-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H4ViNUZ+0z2Ie3oTjs5B9zPX6BVs2wY9zIaGI5b+ZhRiiE4QG9C3y1KNnLlp+zpB 2KTFt3XZwJJdAG2i1vrCHQ== 0000950117-04-002309.txt : 20040624 0000950117-04-002309.hdr.sgml : 20040624 20040624103138 ACCESSION NUMBER: 0000950117-04-002309 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040624 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTEC INTERNATIONAL INC CENTRAL INDEX KEY: 0000889992 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 113068704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27368 FILM NUMBER: 04878534 BUSINESS ADDRESS: STREET 1: 3960 BROADWAY STREET 2: BLDG 28 CITY: NEW YORK STATE: NY ZIP: 10032 BUSINESS PHONE: 7183264698 10-K/A 1 a37913.txt ORTEC INTERNATIONAL, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K/A (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 OR [ ] 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 0-27046 ORTEC INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 11-3068704 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 3960 Broadway 10032 New York, New York (Zip Code) (Address of principal executive offices) (212) 740-6999 Issuer's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ('SS'229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The number of shares outstanding of the Registrant's common stock is 5,422,665 (as of March 23, 2004) (giving effect to issuance of 242,931 shares as a result of conversion of 60.7309 shares of Series B preferred stock for which the Series B preferred stock certificates have not been surrendered.) The aggregate market value of the voting stock held by nonaffiliates of the Registrant was $13,620,053 (as of March 23, 2004, based upon a closing price of the Company's Common Stock on the Nasdaq Bulletin Board on such date of $2.53). DOCUMENTS INCORPORATED BY REFERENCE None. ORTEC INTERNATIONAL, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 ITEMS IN FORM 10-K/A
Page ---- Facing page Part I - ------ Item 1. Business........................................................................................1 Item 2. Properties....................................................................................N/A Item 3. Legal Proceedings.............................................................................N/A Item 4. Submission of Matters to a Vote of Security Holders...........................................N/A Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................................................N/A Item 6. Selected Financial Data.......................................................................N/A Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................................N/A Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................................................N/A Item 8. Financial Statements and Supplementary Data...................................................N/A Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................N/A Part III Item 10. Directors and Executive Officers of the Registrant............................................N/A Item 11. Executive Compensation........................................................................N/A Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..............................................N/A Item 13. Certain Relationships and Related Transactions................................................N/A Item 14. Controls and Procedures.......................................................................N/A Part IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................11 Signatures.......................................................................................................14
PART I Item 1. BUSINESS Overview We are a development stage tissue engineering company that has developed a proprietary and patented technology that we call "OrCel", which is used to stimulate the repair and regeneration of human skin. OrCel is a two layered tissue engineered dressing that consists of human derived skin cells, both dermal and epidermal, supported within a porous collagen matrix. The composite matrix is seeded with keratinocytes for epidermal growth and fibroblasts for dermal growth. When OrCel is applied to the wound site, it produces a mix of growth factors that stimulates wound closure. In 2001 the FDA granted our application for the commercial sale of OrCel for the treatment of donor site wounds. A donor site wound is created in an area of the patient's body from which the patient's skin was taken to cover a wound at another part of such patient's body. In 2001 the FDA also granted our application for the commercial sale of OrCel for use on patients with recessive dystrophic epidermolysis bullosa undergoing hand reconstruction, as well as to treat the donor site wounds created during the surgery. Recessive dystrophic epidermolysis bullosa is a condition in which a newborn infant's skin instantly blisters and can peel off at the slightest touch and leave painful ulcerations and permanent scarring resulting in deformity of the hands and feet. From December 2001 through December 