-----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, BpUN4jqxR4KOVNU9/m/KgthEdzRWhXCyDiubPpdmWpZBNoy09KahJjSXJls5eoN/ v0zTgDPQJkzZKSFMemgnnQ== 0000950117-04-002715.txt : 20040728 0000950117-04-002715.hdr.sgml : 20040728 20040728171246 ACCESSION NUMBER: 0000950117-04-002715 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20040728 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: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-109027 FILM NUMBER: 04936666 BUSINESS ADDRESS: STREET 1: 3960 BROADWAY STREET 2: BLDG 28 CITY: NEW YORK STATE: NY ZIP: 10032 BUSINESS PHONE: 7183264698 S-2/A 1 a37405.txt ORTEC INTERNATIONAL, INC. As filed with the Securities and Exchange Commission on July 28, 2004 Registration No. 333-109027 - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- AMENDMENT No. 4 to FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------- ORTEC INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 11-3068704 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3960 Broadway, New York, New York 10032 (212) 740-6999 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Steven Katz, Ph.D. Chairman Ortec International, Inc. 3960 Broadway New York, New York 10032 (212) 740-6999 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------- Copy to: Gabriel Kaszovitz, Esq. Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine LLP 750 Lexington Avenue New York, New York 10022-1200 (212) 888-8200 Fax: (212) 888-7776 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this form, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE
========================================================================================================== Proposed Proposed Title of Each Class of Maximum Maximum Amount of Securities To Amount to be Offering Price Aggregate Registration Be Registered Registered Per Unit (1) Offering Price(1) Fee - ---------------------------------------------------------------------------------------------------------- Common Stock, par 15,127,318 $1.375(3)(a) $16,543,337(3)(a) $1,837 Value $.001 per share Shares(2) $ 4.00(3)(b) $ 8,273,844(3)(b) $ 670 - ---------------------------------------------------------------------------------------------------------- Class E Warrants 3,000,000 -- -- -- - ---------------------------------------------------------------------------------------------------------- Units - each consisting of two shares of Common Stock and one Class E Warrant 3,000,000 -- -- -- ==========================================================================================================
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c). (2) Such 15,127,318 shares include (a) 6,000,000 shares offered for sale by the registrant, (b) 3,000,000 shares underlying the 3,000,000 Class E Warrants, also offered for sale by the registrant, (c) 4,187,858 shares issuable upon conversion of currently outstanding Series B, Series C and Series D Convertible Preferred Stock and (d) 1,939,460 shares issuable upon exercise of warrants currently outstanding. (3) (a) Pursuant to Rule 457(c), represents the average of the high and low sales prices of our common stock as to 13,113,057 shares for September 17, 2003 as reported on the Over the Counter Bulletin Board and (b) as to the balance of 2,068,461 shares at the maximum offering price. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE HAVE FILED A REGISTRATION STATEMENT WITH THE SECURITIES AND EXCHANGE COMMISSION AND WE MAY NOT SELL THESE SECURITIES UNTIL IT BECOMES EFFECTIVE. WE ARE NOT OFFERING TO SELL, OR SOLICITING ANY OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY ___, 2004 PROSPECTUS 12,127,318 Shares of Common Stock 3,000,000 Class E Redeemable Common Stock Purchase Warrants Exercisable for 3,000,000 Shares of Common Stock ORTEC INTERNATIONAL, INC. The shares offered pursuant to this prospectus include (a) 6,000,000 shares of common stock and 3,000,000 Class E Redeemable Common Stock Purchase Warrants exercisable for 3,000,000 shares of common stock offered by Ortec for its own account, and (b) the balance of 6,127,318 shares that may be sold from time to time by the Selling Stockholders listed under the caption "Selling Stockholders". ---------- The 6,000,000 shares and the 3,000,000 Class E Warrants will be offered on behalf of Ortec by Burnham Hill Partners, a division of Pali Capital, Inc. (or BHP), and ViewTrade Securities Inc. (ViewTrade), as placement agents, in units each consisting of two detachable shares of common stock and one detachable warrant, at a price of $_____ per unit [$4-8 per unit; or $2-4 per share and 1/2 a warrant]. The Class E Warrants expire in 5 years and each is exercisable to purchase one share of common stock at a price of $_____. The Class E Warrants are redeemable by Ortec in certain circumstances. See "Description of Securities - - Class E Warrants". Our offering of 6,000,000 shares and 3,000,000 Class E Warrants is on a best efforts, 2,500,000 units minimum sold basis. Unless 2,500,000 units (5,000,000 shares and 2,500,000 Class E Warrants) are sold, proceeds received from the sale of the units will be returned in full to the purchasers. We have agreed to pay BHP and ViewTrade a cash commission of ____% [up to $875,000] of the gross proceeds received by us from our direct sales, in units, of the 6,000,000 shares and 3,000,000 Class E Warrants to acquire an additional 3,000,000 shares, and we will grant BHP and ViewTrade 5 year warrants to purchase so many units equal to 10% of the units sold in the offering at a purchase price of $_____ per unit [equal to 125% of the unit purchase price paid by purchasers in the offering]. Our engagement of BHP and ViewTrade expires in 90 days after the date below unless extended by mutual agreement. See "Plan of Distribution." ---------- 6,127,318 shares are being registered to permit the Selling Stockholders to sell those shares from time to time in the public securities market. The Selling Stockholders may determine the prices at which they will sell the common stock, which prices may be at market prices prevailing at the time of such sale or some other price. See "Plan of Distribution". ---------- We will amend this prospectus (by filing a post-effective amendment to the registration statement of which this prospectus is a part) to inform you of any fundamental changes to the information in this prospectus. Our common stock is traded on the Over the Counter Bulletin Board under the symbol "ORTN". On July ___, 2004, the last reported sale price of our common stock was $____ per share. There is no trading market for the Class E Warrants or the units. ---------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 3. Neither the Securities and Exchange Commission nor any state securities commission has approved or determined if this prospectus is truthful and complete. Any representation to the contrary is a criminal offense. ---------- The date of this Prospectus is __________, 2004. You should rely only on the information contained or incorporated in this prospectus. We and the Selling Stockholders have not authorized anyone to provide you with information different from that contained or incorporated in this prospectus. We and the Selling Stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sale are permitted. The information contained or incorporated in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. In this prospectus and in documents incorporated in this prospectus, references to the "Company," "Ortec," "we," "us" and "our" refer to Ortec Interntional, Inc. and its wholly owned subsidiary, OrCel LLC. TABLE OF CONTENTS
Page ---- Disclosure Regarding Forward-Looking Statements ..............................3 Risk Factors .................................................................3 Use of Proceeds .............................................................16 Reverse Stock Split .........................................................19 Recent Sales of Our Securities ..............................................19 Selling Stockholders ........................................................22 Plan of Distribution ........................................................24 Description of Securities ...................................................28 Legal Matters ...............................................................46 Experts .....................................................................46 Information With Respect to Ortec International, Inc. .......................46 Where You Can Find More Information .........................................46 Information Incorporated by Reference .......................................47 SEC Position on Indemnification for Securities Act Liabilities ..............48
