= ============
See notes to condensed unaudited financial statements. 9 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (Unaudited)
Six months Cumulative from ended June 30, March 12, 1991 -------------- (inception) to 2001 2000 June 30, 2001 ---- ---- ------------- Cash flows from operating activities: Net loss $(7,247,603) $(5,462,480) $(50,516,880) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 352,679 342,232 2,745,440 Unrealized loss on marketable securities 11,404 Realized loss on marketable securities 5,250 Non cash stock compensation and interest 168,390 25,910 3,021,481 Purchases of marketable securities (19,075,122) Sales of marketable securities 19,130,920 Changes in operating assets and liabilities Other current assets 18,191 (92,771) (70,685) Accounts payable and accrued liabilities 339,670 (592,976) 1,710,074 ----------- ----------- ------------ Net cash used in operating activities (6,368,673) (5,780,085) (43,038,118) ----------- ----------- ------------ Cash flows from investing activities: Purchases of property and equipment, excluding capital leases (318,683) (247,803) (4,190,664) Payments for patent application (25,147) (49,255) (756,696) Organization costs (10,238) Deposits 2,821 (21,774) (25,528) Purchases of marketable securities (594,986) Sales of marketable securities 522,532 ----------- ----------- ------------ Net cash provided by (used in) investing activities (341,009) (318,832) (5,055,580) ----------- ----------- ------------
See notes to condensed unaudited financial statements. 10 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (Unaudited)
Six months Cumulative from ended June 30, March 12, 1991 -------------- (inception) to 2001 2000 June 30, 2001 ---- ---- ------------- Cash flows from financing activities: Proceeds from issuance of notes payable $ 515,500 Repayment of notes payable (515,500) Proceeds from issuance of common stock $ 1,327,287 53,527,522 Share issuance expenses (43,369) (3,582,105) Purchase of treasury stock (20,042) (177,645) Proceeds from issuance of loans payable 1,446,229 Repayment of loans payable $ (64,849) (59,816) (495,152) Repayment of capital lease obligations (5,151) (107,204) ----------- ----------- ----------- Net cash provided by (used in) financing activities (64,849) 1,198,909 50,611,645 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (6,774,531) (4,900,008) 2,517,947 Cash and cash equivalents at beginning of period 9,292,478 12,604,027 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 2,517,947 $ 7,704,019 $ 2,517,947 =========== =========== =========== Supplemental disclosure of cash flow information: Non-cash financing activities Share issuance expenses - warrants $ 23,000 $ 255,000 =========== ===========
See notes to condensed unaudited financial statements. 11 ORTEC INTERNATIONAL, INC. (a development stage enterprise) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) June 30, 2001 and 2000 NOTE 1 - FINANCIAL STATEMENTS The condensed balance sheet as of June 30, 2001, and the condensed statements of operations and shareholders' equity for the three and six month periods, and the statements of cash flows for the six month periods ended June 30, 2001 and 2000 and for the period from March 12, 1991 (inception) to June 30, 2001, 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 June 30, 2001, results of operations for the three and six month periods, and cash flows for the six month periods ending June 30, 2001, and June 30, 2000, have been made. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2000, annual report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the three and six month periods ended June 30, 2001, are not necessarily indicative of the operating results for the full year. NOTE 2 - FORMATION OF THE COMPANY AND BASIS OF PRESENTATION Formation of the Company Ortec International, Inc. ("Ortec" or the "Company") was incorporated in March 1991 as a Delaware corporation to secure and provide funds for the further development of the technology developed by Dr. Mark Eisenberg of Sydney, Australia, to replicate in the laboratory, a tissue engineered skin substitute 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. 12 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. These financial statements have been prepared assuming that Ortec will continue as a going concern. Successful future operations depend upon the successful development and marketing of Ortec's product to be used for the repair, replacement and regeneration of human skin. Historically Ortec has funded its operating losses by periodically raising additional sources of capital. If additional funding is not available to Ortec when needed, Ortec may not be able to continue operations. No adjustments have been made to the accompanying financial statements as a result of this uncertainty. See Management's Discussion and Analysis of Financial Condition and Results of Operations. NOTE 3 - NET LOSS PER SHARE As of June 30, 2001, an aggregate of 2,764,579 outstanding warrants and options were excluded from the weighted average share calculations as the effect was antidilutive. As of June 30, 2000, an aggregate of 1,826,773 outstanding warrants and options were excluded from the weighted average share calculations for the same reason. NOTE 4 - SETTLEMENT OF CLAIM During the second quarter Ortec settled a vendor's claim for services for approximately $250,000 by payment of $100,000. 