2002, our gross revenues from the sale of OrCel were $265,665. We discontinued our sales efforts and the manufacture of OrCel for commercial sale because of our need to use our limited financial resources for the completion of our clinical trial for the use of OrCel in the treatment of venous stasis ulcers, which is a larger potential market. Venous stasis ulcers are open lesions on the legs which result from the poor circulation of the blood returning from the legs to the heart. We completed a pivotal clinical trial for the use of OrCel in its cryopreserved form for the treatment of venous stasis ulcers. The study was conducted at 19 clinical sites and 136 patients were treated in the trial. One half of the patients were a control group and were treated with standard of care currently being used for treatment of venous stasis ulcers. In February 2004, we completed the filing with the Food and Drug Administration (FDA) of our application for premarket approval to market OrCel for the treatment of venous leg ulcers. We have developed the technology for the cryopreservation of OrCel without diminishing its effectiveness. Cryopreservation is the freezing of our product which gives it a minimum shelf life of six months, as opposed to only a few days when our product is not cryopreserved. Due to budgetary constraints we are encountering in this difficult investment climate, we have deferred conducting a pivotal clinical trial for the use of OrCel in the treatment of diabetic foot ulcers (although the FDA granted clearance for us to conduct that pivotal trial) until after FDA determination of whether we may make commercial sales of cryopreserved OrCel to treat venous stasis ulcers. We completed a pilot clinical trial for the use of OrCel, in its fresh, not 1 cryopreserved, form in the treatment of diabetic foot ulcers in the latter part of 2001. People with diabetic foot ulcers also constitute a large patient population and therefore also a large potential market for OrCel. Our target patient population for the use of OrCel are persons with venous stasis and diabetic foot ulcers which we believe are large potential markets for the use of OrCel. We also believe that OrCel can be used to treat other medical conditions, such as decubitis ulcers, and for cosmetic surgery. Decubitis ulcers are pressure sores, commonly known as bed sores. Decubitis ulcers range from a small wound to a very deep wound extending to and sometimes through a bone into internal organs. Our cash on hand as of December 31, 2003, an additional $650,000 in loans repayable June 30, 2004 which we received in January and a $250,000 loan payable on demand which we received in March 2004, all from some of the holders of our convertible preferred stock, will enable us to continue our operations through approximately March 31, 2004, assuming that we will not incur unexpected costs. Before March 31, 2004, we will be required to raise additional funds (through the sale of our securities or debt financing) to complete our clinical trials, to produce and market OrCel and to pay our accumulated debt. Our failure to receive additional financing will make it impossible for us to continue our business. Ortec was organized in 1991 under the laws of the State of Delaware for the purpose of acquiring, developing, testing and marketing our skin replacement product. Our executive offices are located at 3960 Broadway, New York, New York, and our telephone number is (212) 740-6999. Our website address is www.ortecinternational.com. The Product OrCel is produced from cells derived from infant foreskins obtained during routine circumcisions. The immature, neonatal cells are highly reproductive and provide enhanced proliferation and rapid remodeling of the human skin. We separate the epidermis from the dermis and treat each of these layers to release individual keratinocyte (epidermal) and fibroblast (dermal) cells, which are the primary cellular components of human skin. We grow the fibroblast and keratinocyte cells in culture in large quantities, then freeze and store them as a cell bank, ready for use. Prior to the use of each cell line, we conduct extensive testing and screening in accordance with current FDA guidelines to ensure that the cells are free of presence of bacterial contaminants, viruses, pathogens, tumorigenicity or other transmittable diseases. We then apply the dermal fibroblast cells to a proprietary, cross-linked bovine collagen sponge to form the dermal layer matrix and we grow the epidermal keratinocyte cells on a separate non-porous layer of collagen. We then incubate and supply this composite matrix with the proper nutrients to allow the cells to multiply and for the fibroblasts to permeate inside and anchor to the porous collagen sponge. The top layers of keratinocyte cells and bottom layers of fibroblast cells in the collagen matrix, together, constitute our proprietary OrCel, which we can then deliver to customers in a fresh or cryopreserved state. 