2 DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This prospectus includes "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements included or incorporated in this prospectus regarding the potential market revenues from the sale of our OrCel product, the number of patients with medical conditions who can be treated with OrCel, the clinical trials for OrCel, future approvals by the United States Food and Drug Administration (the "FDA") and other plans and objectives for the future and assumptions and predictions about future supply, manufacturing, costs and sales and future financing we may secure are all forward looking statements. When we use words like "intend," "anticipate," "believe," "assume," "estimate," "plan" or "expect," we are making forward looking statements. We believe that the assumptions and expectations reflected in such forward looking statements are reasonable, based on information available to us on the date of this prospectus, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. We have disclosed certain important factors that could cause our actual results to differ materially from our current expectations under "Risk Factors" elsewhere in this prospectus. You should understand that forward looking statements made in connection with this offering are necessarily qualified by these factors. We are not undertaking to publicly update or revise any forward looking statement if we obtain new information or upon the occurrence of future events or otherwise. RISK FACTORS We Do Not Have Sufficient Funds to Bring Our Product to Market for Use by Large Patient Populations. Unless We Secure Additional Financing We Will Not be Able to Continue to Operate Our Business. We anticipate that the proceeds we received in 2002 and in 2003 from our private placement sales of shares of our Series B Convertible Preferred Stock and Series C Convertible Preferred Stock, and loans we received from October through July 2004, payable September 30, 2004, aggregating $7,510,000, will be sufficient to meet our cash requirements only through approximately July 31, 2004. We will need to secure additional financing for the approximately $830,000 of cash we are currently consuming per month. Over half the loans we received were provided by purchasers of our Series C Convertible Preferred Stock. The amount of cash we consume each month fluctuates, depending, among other things, on whether we are incurring expenses from services provided by third party suppliers in connection with a clinical trial and what payments we have to make on our outstanding debt. We may not be able to secure any financing nor may we be able to reach the larger patient population markets of persons with venous stasis ulcers and diabetic foot ulcers, with funds that we may be able to raise. Venous stasis ulcers are open lesions on the legs which result from poor circulation of the blood returning from the legs to the heart. We are also likely to continue to encounter difficulties which are common to development stage companies, including unanticipated costs relating to development, delays in the testing of products, regulatory approval 3 and compliance and competition. We hope to obtain additional funds through collaborative arrangements with a pharmaceutical sales company and through the sale of our securities to the public and through private placements, debt financing or short-term loans. We have not yet entered into any collaborative arrangements with pharmaceutical sales organizations. Our capital funding requirements depend on numerous factors, including: o the progress and magnitude of our research and development programs; o the time involved in obtaining regulatory approvals for the commercial sale of our OrCel product in its cryo-preserved form to treat venous stasis ulcers and, later, diabetic foot ulcers; o the costs involved in filing and maintaining patent claims; o technological advances; o competitive and market conditions; o our ability to establish and maintain collaborative arrangements; o the successful implementation of an agreement we have entered into with Cambrex Bio Science Walkersville, Inc. for manufacturing of our OrCel product in its cryo-preserved form; and o the cost and effectiveness of commercialization activities and arrangements. Unless we obtain additional financing we will not be able to continue to operate our business. We have no current commitments from any persons that they will provide any additional financing. Because of Our History of Ongoing Losses and Because We May Never Generate a Profit and Our Lack of Cash or Other Current Assets, We have Received an Opinion From Our Auditors that There is Substantial Doubt About Our Ability to Continue as a Going Concern. Since our organization in 1991 we have sustained losses each year because, among other reasons, we have had very limited sales of our product. In the years ended December 31, 2001, December 31, 2002, and December 31, 2003 our losses applicable to common stockholders were $15,885,377, $22,703,955 and $21,449,131, respectively. For these reasons and because at December 31, 2003 our current liabilities exceeded our current assets by $25,360,740, and our total liabilities exceeded our total assets by $24,697,407, our auditors advised us that these factors, among others, raise substantial doubt about our ability to continue as a going concern. Unless we obtain additional financing we will not be able to continue as a going concern. 4 We Have Accumulated Obligations that We are Required, but are Unable, to Pay Currently. This Also Raises Doubt as to Our Ability to Continue as a Going Concern. As of June 30, 2004, payment of approximately $2,143,000 of the approximately $2,587,000 we owed to our trade creditors was past due. We have entered into agreements with creditors to whom we owe an aggregate of $1,353,000 (as of June 30, 2004) to pay $656,000 in the rest of 2004, $641,000 in 2005 and $56,000 in 2006. While we have arranged for payment of some of our obligations over a period of time, and have to make other payments of past due obligations to our current and ongoing suppliers, our ability to make payments we have agreed to pay and to insure continued receipt of needed supplies, and to continue reducing our past due obligations, will depend on our ability to secure needed financing. Unless We Secure FDA Clearance for the Sale of OrCel to Treat Venous Stasis Ulcers We Will Not be Able to Continue to Operate Our Business. 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. We 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, and collected the clinical data of treatment and patient follow up from all the 19 sites that participated in the study. Based on such results, in February 2004, we completed the filing of our pre-market approval (PMA) application with the FDA to market OrCel for the treatment of venous stasis ulcers. After the FDA staff completes its review of our report (including our responses to questions the staff asks), the FDA's 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. 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 our original 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. 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. We may appeal a Division Director's negative determination through appeal levels within the FDA, up to the Commissioner of the FDA. We may not obtain FDA clearance for the commercial sale of the cryopreserved form of OrCel for the treatment of venous stasis ulcers and later for diabetic foot ulcers. Among the factors which may contribute to that finding are a negative assessment of our manufacturing processes, raw materials used in manufacturing our product, our freezing technique, and OrCel's clinical results. For example, the clinical results submitted in our PMA application show statistically significant differentials between OrCel and the standard of care 5 therapy for both primary clinical endpoints in patients who were shown to have typical venous ulcers (ulcers resulting from venous insufficiency and extending into but not through the dermal layer of the skin). In the overall group of patients which included patients who had venous ulcers complicated by other factors (including diseases other than venous insufficiency), we achieved statistically significant differentials for certain secondary endpoints, but did not achieve statistically significant differentials for the two primary clinical endpoints. If we do not obtain FDA clearance for the sale of OrCel in its cryopreserved form for the treatment of venous stasis ulcers we do not believe that we can continue our business operations. Unless We Later Secure FDA Clearance for the Sale of OrCel in its Cryopreserved Form to Treat Diabetic Foot Ulcers Our Sales of OrCel Will be More Limited and Thereby Limit Our Ability to Earn Profits. 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. The cryo-preserved form of OrCel has a shelf life of approximately six months as opposed to only approximately three days for the fresh form of OrCel. 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 skin 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 permitted by the FDA. A donor site skin wound is created in 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. Recessive dystrophic epidermolysis bullosa is a condition in which a newborn infant's skin constantly blisters and can peel off at the slightest touch and leave painful ulcerations and permanent scarring resulting in deformity of the hands and feet. 