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 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. The following discussion should be read in conjunction with our financial statements and notes thereto. This discussion may be deemed to include forward looking statements. 13 General Since Ortec's inception we have been principally engaged in the research and development of our tissue engineered skin regeneration product for use in the treatment of chronic and acute wounds, such as venous and diabetic skin ulcers, indeterminate depth burns and autograft donor site wounds. We call our product OrCel'TM' and in June 2001 we filed a trademark application for such name with the United States Patent and Trademark Office. We have not had any revenues from operations since Ortec's inception in 1991 because we cannot make any sales of OrCel'TM' until we receive approval from the FDA to do so. We have incurred a cumulative net loss of approximately $50.5 million as of June 30, 2001. 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 trials and regulatory activities and the costs of manufacturing, marketing, sales, distribution and administrative activities. Our revenues consist only of interest income. To date, we have received no revenue from the sale of OrCel'TM'. While we may make commercial sales of OrCel'TM' for use in surgeries on patients with recessive dystrophic epidermolysis bullosa, which has a small patient population, we are not yet permitted to engage in commercial sales of OrCel'TM' for treatment of skin wounds with larger patient populations, until such time, if ever, as we receive requisite FDA and/or other foreign regulatory approvals for such sales. As a result, we do not expect to record significant product sales until such approvals are received. In March 2001 we filed an application with the FDA requesting permission to market OrCel'TM' for treatment of donor site wounds in burn patients. On May 14, 2001, the FDA notified us that our application was placed on the agenda for review by the FDA's General and Plastic Surgery Devices Panel. On July 17, 2001 the General and Plastic Surgery Devices Panel unanimously recommended that the FDA approve our tissue engineered skin substitute for commercial sale for the treatment donor site wounds in burn patients. We are currently awaiting such FDA approval. We are currently conducting clinical trials of OrCel'TM' in the treatment of venous and diabetic ulcers. 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. 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 OrCel'TM' and/or the establishment of collaborative arrangements for the manufacturing, marketing and 14 distribution of our product. We anticipate that our operating activities will result in substantial net losses until at least 2003. Results of Operations Six Months and Three Months Ended June 30, 2001, and June 30, 2000. Revenues. We have had no revenues from operations other than interest income from our inception in 1991 to date. Interest income declined by approximately $141,000 from approximately $304,000 in the 2000 half to approximately $163,000 in the 2001 half, and approximately $90,000 from approximately $139,000 in the 2000 quarter to approximately $49,000 in the 2001 quarter, because of smaller average cash and cash equivalents balances in the 2001 periods. Expenses. Our expenses increased by approximately $1.6 million in the 2001 half from approximately $5.8 million in the 2000 half, and by approximately $851,000 in the 2001 quarter from approximately $3.0 million in the 2000 quarter. Such increased expenses consist primarily of an approximately $825,000 in the six month period and approximately $418,000 in the quarter, increase in the cost of personnel required by our clinical trial programs, our other research and development activities and for corporate administration; an increase of approximately $535,000 in the six month period and approximately $121,000 in the quarter for other research and development costs, most of which were costs incurred in connection with the conduct of our clinical trials, and an increase of approximately $118,000 in the six month period and approximately $195,000 in the quarter for consulting services. In the 2001 half and quarter, compared to the 2000 half and quarter there were also increases in general and administrative expenses (approximately $138,000 in the six month period and approximately $112,000 in the quarter) and for rent (approximately $33,000 in the