2 Original Research Our technology was developed by Dr. Mark Eisenberg, a physician in Sydney, Australia. Dr. Eisenberg is a director and one of the founders of Ortec. He has been involved in biochemical and clinical research at the University of New South Wales in Australia for over twenty five years, focusing primarily on treating the symptoms of epidermolysis bullosa. In 1987, through his work on epidermolysis bullosa, Dr. Eisenberg first succeeded in growing epidermal layers of human skin, which he successfully applied as an allograft on an epidermolysis bullosa patient. An allograft is a transplant other than with the patient's own skin. Dr. Eisenberg continued his research which eventually led to the development of OrCel - a tissue-engineered dressing which consists of both the dermal and epidermal layers. The FDA Clearance Process Pursuant to the Federal Food Drug and Cosmetic Act and regulations promulgated thereunder, the FDA regulates the manufacture, distribution and promotion of medical devices in the United States. OrCel is considered by the FDA to be a medical device and is therefore regulated by the FDA. We must receive pre-market clearance from the FDA for any commercial sale of our product. Before receiving such clearance we must provide proof in human clinical trials of the safety and efficacy of OrCel. Pre-market clearance is a lengthy and expensive process. The steps in the FDA clearance process may be summarized as follows: o The sponsor (such as Ortec) prepares a protocol which sets forth in detail all aspects of the proposed clinical trial. The information includes the number of patients to be treated, the number of sites (hospitals and clinics) at which the patients in the clinical trial are to be treated, the then current standard of care with which the patients in the control group (in comparable medical condition as the patients to be treated with the medical device which is the subject of the clinical trial) are to be treated, the treatment frequency and the statistical plan that will be utilized to analyze the data derived from the clinical trial. o The protocol also has to establish the safety of the use of the medical device to be studied in the trial. Safety can be established in a number of ways. One is by showing the results of use of the medical device in treatments in other clinical trials, in hospital approved treatments elsewhere in the world or by use in animal clinical trials and/or in an FDA cleared "pilot" clinical trial in which far fewer patients are treated than in the definitive "pivotal" clinical trial. o The sponsor submits the protocol to the FDA. o The FDA staff give their comments, objections and requirements on the submitted protocol. o The sponsor redrafts the protocol and otherwise responds to the FDA's comments. 3 o The sponsor recruits hospitals and clinics as sites at which the patients in the study are to be treated. Such recruitment begins with or prior to the preparation of the protocol. o After the FDA clears the protocol the trial sites and the sponsor recruit the patients to be treated in the study. o The patients are treated at not more than the number of trial sites specified in the protocol. One half of the patients are treated with the medical device being studied and the other half, the control group, with the then current standard of care for treatment of the same medical condition. o The sites follow up each treated patient (for the period and the number of times provided in the FDA cleared protocol) to determine the efficacy of the medical device being studied in the treatment of the medical condition identified in the protocol, as against the efficacy of the standard of care used in the study. o The sponsor assists and monitors compliance with the protocol's requirements in each site's conduct of the study. o The sponsor collects the clinical data of each patient's treatment and progress from the sites. o The data is analyzed by or for the sponsor. The sponsor prepares a report of the results of the study and submits the report and the supporting clinical data to the FDA staff reviewers for their comments and questions. o After staff review of the submitted data, the sponsor responds to the FDA's comments and questions. o After completion of its review the FDA staff may submit a report of the results of the trial to an advisory medical panel consisting of experts in the treatment of the medical condition which the studied medical device is intended to treat. o The panel submits its advice as to the efficacy and safety of the device to the FDA official who is the Director of the FDA Division to which the protocol and the results of the pivotal trial were originally submitted. If no advisory panel is required the FDA staff reviewers submit their recommendation directly to the Division Director. o The FDA Division Director is the FDA official who determines whether or not to clear the medical device for commercial sale for treatment of that medical condition. The sponsor may appeal a Division Director's negative determination through appeal levels within the FDA, up to the Commissioner of the FDA. 4 o After FDA clearance the sponsor must submit all labeling information for the medical device to the FDA to make certain that the claims