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. If we are unable to later obtain FDA clearance for the sale of cryopreserved OrCel for the treatment of diabetic foot ulcers, and to a lesser extent for the treatment of donor site wounds, our sales of OrCel will be more limited and thereby limit our ability to earn profits. Because OrCel is Our Only Product, Our Failure to Sell OrCel on a Profitable Basis Will Limit Our Ability to Continue Our Operations. To date OrCel is the only product that we have developed. In the event we fail to develop additional products, or if the FDA does not grant us approval to use OrCel for the treatment of venous stasis ulcers and later diabetic foot ulcers, or if OrCel is not favorably received by the 6 medical community or it becomes obsolete, we will be unable to become profitable and we may be required to discontinue our operations. We May Lose Our U.S. Patents, Patent Applications and Trademarks Because of Security Interests We Have Granted in Them. In August 2001 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 an amount that would yield cash flows to Paul Capital yielding 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. We are Subject to Extensive Governmental Regulation Which Increases the Costs of Manufacturing Our Product and Will Thereby Negatively Impact Our Ability to Earn Profits. Our business is subject to extensive regulation principally by the Food and Drug Administration in the United States and corresponding foreign regulatory agencies in each country in which we intend to sell our product. These regulations affect: o Product marketing clearances or approvals; o Product standards; o Packaging requirements; o Design requirements; 7 o Manufacturing and quality assurance, including compliance by the manufacturing facility with good manufacturing process requirements, record keeping, reporting and product testing standards; o Labeling; o Periodic FDA inspections of the facility in which OrCel will be manufactured; o Import and export restrictions; and o Tariffs and other tax requirements. Our need to comply with these regulatory requirements will increase the cost of manufacturing our OrCel product and negatively impact our ability to earn profits. The Medical Community May Not Accept Our Products Which Will Prevent Us from Selling our Products and Prevent Us from Continuing Our Business. Market acceptance for OrCel will depend upon a number of factors, including: o The receipt and timing of FDA regulatory approvals for use of OrCel, in its cryo-preserved form, for the treatment of venous stasis ulcers and later for diabetic foot ulcers; o Acceptance by the medical community of OrCel for the treatment of the medical conditions that it is intended to treat, the demonstration of its safety and its cost effectiveness; and o Securing approval of third party payors, such as Medicare and insurance companies, for reimbursement for the cost of OrCel. Unless we secure market acceptance for OrCel we will be unable to sell OrCel and as a result we will be unable to conduct any business. Our Potential Competitors Have Greater Financial, Sales and Marketing Resources Than We Do So That We May Have Difficulty in Competing Against Them. While there are many products available for treating skin wounds, we believe that the use of donor cells on a collagen sponge matrix is the most effective process for healing 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 cleared product using donor cells on a collagen sponge matrix for the treatment, in the case of Organogensis' Apligraf, of both venous stasis and diabetic foot ulcers, and in the case of Advanced Tissue Sciences' Dermagraft for the treatment of diabetic 8 foot ulcers. Advanced Tissue Sciences' Dermagraft was manufactured in a cryo-preserved 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. In addition, 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 clearance 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. We Rely on a Limited Number of Key Suppliers to Manufacture OrCel and Therefore Run the Risk of Delay in Securing Needed Materials from Other Suppliers. 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 9 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 term of our agreement with Cambrex, or elect to terminate the agreement, there are substantial payments we must 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 arrangements, if we are required to secure another source for bovine collagen sponges we would encounter additional 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. We Depend on Our Patents and Proprietary Technology Which May Not Provide Us With Sufficient Protection Against Technologies Used, or Which May be Used by Our Competitors. We have four United States patents, one European patent covering thirteen countries and nine patents in nine other countries, all already issued, and we also have one United States and three international patent applications (filed under the Patent Cooperation Treaty) pending, for our technology and processes. Despite such patents our success will depend, in part, on our ability to maintain trade secret protection for our technology. One patent granted to us by the European Patent Office was challenged by Advanced Tissue Sciences after grant. We prevailed at the first level of hearings and Advanced Tissue Sciences has appealed that determination in our favor. That appeal is still 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 of our patents or any of our pending patent applications or any future patent application of ours that will issue as patents, will provide us with the scope of patent protection that will be enough to exclude competitors. We also do not know that any of our patents will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents and other proprietary rights held by us. 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 Advanced Tissue Sciences, Inc. and Organogenesis, 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. 10 We successfully defended challenges to our United States and European patents 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 an interference proceeding brought by the U.S. Patent and Trademark Office, or to opposition proceedings initiated in a foreign patent office by third parties. We might incur significant costs defending such proceedings and we might not be successful. We May Be Subject to Product Liability Claims Which We Might Not Be Able to Pay Thereby Causing Us to Discontinue our Business. OrCel is designed to be used in the treatment of medical conditions and diseases where there is a high risk of serious medical complications, amputation of the leg or death. Although we have obtained product liability insurance coverage in the amount of $3,000,000, such insurance coverage may not be adequate to protect us against future product liability claims. In addition, the cost of obtaining product liability insurance in the future may prevent us from securing such insurance on terms acceptable to us, if at all. Furthermore there can be no assurance that we will avoid significant product liability claims and the attendant adverse publicity. Large product liability claims or other claims with respect to uninsured or underinsured liabilities could make it impossible for us to continue our business operations. If We Lose Our Key Employees We May Not be Able to Continue Our Business Operations. The management of our day-to-day operations is handled by Messrs. Ron Lipstein and Costa Papastephanou, two of our executive officers. The development and production of our product is managed by a wide array of scientific personnel, two of whom we consider to be key employees. Dr. Melvin Silberklang is our vice president for research and development. Mr. Steven Peltier coordinates and supervises our clinical and regulatory matters, primarily our clinical trials and our filings with the FDA. The loss of the services of Messrs. Papastephanou, Lipstein, Silberklang or Peltier could cause delays in our ongoing business operations, and would have a material adverse effect on our business, results of operations and financial condition. Except for the termination of employment agreements we have entered into with Mr. Lipstein and with Messrs. Steven Katz and Alain Klapholz (the terms of which are described in the last Risk Factor in this prospectus) we do not have employment contracts with any of our key personnel nor any of our other employees nor do we carry key man insurance policies for any of our employees. 11 The Delisting of Our Common Stock from the Nasdaq SmallCap Market May Create a Lack of Liquidity in the Trading of Our Common Stock Negatively Affecting a Seller's Ability to Find Purchasers for Our Common Stock. During the third quarter of 2002 our common stock was delisted from the Nasdaq SmallCap Market and we are now listed on the Over the Counter Bulletin Board. Such delisting may have created a lack of liquidity in the trading of our common stock which could negatively affect a seller's ability to find purchasers for our common stock. Such delisting may also make it difficult for us to raise the additional funds we need through equity financing. The Market Price of Our Common Stock May Also Be Highly Volatile Creating Greater Financial Risk for the Owners of Our Common Stock. The market price of our common stock has ranged from $1.31 to $158.10 during the past three years. Other factors that may affect the price of our common stock include: o our ability to successfully market and sell our OrCel product, o develop other products for sale, o our competitors' announcements concerning technological innovations, o new commercial products or procedures, o proposed government regulations, o developments or disputes relating to patents, trade secrets or proprietary rights, o the following substantial number of additional shares of our common stock we will have to issue: o an aggregate of 4,922,349 shares upon conversion of our outstanding Series B, Series C and Series D Convertible Preferred Stock; o an aggregate of 3,001,088 shares upon the exercise of warrants to purchase the shares of our common stock we granted to the purchasers of our Series B and Series C Convertible Preferred Stock and to the placement agent who arranged such financings; o an aggregate of 1,708,599 shares upon exercise of options we have granted to our employees, and particularly to our executive officers, our directors and to consultants and vendors; 12 o if we sell all, or at least 5,000,000, of the 6,000,000 shares we are offering for sale and upon the exercise of the warrants to purchase up to an additional 3,000,000 shares we included, together with such 6,000,000 shares, in the units offered by this prospectus. We May Have to Sell Additional Equity Securities in the Future Which Will Dilute the Portion of Ortec's Equity Owned by Our Current Stockholders and by the