six month period and approximately $9,000 in the quarter). Liquidity and Capital Resources Since inception (March 12, 1991) through June 30, 2001, Ortec had accumulated a deficit of approximately $50.5 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 June 30, 2001, we received cash proceeds from the sale of equity securities, net of share issuance expenses, of approximately $49.9 million. For the six months ended June 30, 2001, we used net cash for operating activities of approximately $6.4 million. Cash used in operating activities resulted primarily from our net loss of $7.2 million offset by non cash depreciation and amortization of approximately $353,000 and approximately $168,000 of non cash stock compensation related to the presentation to the FDA 15 of the results of the clinical test in the use of OrCel'TM' for the treatment of donor site wounds in burn patients. We invested approximately $344,000 in property, plant, equipment and patent application costs during the six months ended June 30, 2001. We did not receive any cash from the sale of our common stock or any other financing activities in the first half of 2001. 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 require substantial funding to continue our research and development activities, clinical trials, manufacturing scale up, marketing, sales, distribution, and administrative activities. Our cash and cash equivalents on hand at June 30, 2001, (approximately $2.5 million) will enable us to continue our operations until the middle of September 2001. However, we have reached an agreement with Paul Capital Royalty Acquisition Fund to provide us with up to $15 million of non-equity capital, $5 million to be paid upon execution of a definitive agreement, an additional $5 million upon our receipt of FDA approval for sale of OrCel'TM' for treatment of donor site wounds in burn patients (which we expect to receive within the next 60 days) and a third $5 million, at our option but only if we achieve a minimum threshold of end user sales within a year and we receive net proceeds of $7.5 million from sales to other parties of our equity capital. We have negotiated all the terms of our agreement with Paul Capital and we expect to sign the definitive agreement about August 23, 2001, at which time Paul Capital will provide us with $5 million. We believe that such $5 million will enable us to continue our operations through December 2001. We believe that we will be able to continue operations through May 15, 2002, upon receipt of the second $5 million payment from Paul Capital. In consideration for its capital investment, Paul Capital will receive a percentage of the future North American end user sales of our OrCel'TM' through 2011. The definitive agreement will also provide for Paul Capital to provide us with additional non-equity investments of up to $10 million dollars, but only upon our and Paul Capital's mutual consent and conditioned on our achievement of certain regulatory milestones. We have raised funds in the past through the public or private sale of securities, and even after receipt of $10 million or $15 million from Paul Capital, we will need to raise additional 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 and upon market conditions. 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 16 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 additional investments, collaborative arrangements, agreements or other 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 may not be able to continue operations. PART II Item 1. Legal Proceedings and Claims. During the second quarter of 2001 we settled a vendor's claim for services for approximately $250,000 by payment of $100,000. Item 2. Changes in Securities (c) Recent Sales of Unregistered Securities. During the second quarter of 2001 we granted 15 full time employees, one part time employee, one of our directors, one consultant and five advisors, options under our Employee Stock Option Plan, expiring from 2 to 7 years after the date of grant, to purchase an aggregate of 154,000 shares of our common stock, at exercise prices ranging from $6.05 to $7.19 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 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description ---------- ----------- 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)
---------------------- 17 (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 did not file any reports on Form 8-K in the second quarter of 2001. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized. Registrant: ORTEC INTERNATIONAL, INC. Date: August 20, 2001 By: /s/ Steven Katz ------------------- Steven Katz, PhD Chairman and Chief Executive Officer (Principal Executive Officer) Date: August 20, 2001 By: /s/ Ron Lipstein ----------------------------- Ron Lipstein Chief Financial Officer (Principal Financial Officer) 18 STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as..................................'TM'