on the label accurately state the uses for which the medical device has been cleared. We have completed the treatment and follow-up of 136 patients in the pivotal clinical trial of the use of OrCel in its cryo-preserved form for the treatment of venous stasis ulcers. We have also collected the clinical data of treatment and patient follow up from all the 19 sites that participated in the study. In February 2004 we completed the filing of our Premarket Approval (PMA) application with the Food and Drug Administration (FDA) to market OrCel for the treatment of venous stasis ulcers. We submitted the Manufacturing and Controls section of our PMA application in December 2003 and in February 2004 we filed the final section of our PMA, which included the summary of safety and effectiveness in the clinical studies and device labeling. Although we have completed an FDA cleared pilot clinical trial for the use of the fresh form of OrCel for the treatment of diabetic foot ulcers, we do not have the funds available to conduct a pivotal clinical trial for the use of OrCel in its cryo-preserved form for the treatment of diabetic foot ulcers. We will not begin the FDA clearance process for a pivotal trial for cryo-preserved OrCel for the treatment of diabetic foot ulcers until we believe that we can secure financing for the conduct of that trial. Although we have already received FDA clearance for the commercial sale of the fresh version of OrCel for the treatment of donor site wounds and the treatment of recessive dystrophic epidermolysis bullosa during reconstructive hand surgery, due to our limited resources we decided to discontinue the sale of the fresh version of OrCel preferring to sell the cryo-preserved form of OrCel when cleared to do so by the FDA. Based on published information we believe that the use of OrCel for the treatment of patients suffering from venous stasis ulcers, and of patients suffering from diabetic foot ulcers, each represents a significantly larger potential market than the use of OrCel for the treatment of donor site wounds. Published reports and studies indicate that the epidermolysis bullosa patient population is a small one. Regulatory Strategies, Product Development and Sales We employ a team of regulatory and clinical professionals, both full time employees and consultants, with extensive knowledge in strategic regulatory and clinical trial planning to support our product development efforts through every stage of the development and FDA approval process. We also employ persons with extensive knowledge and experience in the marketing and sale of new FDA approved products for treatment of many medical conditions, including experience in securing approval of insurance companies to reimburse their insured patients for the cost of the use of new medical products used in medical treatments. We have secured approval for Medicare payments for the use of OrCel under Medicare's Outpatient Prospective Payment System (OPPS). This approval covers the use of OrCel in hospitals, other hospital-owned facilities and for hospital outpatient treatment. This OPPS approval expires December 31, 2005. However, we will still need to secure the approval of Medicare designated 5 contractors in different parts of the country for approval of the different medical conditions for which Medicare reimbursement of the use of OrCel will be made. We can only secure that further approval after we have received FDA clearance for use of OrCel for the treatment of that medical condition. We will also seek to secure approval for private health insurance providers' reimbursement for the cost of OrCel. We believe that securing Medicare reimbursement approval for OrCel will be of significant assistance to us in securing reimbursement approval by private health insurance companies. Production and Supply In October 2003 we entered into an agreement with Cambrex Bio Science Walkersville, Inc., a subsidiary of Cambrex Corporation, for Cambrex to manufacture OrCel in its cryo-preserved form in Cambrex's Walkersville, Maryland facilities. The Cambrex manufacturing facility is required to meet FDA's good manufacturing processes standards. Cambrex is experienced in the manufacture of cell-based medical products such as our OrCel. Our agreement with Cambrex requires us to pay Cambrex $1,200,000 a year for the use of a Cambrex production facility in Walkersville, Maryland. The annual payments we will make to Cambrex will increase to $2,100,000 per year if we require Cambrex to build us a larger production facility to meet our requirements for the production of OrCel. Such annual payments we are required to make will increase by a small percentage each year. Such annual payments include some services and overhead expenses provided and paid for by Cambrex. We are required to pay a portion of the cost of the construction of that larger production facility. However, the amount we contribute to the construction of that larger facility will be repaid to us by credits against a portion of the future annual payments of $2,100,000 and of certain other payments we are required to make to Cambrex