Purchasers of Our Common Stock and Our Class E Warrants Offered for Sale by this Prospectus. In the future we will probably have to sell even more shares of our common stock, or other securities convertible into or otherwise entitling the holder to purchase our common stock. In the future we will also issue additional options to purchase our common stock to our employees, possibly including our executive officers, and our directors, and possibly to consultants and vendors. We also intend to issue shares of our common stock to our executive officers. All such sales and issuances of our common stock, other equity securities and warrants and options to purchase our common stock, will dilute the portion of Ortec's equity owned by our current stockholders and by the purchasers of our common stock and the warrants offered for sale by this prospectus. The Price Protection Provisions of Most of Our Outstanding Warrants Might Prevent Increases in the Market Price of Our Common Stock. In 2002 and 2003 we granted to the purchasers of our Series B and Series C convertible preferred stock, and to the placement agent and to designees of the placement agent who arranged such preferred stock financings, warrants to purchase our common stock. Of those warrants granted to such persons, warrants to purchase the following number of shares of our common stock at the following exercise prices are currently outstanding: o 32,460 shares at $0.01 per share o 1,707,000 shares at $3.60 per share (the "Series C Warrants") o 667,963 shares at $4.00 per share (the "Series B-1 Warrants") o 543,665 shares at $5.00 per share (the "Series B-2 Warrants") o 25,000 shares at $15.00 per share (also "Series B-1 Warrants") o 25,000 shares at $20.00 per share (also "Series B-2 Warrants") The Series B-1 Warrants and the Series B-2 Warrants provide that if we sell shares of our common stock at prices below the exercise prices of those warrants, or issue other securities convertible into, or which entitle the holder to purchase, shares of our common stock, which could result in the sale of our common stock at a price which in effect (taking into consideration the price paid for the convertible security or the warrant or the option) is less than the exercise price of the warrant, the exercise price of the Series B-1 and/or the Series B-2 Warrants are reduced to the price at which the shares of our common stock were sold, or in the case of our sale of derivative securities, to the effective price at which our common stock could be acquired. The Series C Warrants also contain similar price protection provisions except that the exercise price of the Series C Warrants are only reduced by a portion of the difference between the exercise 13 price and the lower price at which the common stock was, or effectively could be, acquired. That percentage by which the exercise price of the Series C Warrants could be reduced depends not only on the lower price at which our common stock was, or could be, acquired, but also by the ratio that the number of shares of our common stock that were, or could be, so acquired bears to the total number of shares of our common stock that would be outstanding after such sale of our common stock, or the conversion of securities convertible into, or the exercise of such warrants or options to purchase, our common stock. The Class E Warrants included in the units we are offering by this prospectus will contain price protection provisions similar to those contained in the Series C Warrants. The closing price for our common stock on July ____, 2004 was $____. Neither our sale of all, or at least 5,000,000, of the 6,000,000 shares of our common stock and our 3,000,000 Class E Warrants offered for sale by us in this prospectus at the $___________ price per unit we are offering such units for sale, nor the warrants we will grant to the placement agents, will trigger the price protection provisions of the Series C, Series B-1 and Series B-2 warrants described above because all of the Series C, Series B-1 and Series B-2 warrants have provisions exempting our issuances of our securities in connection with our public offering of shares of our common stock and warrants or common stock we issue to placement agents or their designees in connection with any sales of our securities, from those price protection provisions of the warrants. Such price protection provisions in our Series B-1, Series B-2, Series C and Class E Warrants could have the effect of limiting any significant increase in the market value of our common stock. However, the Series B-1, the Series B-2, the Series C and the Class E Warrants all have provisions that permit the holders who could acquire the majority of the shares of our common stock issuable upon exercise of all the warrants in that particular series, to waive the price protection provisions for that series. Pursuant to that provision the price protection provisions of the Series B-1 and of the Series B-2 Warrants were waived on two occasions in 2003. Once in February 2003 when we sold additional shares of our Series B preferred stock for $2,000,000, and again in May and July 2003 when we sold shares of our Series C preferred stock for $5,690,000. See "Recent Sales of Our Securities." Because We Do Not Intend to Pay Any Dividends on Our Common Stock, an Investor in Our Common Stock May Only Realize an Economic Gain From an Increase, if any, in the Market Price of Our Common Stock. We have never paid, and have no intentions in the foreseeable future to pay, any dividends on our common stock. Therefore, an investor who purchases our common stock in this offering, in all likelihood, will only realize a profit on his investment if the market price of our common stock increases in value. Concentration of Ownership of Our Common Stock by Our Management and Others and Termination of Employment Agreements We have Entered Into With our Executive and Other Officers Could Negatively Affect the Market Price of Our Common Stock Because They Discourage Open Market Purchases of Our Common Stock by Purchasers Who Might Seek to Secure Control of Ortec. 14 Our officers and directors as a group own an aggregate of 96,098 shares of our common stock and have been granted options to purchase an additional 1,531,867 shares of our common stock. All of such options can be exercised immediately and are exercisable at prices ranging from $1.80 to over $10.00 per share. The closing price of our common stock on July __, 2004 was $_______ and the following are the exercise prices of the options held by our officers and directors as a group: $1.80 for 510,000 shares 2.00 for 98,462 shares 2.10 for 74,000 shares 3.00 for 8,350 shares 3.50 for 420,000 shares 3.60 for 320,400 shares 4.10 for 7,500 shares 6.00 and higher for 83,155 shares The certificates of designations setting forth the terms of our Series B and Series C convertible preferred stock, and the terms of the Series B-1, B-2 and C warrants held by the purchasers of our Series B and Series C preferred stock, permit us to issue to our officers, directors and employees up to 1,800,000 shares of our common stock without triggering the price protection provisions of the Series B-1, B-2 or C warrants or the anti-dilution provisions of the Series B or Series C preferred stock. Our Board of Directors has determined our executive officers and other employees to whom, and the conditions on which such 1,800,000 shares of common stock will be issued. 1,000,000 shares may be issued to Ron Lipstein, our chief executive officer, 340,000 shares may be issued to Dr. Steven Katz, the chairman of our board of directors, 220,000 shares to Mr. Costa Papastephanou, our president, and the remaining 240,000 shares to four other employees, none of whom are executive officers of Ortec. The issuance of different portions of such 1,800,000 shares is contingent on our achieving certain performance milestones. In the case of the 1,340,000 shares designated for Messrs. Lipstein and Katz issuance is contingent on our securing additional funds in any combination of sale of our equity securities, borrowing or from licensing fees. If we sell at least 5,000,000 shares of our common stock and 2,500,000 Class E Warrants of the 6,000,000 shares and 3,000,000 Class E Warrants we are offering and receive gross proceeds of not less than $10,000,000 from such sales, we will issue the 1,340,000 shares to Messrs. Lipstein and Katz. Our issuance of different portions of the 220,000 shares our directors have designated for issuance to Mr. Papastephanou and different portions of the 240,000 shares designated for issuance to four other employees is contingent on our progress in our clinical trials, reducing our cost of manufacturing OrCel, product development and achieving gross profit margins from the commercial sale of OrCel. Our executive officers and other employees receiving all or any portion of such 1,800,000 shares are not allowed to sell any of those shares until the beginning of 2007. If our executive officers and directors exercised all their options and purchased an aggregate of 1,531,867 shares of our common stock and if we issued to Messrs. Lipstein, Katz and Papastephanou all of the 1,560,000 shares our directors have designated for issuance to them if the contingencies referred to above were achieved, our officers and directors would own 37% 15 of our outstanding common stock. Such concentration of ownership would probably insure our management's continued control of Ortec. In addition, certain combinations of investors who purchased our Class B and Class C convertible preferred stock and in connection therewith were granted warrants to purchase our common stock, would, if they converted the Series C preferred