after the larger facility is in use. We are also required to pay specified hourly charges for the Cambrex employees engaged in the production of OrCel as well as certain other charges. After construction of the larger production facility we are required to acquire from Cambrex virtually all of our requirements for OrCel that Cambrex can produce. Prior to our election to have Cambrex construct the larger production facility for us, either we or Cambrex may terminate the agreement on six months notice by us and twelve months notice by Cambrex, except that such termination will not be effective prior to November 1, 2004. If we elect to have Cambrex construct the larger production facility for us the agreement will continue for six years after the larger production facility is constructed. However, even after such construction we and Cambrex may elect to scale down over the following three years the portion of our requirements for OrCel that Cambrex will produce for us. We may elect the scale down period at any time after one year after the larger production facility is constructed and in operation in which event there are additional payments we must make to Cambrex. If we elect the scale down period after one year we must pay Cambrex $2,625,000 and if we elect the scale down period after two years we must pay Cambrex $1,050,000. If we elect the scale down periods in either of those two years, we forfeit our right to receive any further credits (up to the amount of our contribution to the cost of the larger production facility) against payments we are thereafter required to make to Cambrex. Either Cambrex or we may elect the scale down period later than three years after that facility is in operation and neither of us will be required to make any additional payments to the other because of that election. If after the construction of the larger production facility, we breach a material 6 term of our agreement with Cambrex, or elect to terminate the agreement, we will have to pay Cambrex the following amounts:
If termination occurs after the following anniversary of the construction of the larger production facility Amount of Payment --------------------------------- ----------------- 6 years $1,050,000 5 years, but less than 6 years 1,575,000 4 years, but less than 5 years 2,625,000 3 years, but less than 4 years 3,675,000 2 years, but less than 3 years 5,250,000 1 year but less than 2 years 6,300,000
In addition, upon such termination we will forfeit our right to receive any further credits (up to the amount of our contribution to the cost of the larger production facility) against future payments we may have to make to Cambrex. The raw materials that we use to manufacture OrCel come from a limited number of key suppliers. We purchase bovine collagen sponges, a key component of OrCel, from one supplier who produces the sponges to our specifications. We have no written agreement with that supplier obligating it to supply sponges to us. While there are other manufacturers from whom we could purchase bovine collagen sponges, with one of whom we are discussing such supply arrangement, if we are required to secure another source for bovine collagen sponges we would encounter delay and expense in manufacturing OrCel. We also rely on a limited number of outside suppliers to supply other materials that we use in the manufacture and testing of OrCel. While there are other sources from whom we could purchase such other materials, as with bovine collagen sponges, if we are required to replace any or all of our suppliers we would encounter delay and expense in manufacturing OrCel. Competition We are aware of several companies that are actively engaged in the research and development of products for the repair and regeneration of skin. There are currently three primary and distinct approaches to the repair and regeneration of skin: the acellular (no cell) approach, including the use of cadaver based products; the cell-based unilayered (epidermal or dermal cell) approach, and the cell based bi-layered (epidermal and dermal cell) approach. A cell based approach makes use of donor cells. The approach we believe to be the most advanced and effective is the cell based bi-layered approach, making use of donor cells. The production of OrCel consists of a top layer of epidermal cells and a bottom layer of dermal cells in a collagen matrix, that is a bi-layered approach utilizing donor cells. There are many products available for treating skin wounds. However, as already noted, we believe that the use of donor cells on a collagen sponge matrix is the most effective process 7 for healing skin wounds and in particular hard to heal skin wounds. Therefore, we consider only products using donor cells on a collagen sponge matrix would compete with OrCel. We previously considered Organogenesis, Inc. and Advanced Tissue Sciences, Inc. to be our principal competitors because each of them was previously manufacturing and selling an FDA approved product using donor cells on a collagen sponge matrix, as we do, for the treatment, in the case of Organogenesis' Apligraf, of both venous stasis and diabetic foot ulcers, and in the case of Advanced Tissue Sciences' Dermagraft for the treatment of diabetic foot ulcers. Advanced Tissue Sciences' Dermagraft was manufactured in a cryopreserved form while Organogenesis' Apligraf was not. However, in 2002 both Organogenesis and Advanced Tissue Sciences filed for bankruptcy protection and, at least temporarily, discontinued the sale of their products. We believe that sales of both Dermagraft and Apligraf have been resumed. We believe that sales of Apligraf are now being made directly by Organogenesis and that sales of Dermagraft are being made by Smith & Nephew, a major pharmaceutical company which, we believe, purchased Advance Tissue Science's interest in Dermagraft. Smith & Nephew is substantially larger than we are and has significantly greater resources than we have. The biomedical field is continually undergoing rapid and significant technological changes. Other companies may succeed in developing other products that are more effective than OrCel. If such new products are accepted by the medical community, or if those products receive FDA approval for treatment of venous stasis and diabetic foot ulcers before OrCel does, or if other companies develop products that are more effective than OrCel, any such developments could impede our ability to continue our operations. Patents and Proprietary Rights We have four United States patents, one European patent covering thirteen countries and nine patents in nine other countries, issued. We also have one United States and eight international patent applications (filed under the Patent Cooperation Treaty) pending, for our technology and processes: o The first of these patents covers the method for the production of OrCel. It is an epidermal layer of cultured epidermal cells and a bilayered collagen sponge structure that includes a layer of highly purified, non-porous collagen on top of a porous cross-linked collagen sponge containing cultured dermal cells. This patent expires on February 1, 2011. This is also the technology covered by the European and other foreign patents which have been issued to us. These foreign patents also expire in 2011. o Another United States patent provides for the extension of the use of the collagen sponge structure described above which may contain cells other than epidermal and/or dermal cells, such as cells for regenerating such organs and tissues as heart muscle, blood vessels, ligaments, cartilage and nerves. This patent also expires on February 1, 2011. We have not performed, nor are we planning to perform in the near future, any clinical trial using our platform technology for use of donor cells other than epidermal and dermal cells. 8 o Another United States patent covers a manufacturing process which, when implemented, can reduce the cost of producing OrCel. These new manufacturing processes create an improvement over our collagen structures described above in that a third layer of collagen which is hospitable to cell growth is deposited on the non-porous collagen layer. This patent expires on December 28, 2020. o Our fourth United States patent covers a process for the cryo-preservation of OrCel. This patent expires on December 26, 2021. Despite such patents our success will depend, in part, on our ability to maintain trade secret protection for our technology. Our European patent was granted to us by the European Patent Office and was challenged by Advanced Tissue Sciences in an opposition proceeding after grant. We successfully defeated that opposition. Advanced Tissue Sciences has appealed that determination in our favor and the appeal is currently pending. The validity and breadth of claims in medical technology patents involves complex legal and factual questions and, therefore, are highly uncertain. We do not know if any pending patent applications or any future patent application will issue as patents, that the scope of any patent protection obtained will be enough to exclude competitors or that any of our patents will be held valid if subsequently challenged in court proceedings. We do not know if others have or will develop similar products, duplicate any of our products or design around any of our patents issued or that may be issued in the future. In addition, whether or not patents are issued to us, others may hold or receive patents which contain claims having a scope that covers aspects of our products or processes. Several of our competitors, including Organogenesis and Advanced Tissue Sciences, Inc., have been granted patents relating to their particular skin technologies which also utilize donor cells on a collagen sponge matrix. To that extent they may be considered similar to our OrCel technology. We successfully defended challenges by Organogenesis to our United States patent and by Advanced Tissue Sciences to our European patent in the respective patent offices where those patents were issued. However, those successful defenses do not preclude future challenges in court. The dismissal of the challenge to our patent in Europe has been appealed. We do not know if any of the other patents issued to us will be challenged, invalidated or circumvented. Patents and patent applications in the United States may be subject to interference proceeding brought by the U.S. Patent and Trademark Office, or to opposition proceedings initiated in a foreign patent office by third parties or to re-examination proceedings in the United States. We might incur significant costs defending such proceedings and we might not be successful. 