stock owned by them and if they exercised all of the Series B-1, Series B-2 and Series C Warrants owned by them, would own in aggregate more than 50% of our outstanding common stock. Such concentration of ownership of our common stock could discourage persons from making open market purchases of our common stock for the purpose of securing a controlling interest in Ortec and thereby prevent increases in the market price of our common stock. We have entered into agreements with Messrs. Steven Katz and Ron Lipstein, two of our executive officers, and with one other employee, Mr. Alain Klapholz, who is not an executive officer, that provide for payments to them in the event that their employment is terminated by us, including "constructive termination" as defined in those agreements. We will pay to Messrs. Katz and Lipstein an amount equal to 2.99 times, and to Mr. Klapholz 1.99 times, the average annual compensation paid by us to such person in the five tax years prior to termination of his employment. The agreements also provide that in the event of such termination of employment, the expiration dates of all options and warrants which have been granted to such persons and which expire less than three years after such termination of employment, will be extended so that such options and warrants expire three years after such termination of employment. The agreements further provide that in the event of the death or disability of any of Messrs. Katz, Lipstein or Klapholz, or the voluntary termination by either Messrs. Katz or Lipstein of their employment with us, we will pay to such person an amount equal to the compensation received by such officer from us in the previous 12 months. Such termination of employment agreements could also discourage persons from making open market purchases of our common stock for the purpose of securing a controlling interest in Ortec. USE OF PROCEEDS We will receive and retain net proceeds only from the sale of the 6,000,000 shares of our common stock and our Class E Warrants to purchase an additional 3,000,000 shares of our common stock we are offering for sale. If we receive gross proceeds of $12,000,000 from the sale of all such 6,000,000 shares and such warrants, we estimate that the net proceeds we will receive from such sale will be approximately $11,000,000 after payment of placement fees and other expenses we incur in connection with the filing and preparation of the registration statement of which this prospectus is a part. If we sell only 2,500,000 units, that is 5,000,000 shares of our common stock and Class E Warrants to purchase an additional 2,500,000 shares of our commons stock, and if we receive gross proceeds of $10,000,000 from such sale, we estimate that the net proceeds we will receive will be $9,000,000. From the net proceeds we receive, except as we explain after the table below, we expect to use approximately $830,000 per 16 month in the next twelve months to continue our operations to secure FDA clearance for the use of OrCel for the treatment of venous stasis ulcers, to make payments we are required to make to Cambrex Bio Science Walkersville, Inc. under our agreement with Cambrex for Cambrex to produce the cryopreserved form of OrCel in Cambrex's production facilities, to reduce the amount of our past-due obligations, for our continuing research and development activities (including further developing our manufacturing processes with a view to cost reduction) and for our general overhead and corporate expenses. The following lists our best estimates as to the purposes for which we will use $11,000,000 net proceeds, including the approximately $830,000 in cash we expect to continue consuming each month for the next 12 months. The $830,000 in cash we expect to continue consuming each month will, we anticipate, be used as set forth under the heading "Monthly Cash" in the right hand column in the table below. Except for the compensation and benefits to be paid to our employees all of the following payments will be made to non-affiliated suppliers of goods and services. 17
Monthly Cash ------------ o Compensation to our employees, including our executive officers, plus employee benefits. $ 3,700,000 $308,000 o Minimum payments we will be required to make to Cambrex Bio Science Walkersville, Inc. under our agreement with Cambrex for Cambrex to manufacture OrCel, in its cryopreserved form, in their production facilities. 1,200,000 100,000 o Repayment of our past due obligations. 2,000,000 107,000 o Payments to manufacturers and for raw materials for developing production methods to increase, and reduce the per unit cost of, the production of OrCel units and their component parts (cells from infant foreskins, bovine serum and collagen sponges). 600,000 50,000 o Finishing the development and constructing , and creating an inventory, of devices to be used by physicians and their staffs to thaw and rinse the cryopreservative from our OrCel product; to test the use of dry ice instead of liquid nitrogen to ship the cryopreserved version of OrCel. 500,000 42,000 o Initial raw material purchases and production costs, other than our monthly fixed payments to Cambrex, to manufacture OrCel in 2004 assuming FDA clearance for the sale of OrCel to treat venous stasis ulcers and also assuming that commercial sales can be made in the last quarter of 2004. 1,200,000 100,000 o Our working capital and general and corporate expenses. 885,000 66,000 o Initiating the pivotal clinical trial for the use of OrCel in its cryopreserved form for the treatment of diabetic foot ulcers. 915,000 57,000 ----------- -------- Total: $11,000,000 $830,000
If we receive less than $11,000,000 net proceeds we will try to reduce payment of our past due obligations by $720,000 in aggregate for the next 12 months. If we receive less than $10,280,000 net proceeds, we will reduce, or not use, the proceeds to initiate the diabetic foot ulcers clinical trial. If we receive less than $9,365,000 net proceeds but receive at least $9,000,000 (based on the sale of 2,500,000 units), we will reduce, but not eliminate, the net proceeds we use for (1) our working capital and general and corporate expenses, (2) constructing 18 and creating an inventory of machines to thaw and rinse the cryopreserved form of our OrCel product and (3) our initial raw material purchases and production costs (other than our fixed monthly payments to Cambrex) to manufacture OrCel for commercial sales in the last quarter of 2004. We will not receive any proceeds from the sale by the Selling Stockholders of the shares of common stock pursuant to this prospectus which are already owned by them, or which are to be issued to them upon their conversion of shares of any of our convertible preferred stock or when they exercise any of the warrants we granted in equity financings in which we sold shares of our convertible preferred stock. Nor will we receive any proceeds from the sale of any of the shares of common stock we will issue upon exercise of the warrants included in the units we are offering for sale by this prospectus. Assuming that the Selling Stockholders exercise all of their warrants to purchase the shares of our common stock which they may resell pursuant to this prospectus, we will receive net proceeds from such exercise of approximately $7,700,000. Assuming the exercise of all of the 3,000,000 warrants included in the units we are offering for sale, we will receive an additional $__________. We intend to use such proceeds from the exercise of warrants, if received, for the purposes described above to the extent we do not receive net proceeds of approximately $11,000,000 from our sale of 6,000,000 shares and 3,000,000 warrants. If we do receive net proceeds of approximately $11,000,000 from our sale of 6,000,000 shares and 3,000,000 warrants, we will use any proceeds received by us upon the exercise of any warrants for repayment of any outstanding balance of our past-due debts and the $7,510,000 which we recently borrowed and the balance, if any, for research and development for the use of OrCel for the treatment of other medical conditions and for other working capital and general corporate purposes. REVERSE STOCK SPLIT We effected, as of 5 PM EDT on June 24, 2003, a reverse split of our common stock of one new share for each ten shares previously outstanding. All references we make in this prospectus to the number of shares of our common stock, the market prices of our common stock, the conversion prices of securities convertible into our common stock and the exercise prices of our outstanding warrants, are after giving effect to such one new share for ten old shares reverse split. RECENT SALES OF OUR SECURITIES From the beginning of 2003 to the date of this prospectus we sold an aggregate of 948.333 shares of our Series C Convertible Preferred Stock for $6,000 per share, receiving gross proceeds of $5,690,000, and 200 shares of our Series B Convertible Preferred Stock for $10,000 per share, receiving gross proceeds of an additional $2,000,000. Beginning in May 2002 through the end of 2002 we sold our convertible notes, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, receiving gross proceeds of $8,178,000. The holders of all of our 19 convertible notes and of our Series A Convertible Preferred Stock, exchanged such notes and interest accrued thereon and such Series A Convertible Preferred shares and dividends accrued thereon, for shares of our Series B Convertible Preferred Stock. In 2002 we issued a total of 938.2742 shares of our Series B Convertible Preferred Stock for cash and in exchange for such convertible notes, the interest accrued on such notes, for our outstanding Series A Convertible Preferred Stock and the dividends accrued on such Series A Convertible Preferred shares. In connection with our sale of our Series C Convertible Preferred Stock in May and July 2003, the holders of 1,088.2742 shares of our Series B Convertible Preferred Stock converted their shares into our common stock or exchanged their Series B Convertible Preferred Stock for shares of our newly created Series D Convertible Preferred Stock, leaving only 50 shares of our Series B Convertible Preferred Stock outstanding. 