9 Paul Capital Agreements In August 2001 and in 2002 we entered into agreements with Paul Capital Royalty Acquisition Fund, L.P. pursuant to which we agreed in consideration of Paul Capital paying us $10,000,000, to pay to Paul Capital 3 1/3% of the end user sales prices paid for our OrCel product in the United States, Canada and Mexico through the period ending in 2011. Such percentage interest in our revenues in those three countries may be adjusted upward or downward based on the volume of sales to end users of OrCel in those three countries. As security for the performance of our obligations to Paul Capital, we have granted Paul Capital a security interest in all of our U.S. patents, patent applications and trademarks. Our agreement with Paul Capital provides that in certain events Paul Capital may, at its option, compel us to repurchase the interest in our revenues that we sold to Paul Capital for a price equal to the $10,000,000 Paul Capital paid us plus an amount that would yield Paul Capital a 30% per annum internal rate of return on its $10,000,000 investment. Among the events that would entitle Paul Capital to compel us to repurchase its interest in our revenues at that price is if we are insolvent or if we are unable to pay our debts as they become due. Our agreement with Paul Capital provides that in determining such insolvency any amount we owe to Paul Capital is excluded in calculating our net worth (or negative net worth). As defined in our agreement with Paul Capital we are currently insolvent. In addition, although we are currently trying to manage our debt we are not paying our debts as they become due. Although Paul Capital has had the right for well over a year to compel us to repurchase its interest in our revenues at the price provided in our agreement, Paul Capital has so far not exercised that right. If Paul Capital does exercise its right to compel us to repurchase its interest in our revenues we would be unable to pay the purchase price and Paul Capital could foreclose its security interest in our U.S. patents, patent applications and trademarks and in such event we will have to discontinue our business operations. In February 2003, Paul Capital purchased 50 shares of our Series B convertible preferred stock, and in connection therewith we issued to Paul Capital 73,077 shares of our common stock and granted Paul Capital warrants to purchase an aggregate of 50,000 shares of our common stock, at exercise prices of $15.00 per share for 25,000 shares and at $20.00 per share for the other 25,000 shares. The February 2003 amendments to our agreements with Paul Capital provided, among other things, for (a) the election of one director designated by Paul Capital, (b) the right of one observer (other than such director) selected by Paul Capital to attend and observe all meetings of Ortec's Board of Directors and (c) for us to use our best efforts to have independent directors who are acceptable to both Ortec and Paul Capital, including the director designated by Paul Capital, as a majority of Ortec's Board of Directors. Employees We presently employ 39 people on a full-time basis, including three executive officers. We also have 2 part time employees. 10 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules. (i) Financial Statements: See Index to Financial Statements. (ii) Financial Statement Schedules All financial statement schedules have been omitted since either (i) the schedule or condition requiring a schedule is not applicable or (ii) the information required by such schedule is contained in the Financial Statements and Notes thereto or in Management's Discussion and Analysis of Financial Condition and Results of Operation. (b) Reports on Form 8-K. We did not file any report on Form 8-K in the fourth quarter of 2003. 11 (c) Exhibits.
Exhibit No. Description ----------- ----------- 3.1 Restated Certificate of Incorporation (1) 3.2 Amendment to Restated Certificate of Incorporation (2) 3.3 Amendment to Certificate of Incorporation adopted June 28, 2002, being a Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock (3) 3.4 Amendment to Certificate of Incorporation filed on August 26, 2002, being an Amended Certificate of Designation of the Relative Rights and Preferences of the Series B Convertible Preferred Stock (4) 3.5 Amendment to Certificate of Incorporation filed on May 23, 2003, being the Certificate of Designation of the Relative Rights and Preferences of the Series C convertible preferred stock (5) 3.6 Amendment to Certificate of Incorporation filed on June 10, 2003. (12) 3.7 Amendment to Certificate of Incorporation filed on August 19, 2003, being the Certificate of Designation of the Relative Rights and Preferences of the Series D convertible preferred stock. (6) 3.8 By-Laws (7) 10.1 Agreement with Cambrex BioScience of Walkersville, Inc.; redacted (9) 10.2 Agreement with Paul Capital Royalty Acquisition Fund L.P.; redacted (10) 10.3 Termination of Employment Agreements between the Registrant and Steven Katz, Ron Lipstein and Alain Klapholz (11) 10.4 Lease with Audubon Biomedical Science and Technology Park (2) 14 Code of Ethics (12) 23. Consent of Grant Thornton LLP (12) 31.1 Certifications (Principal Executive Officer) (8) 31.2 Certifications (Principal Financial Officer) (8) 32.1 Certification of Principal Executive Officer (8) 32.2 Certification of Principal Financial Officer (8)