544.6581 Series B shares have been converted to 2,178,636 shares of our common stock. 482.8852 Series B shares have been exchanged for an equal number of our Series D shares. Such 482.8852 Series D shares are, as of the date of this prospectus, convertible into 1,931,540 shares of our common stock. The holders of 60.7309 Series B shares have elected to convert their shares but have not yet surrendered their Series B certificates. We assume that when those certificates are surrendered all such 60.7309 Series B shares will be converted into an aggregate of an additional 242,931 shares of our common stock and that none of such 60.7309 Series B shares will be exchanged for our Series D shares. In July, 2004, 18.067 shares of our Series C Convertible Preferred Stock were converted into 54,200 shares of our common stock and we have issued an additional 5,784 shares of our common stock as dividends, in lieu of cash, on the 18.067 converted Series C Preferred shares. When we sold shares of our Series B Convertible Preferred Stock (or exchanged them for our outstanding convertible notes and Series A Convertible Preferred Stock) in November and December 2002 and in February 2003, we granted warrants to purchase shares of our common stock to the purchasers and other acquirers of our Series B shares, and to the designees of the placement agent who arranged such Series B Convertible Preferred Stock financing for us. Some of those warrants which were exercisable at ten cents per share and some at one cent per share were, except for warrants to purchase 32,460 shares of our common stock, all exercised. Some were exercised using the "cashless exercise" provisions in the warrants. We also granted to the purchasers of our Series B shares Series B-1 Warrants to purchase an aggregate of 642,963 shares of our common stock (the "Series B-1 Warrants") and Series B-2 Warrants to purchase an aggregate of 568,665 shares of our common stock (the "Series B-2 Warrants"). The exercise price of the Series B-1 Warrants is $4.00 per share except for one warrant to purchase 25,000 shares which is exercisable at $15.00 per share. The exercise price of the Series B-2 Warrants is $5.00 per share except for one warrant to purchase 25,000 shares which is exercisable at $20.00 per share. We also granted Series B-1 Warrants to the designees of the placement agent who arranged the Series B financing to purchase an aggregate of 50,000 shares of our common stock which are exercisable at $4.00 per share. When we sold shares of our Series C Convertible Preferred Stock in May and July, 2003, we granted to the purchasers of our Series C shares warrants to purchase an aggregate of 1,707,000 shares of our common stock at an exercise price of $3.60 per share. At that time we 20 also granted warrants to the designees of the placement agent who arranged such Series C financing for us, to purchase an aggregate of 149,520 shares of our common stock at an exercise price of one cent ($0.01) per share. The following summary lists all of our securities we have issued in the Series B and Series C financings described above which are still outstanding as of the date of this prospectus: o 4,316,133 shares of our common stock, including 242,931 shares of our common stock to be issued when certificates for 60.7309 shares of our Series B Convertible Preferred Stock which have been converted are delivered to us. Included among such 4,316,133 shares are those issued upon conversion of shares of our Series B Preferred Stock where the holders surrendered their certificates, shares issued as prepaid dividends on our Series B Preferred Stock and shares issued upon exercise of warrants (at $0.10 per share by purchasers of our Series B shares and at $0.01 per share by designees of the placement agent who arranged all these financings). The 4,316,133 share figure does not include upwards adjustments of one share for each shareholder entitled to a fraction of a share when we effected our one share for ten shares reverse split. o 50 shares of our Series B Convertible Preferred Stock (excluding shares which have been converted but for which certificates have not yet been delivered to us) convertible as of the date of this prospectus into not more than 200,000 shares of our common stock. o 930.266 shares of our Series C Convertible Preferred Stock convertible as of the date of this prospectus into not less than 2,790,800 shares of our common stock. o 482.8852 shares of our Series D Convertible Preferred Stock convertible into 1,931,549 shares of our common stock. o Warrants to purchase the following number of shares of our common stock at the following exercise prices: o 32,460 shares at $0.01 per share o 1,707,000 shares at $3.60 per share o 667,963 shares at $4.00 per share o 543,665 shares at $5.00 per share o 25,000 shares at $15.00 per share o 25,000 shares at $20.00 per share 21 SELLING STOCKHOLDERS
Total Number of Percentage Shares of of Shares of Total Common Common Number of Stock Stock Common Shares of Owned by Owned by Stock Common Selling Selling Owned Stock to be Stockholder Stockholder Prior to Registered After After Name of Selling Stockholder Offering (1) Offering Offering - ------------------------------------------------------------------------------------------------- North Sound Legacy Fund LLC 33,704 67,263(1) 32,242 * - ------------------------------------------------------------------------------------------------- North Sound Legacy Institutional Fund LLC 191,295 734,954(1) 178,141 3.4 - ------------------------------------------------------------------------------------------------- North Sound Legacy International Fund Ltd. 220,112 727,016(1) 205,496 3.9 - ------------------------------------------------------------------------------------------------- Paradigm Millenium Fund, L.P. 8,983 39,999(1) 8,983 * - ------------------------------------------------------------------------------------------------- Sargon Capital International Fund Ltd. 448,045 723,076(1) 374,968 6.9 - ------------------------------------------------------------------------------------------------- SDS Merchant Fund, L.P. 445,591 1,716,924(1) 328,665 6.3 - ------------------------------------------------------------------------------------------------- Bay Star Capital II, L.P. 0 399,999(1) 0 0 - ------------------------------------------------------------------------------------------------- Crestview Capital Fund I LP 0 84,000(1) 0 0 - ------------------------------------------------------------------------------------------------- Crestview Capital Offshore Fund, Inc. 0 12,000(1) 0 0 - ------------------------------------------------------------------------------------------------- Crestview Capital Fund II LP 0 144,000(1) 0 0 - ------------------------------------------------------------------------------------------------- Bristol Investment Fund, Ltd. 0 345,799(1) 0 0 - ------------------------------------------------------------------------------------------------- Bridges & Pipes LLC 0 80,001(1) 0 0 - ------------------------------------------------------------------------------------------------- Michael S. Liss 10,600 32,001(1) 10,600 * - ------------------------------------------------------------------------------------------------- Robert W. Duggan 0 200,001(1) 0 0 - ------------------------------------------------------------------------------------------------- Paul Scharfer 0 159,999(1) 0 0 - ------------------------------------------------------------------------------------------------- Paul Capital Royalty Acquisition Fund, L.P. 73,077 323,077(2) 0 0 - ------------------------------------------------------------------------------------------------- Jason Adelman 357,479 126,057(3) 231,422 1.6 - ------------------------------------------------------------------------------------------------- Matthew Balk 33,039 25,442(3) 12,308 * - ------------------------------------------------------------------------------------------------- Robert Nathan 4,447 3,250(3) 1,197 * - ------------------------------------------------------------------------------------------------- Eric Singer 0 20,586(3) 0 0 - ------------------------------------------------------------------------------------------------- Robert Hussey 4,473 7,163(3) 4,473 * - ------------------------------------------------------------------------------------------------- Stephen Barrett 4,711 4,711(3) 0 0 - ------------------------------------------------------------------------------------------------- MLA Capital, Inc. 0 150,000(4) 0 0 - -------------------------------------------------------------------------------------------------
* Less than 1% None of these Selling Stockholders is an affiliate of Ortec. 22 1) Assumes the conversion by all of these Selling Stockholders of the shares of Series C preferred stock owned by them at a conversion price of $2.00 per share of common stock and exercise by all of these Selling Stockholders of the Series C, Series B-1 and Series B-2 Warrants owned by them at the exercise prices set forth in footnote (c) to the table below. See "Description of Securities". The total number of shares of common stock listed registered for each of these Selling Stockholders consists of the following.