- ---------------------- 12 (1) Filed as an Exhibit to our Form 10-Q filed for the quarter ended September 30, 2001, and incorporated herein by reference. (2) Filed with our Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. (3) Filed as an Exhibit to our Form 10-Q for the quarter ended June 30, 2002, and incorporated herein by reference. (4) Filed as an Exhibit to our Form 10-QA for the quarter ended September 30, 2002, and incorporated herein by reference. (5) Filed as an Exhibit to our Form 10-Q for the quarter ended June 30, 2003, and incorporated herein by reference. (6) Filed as an Exhibit to our Form 10-Q for the quarter ended September 30, 2003, and incorporated herein by reference. (7) Filed as an Exhibit to our Registration Statement on Form SB-2 (File No. 33-96090), or Amendment 1 thereto, and incorporated herein by reference. (8) Filed herewith. (9) Filed as an Exhibit to our Registration Statement No. 333-109027, or an amendment thereto, and incorporated herein by reference. Certain portions of Exhibit 10.1 marked by asterisks were omitted pursuant to a confidential treatment request and filed separately with the Securities and Exchange Commission. (10) Filed as an Exhibit to Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. Certain portions marked by asterisks were omitted pursuant to a confidential treatment request and filed separately with the Securities and Exchange Commission. (11) Filed as an Exhibit to our Form 8-K filed on December 12, 2002, and incorporated herein by reference. (12) Filed as an Exhibit to our Annual Report for our Form 10-K for the year ended December 31, 2003 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: June 23, 2004 Ortec International, Inc. By: /s/ Ron Lipstein ---------------- Ron Lipstein Chief Executive Officer 14 STATEMENT OF DIFFERENCES The section symbol shall be expressed as..............................'SS' EX-31 2 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATIONS I, Steven Katz, certify that: 1. I have reviewed this amended annual report on Form 10-K of Ortec International, Inc.; 2. Based on my knowledge, this amended annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this amended annual report; 3. Based on my knowledge, the financial statements, and other financial information included in the annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this amended annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this amended annual report (the "Evaluation Date"); and c) presented in this amended annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this amended annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 23, 2004 /s/ Steven Katz --------------- STEVEN KATZ Chairman and Principal Executive Officer EX-31 3 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 I, Ron Lipstein, certify that: 1. I have reviewed this amended annual report on Form 10-K of Ortec International, Inc.; 2. Based on my knowledge, this amended annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this amended annual report; 3. Based on my knowledge, the financial statements, and other financial information included in the annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this amended annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this amended annual report (the "Evaluation Date"); and c) presented in this amended annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this amended annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 23, 2004 /s/ Ron Lipstein ---------------- RON LIPSTEIN Principal Financial Officer EX-32 4 ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Ortec International, Inc. ("Ortec"), hereby certifies that Ortec's Annual Report and the amendment thereto on Form 10-K for the fiscal year ended December 31, 2003 (the "Annual Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of Ortec. Dated: June 23, 2004 /s/ Steven Katz - ---------------------------------------- Steven Katz Chairman and Principal Executive Officer EX-32 5 ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Ortec International, Inc. ("Ortec"), hereby certifies that Ortec's Annual Report and the amendment thereto on Form 10-K for the fiscal year ended December 31, 2003 (the "Annual Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of Ortec. Dated: June 23, 2004 /s/ Ron Lipstein - --------------------------- Ron Lipstein Chief Financial Officer Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----