Issuable on Issuable on Issuable Upon Exercise of Conversion Conversion of Series C, of Series C Shares Series D Series B-1 and Preferred Already Preferred Series B-2 Name of Selling Stockholder Stock(a) Issued (b) Stock Warrants(c) - -------------------------------------------------------------------------------------------- North Sound Legacy Fund LLC 38,001 1,462 4,000 23,800 - -------------------------------------------------------------------------------------------- North Sound Legacy Institutional Fund LLC 423,000 13,154 36,000 262,800 - -------------------------------------------------------------------------------------------- North Sound Legacy International Fund Ltd. 414,000 14,616 40,000 258,400 - -------------------------------------------------------------------------------------------- Paradigm Millenium Fund, L.P. 24,999 0 0 15,000 - -------------------------------------------------------------------------------------------- Sargon Capital International Fund Ltd. 249,999 73,077 200,000 200,000 - -------------------------------------------------------------------------------------------- SDS Merchant Fund, L.P. 750,000 116,924 320,000 530,000 - -------------------------------------------------------------------------------------------- Bay Star Capital II, L.P. 249,999 0 0 150,000 - -------------------------------------------------------------------------------------------- Crestview Capital Fund I LP 52,500 0 0 31,500 - -------------------------------------------------------------------------------------------- Crestview Capital Offshore Fund, Inc. 7,500 0 0 4,500 - -------------------------------------------------------------------------------------------- Crestview Capital Fund II LP 90,000 0 0 54,000 - -------------------------------------------------------------------------------------------- Bristol Investment Fund, Ltd. 195,799 0 0 150,000 - -------------------------------------------------------------------------------------------- Bridges & Pipes LLC 50,001 0 0 30,000 - -------------------------------------------------------------------------------------------- Michael S. Liss 20,001 0 0 12,000 - -------------------------------------------------------------------------------------------- Robert W. Duggan 125,001 0 0 75,000 - -------------------------------------------------------------------------------------------- Paul Scharfer 99,999 0 0 60,000 - --------------------------------------------------------------------------------------------
(a) Convertible at $2.00 per share of common stock. (b) Issued to Purchasers of Series B Preferred Stock as prepaid dividends and/or upon exercise of warrants granted them in February 2003 and exercised at $0.10 per share of Common Stock. 23 (c) The Series C Warrants were granted to purchasers of our Series C Preferred Stock in May and July 2003, and the Series B-1 and B-2 Warrants were granted to the purchasers of our Series B Preferred Stock in February, 2003. The Series C Warrants are exercisable at $3.60 per share of common stock, these Series B-1 Warrants at $4.00 per share and these Series B-2 Warrants at $5.00 per share. (2) 200,000 shares issuable on the conversion of the 50 shares of Series B Preferred Stock owned by this Selling Stockholder at an Alternative Conversion Price of $2.50 per share of common stock. (See "Description of Securities - Series B Convertible Preferred Stock -- Series B Conversion Price" for the definition of the "Alternative Conversion Price") 25,000 shares issuable upon this Selling Stockholder's exercise of its Series B-1 Warrants at $15.00 per share and 25,000 shares issuable upon this Selling Stockholder's exercise of its Series B-2 Warrants at $20.00 per share. 73,077 shares were issued as a prepaid dividend and upon exercise of warrants, at $0.10 per share for our common stock, granted to purchasers of our Series B Preferred Stock in February, 2003. (3) 154,749 shares issued and 32,460 shares issuable upon exercise of warrants granted to these designees of H.C. Wainwright & Co., Inc. exercisable at $0.01 per share of common stock, in connection with our sales of Series C Preferred Stock and our sales of Series B Preferred Stock in February, 2003. The shares issued and issuable to the designees of H.C. Wainwright & Co., Inc. are restricted, in that they can not be sold in the public securities markets for 180 days following the effective date of the registration statement of which this prospectus is a part. (4) Issuable upon exercise of warrants granted for consulting services rendered to us. PLAN OF DISTRIBUTION Shares of our common stock to be sold in this offering are listed on the Over the Counter Bulletin Board. Sales by Ortec We have entered into an agreement with Burnham Hill Partners, a division of Pali Capital, Inc. (or BHP) and ViewTrade Securities, Inc. (ViewTrade) pursuant to which BHP and ViewTrade have agreed to use their best efforts to offer for sale the 6,000,000 shares of our common stock and warrants to purchase an additional 3,000,000 shares of our common stock, offered for sale by us, provided that a minimum of 5,000,000 shares and warrants to purchase an additional 2,500,000 shares are sold. Those 6,000,000 shares and the warrants will be offered in units of two detachable shares and a detachable warrant to purchase one share, at a price of $____ [between $4.00 and $8.00] per unit. The purchasers' payments for the units will be held in escrow by the law firm of Jenkens & Gilchrist Parker Chapin LLP, of New York City, until at least 2,500,000 units (5,000,000 shares and 2,500,000 warrants) are sold and paid for. If a minimum of 2,500,000 units are not sold, all payments will be refunded to purchasers without 24 any deductions. Neither BHP nor ViewTrade have made any commitment to purchase or take down all or any part of units offered for sale by us. We have agreed to pay BHP and ViewTrade a cash placement fee equal to ___% [up to $875,000] of the gross proceeds received by us from our sales of units and to grant BHP and ViewTrade 5 year warrants to purchase so many units (two shares and one Class E warrant per unit) equal to 10% of the units sold in the offering at a purchase price of _____ [equal to 125% of the unit price paid in the offering]. These shares issuable to BHP or ViewTrade upon their purchase of units, or upon BHP's or ViewTrade's exercise of Class E Warrants in the units BHP or ViewTrade may purchase, are restricted, in that they may not be resold for a period of 180 days after the effective date of the registration statement of which this prospectus is a part. BHP and ViewTrade may pay other broker dealers a portion of their placement fees for sales of the units made by them. BHP and ViewTrade have advised us that they will not confirm sales to any accounts over which BHP or ViewTrade exercises discretionary authority. Our agreement with BHP and ViewTrade provides that BHP and ViewTrade are our exclusive agents for the sale of the units for a period of 90 days after the date of this prospectus, subject to extensions by mutual agreement between us and BHP for additional 30 day periods. Our agreement also requires us to indemnify BHP and ViewTrade and their affiliates, including persons controlling BHP or ViewTrade, against any claims arising from their actions in acting as placement agents for the sale of the 6,000,000 shares and the 3,000,000 Class E Warrants, including liabilities arising under the Securities Act of 1933. The warrants included in the units we are offering for sale will expire 5 years after the date of this prospectus and will be exercisable at a price of $___ [between $2 and $4] per share of our common stock. The warrants will be designated as our Class "E" Warrants. For other terms governing our Class E Warrants see "Description of Securities - Class E Warrants". In connection with the loans described in the first risk factor in this prospectus, we have paid a commission to BHP as placement agent for arranging those loans aggregating $7,510,000 for us. That commission consisted of our issuance of 300,000 shares of our common stock, in lieu of cash, to BHP and its designees. Those 300,000 shares issued to BHP and its designees are restricted in that they may not be sold for a period of 180 days after the effective date of the registration statement of which this prospectus is a part. We also have agreed that for the period ending December 13, 2004, BHP will be our exclusive placement agent for financing activities such as private placements of our securities. The agreement may be terminated by us if BHP does not secure a financing we request within 90 days. The agreement does not cover any future public offering of our securities that we may make. We do not have any Class E Warrants outstanding and we do not expect that a trading market will develop for our Class E Warrants. Since the two shares of common stock and the one warrant included in a unit are immediately detachable we will not deliver any separate certificates for the units. 25 Sales by the Selling Stockholders We have registered and include in this prospectus an aggregate of 6,127,318 shares of our common stock for sale by the Selling Stockholders. We will not receive any of the proceeds from the sale by the Selling Stockholders of any of their shares of common stock. However, we will receive proceeds from the sale of our common stock to be issued to the Selling Stockholders which we have registered and included in this prospectus upon exercise of any of their warrants. We will bear all fees and expenses incident to our obligation to register the shares of our common stock in behalf of the Selling Stockholders. The Selling Stockholders may sell all or a portion of their common stock offered through this prospectus from time to time directly through one or more underwriters, broker-dealers or agents. If the common stock is sold through underwriters broker-dealers or agents, the Selling Stockholder will be responsible for underwriting discounts or commissions of such underwriters, broker dealers or agents. The common stock may be sold by the Selling Stockholders in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions, which may involve cross or block transactions, (1) on any national securities exchange or quotation service on which our common stock may be listed or quoted at the time of sale, (2) in the over-the-counter market, (3) in transactions otherwise than on these exchanges or systems or in the over-the-counter market, (4) through the writing of options, whether such options are listed on an options exchange or otherwise, or (5) through the settlement of short sales. In connection with their sales of these shares of our common stock or otherwise, the Selling Stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the common stock in the course of hedging in positions they assume. The Selling Stockholders may also sell shares of common stock short or loan or pledge shares of common stock to broker-dealers that in turn may sell those shares. If the Selling Stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, those underwriters, brokers-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the Selling Stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal, which discounts, concessions or commissions as to particular underwriters, brokers-dealers or agents may be in excess of those customary in the types of transactions involved. If any of the Selling Stockholders enter into an agreement with an underwriter to do a firm commitment offering of the shares of our common stock offered by such Selling Stockholder through this prospectus, if we are aware of such underwriting agreement we will file a post-effective amendment to the registration statement of which this prospectus is a part setting forth the material terms of such underwriting agreement. The Selling Stockholder may not sell any of the shares in such firm underwriting until such post-effective amendment becomes effective. All of the Selling Stockholders and any broker-dealers participating in the distribution of the shares of our common stock offered through this prospectus may be deemed to be "underwriters" within the meaning of the Securities Act of 1933. Any profits realized by the 26 Selling Stockholders in their sale of such shares, and any commission paid, or any discounts allowed to the broker-dealer may be deemed to be underwriting discounts or commissions under the Securities Act. The 187,209 shares of our common stock included in this prospectus for sale by Jason Adelman, Matthew Balk, Robert Nathan, Eric Singer, Robert Hussey and Stephen Barrett, six of the Selling Stockholders, consist of 154,749 shares they received upon exercise of warrants at an exercise price of $0.01 per share, and 32,460 shares they can acquire upon exercise of other warrants they own, all exercisable at the same $0.01 per share exercise price. All of such warrants were granted to H.C. Wainwright & Co., Inc. and its designees for services provided as placement agent as part of such placement agent's compensation for arranging our $2,000,000 Series B preferred stock financing in February 2003, and our $5,690,000 Series C preferred stock financing in May and July 2003. These warrants were issued to such six Selling Stockholders pursuant to the direction of H.C. Wainwright & Co., Inc. Each of such six Selling Stockholders is an affiliate of a broker dealer. In addition, H.C. Wainwright & Co., Inc. received cash fees in the aggregate amount of $745,850 as compensation for arranging the Series B and Series C preferred stock financings. None of the other Selling Stockholders are broker dealers or affiliates of broker dealers. Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless the shares have been registered or qualified for sale in the state or an exemption from registration or qualification is available and is complied with. We do not know whether any Selling Stockholder will sell any or all of the shares of common stock registered by the registration statement of which this prospectus forms a part. We will pay all expenses of the registration of the shares of common stock under the registration rights or other agreements we entered into with the Selling Stockholders, including SEC filing fees and expenses of compliance with state securities or "blue sky" laws, except that the Selling Stockholders will pay any underwriting discounts and selling commissions for the sale of their shares. We expect that our expenses for this offering, consisting primarily of legal, accounting and edgarization expenses, will be approximately $125,000. We will indemnify the Selling Stockholders against liabilities, including some liabilities under the Securities Act, in accordance with registration rights and other agreements entered into by us with the Selling Stockholders, or the Selling Stockholders will be entitled to contribution. We will be indemnified by the Selling Stockholders against civil liabilities, including liabilities under the Securities Act, which may arise from any written information furnished to us by the Selling Stockholders for use in this prospectus, in accordance with such registration rights and other agreements, or we will be entitled to contribution. 27 Once sold under the registration statement, of which this prospectus forms a part, by us or any of the Selling Stockholders, the shares of common stock and the Class E Warrants will be freely tradable in the hands of persons other than our affiliates. DESCRIPTION OF SECURITIES General We are authorized to issue 200,000,000 shares of common stock, par value $.221 per share, and 1,000,000 shares of preferred stock, par value $.001 per share. As of July 22, 2004, 5,555,865 shares of our common stock were outstanding and owned of record by approximately 140 persons, 50 shares of our Series B Convertible Preferred stock were outstanding and owned of record by 1 person, 930.266 shares of our Series C Convertible Preferred stock were outstanding and owned of record by 15 persons, and 482.8852 shares of our Series D Convertible Preferred Stock were outstanding and owned of record by 5 persons. We estimate that there are more than 1,000 beneficial owners of our common stock. The shares of common stock outstanding include 242,931 shares to be issued by us upon surrender to us of certificates for 60.7309 shares of our Series B Preferred Stock which the holders have agreed to convert. Common Stock Holders of our common stock are entitled to one vote for each share on all matters submitted to a vote of our stockholders, including the election of directors. Our certificate of incorporation does not provide for cumulative voting. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election if they choose to do so. Holders of common stock will be entitled to receive ratably dividends, if any, declared from time to time by our Board of Directors, and will be entitled to receive ratably all of our assets available for distribution to them upon liquidation. The preference designations for our Series B and Series C Convertible Preferred Stock limit us in payment of dividends on our common stock. Holders of our common stock have no preemptive, subscription or redemption rights. All the currently outstanding shares of our common stock are, and all shares of our common stock offered hereby, upon issuance and sale, will be, fully paid and nonassessable. Class E Warrants There are no Class E Warrants outstanding. The following are the material terms of our Class E Warrants. Exercise price: $_____ per share of common stock. Expiration date: 5 years after the date of this prospectus. The Class E Warrants contain customary provisions with respect to adjustments to the exercise price and the number of shares of our common stock issuable upon exercise of the 28 warrants in the event we are a party to any recapitalization, reorganization, reclassification, consolidation, merger, sale, stock dividend, stock split or reverse stock split involving our common stock. If we issue or sell any additional shares of our common stock, or common stock equivalents (that is, securities which give the holders the right to acquire our common stock), at a price which in effect is lower than the exercise price of the Class E Warrants, or for no consideration, then the exercise price of the Class E Warrants will be adjusted to a price determined by multiplying the exercise price by a fraction: (i) the numerator of which shall be equal to the sum of (A) the number of shares of common stock outstanding immediately prior to the issuance of the additional shares of common stock plus (B) the number of shares of common stock which the aggregate consideration paid for the additional shares would purchase at a price equal to the exercise price, and (ii) the denominator of which shall be equal to the number of shares of common stock outstanding immediately after the issuance of the additional shares. Similar adjustments of the exercise price would be made if we issue or grant common stock equivalents at a purchase price (including the exercise or conversion price of the common stock equivalent) which makes the effective purchase of our common stock less than the exercise price of the Class E Warrants. However, such price protection provisions of the Class E Warrants may be waived by written consent of the holders of Class E Warrants entitled to purchase a majority of the shares of our common stock issuable if all Class E Warrants were exercised. Subject to certain other conditions, if after [one year from date of prospectus], 2005 our common stock has been trading at or greater than $[4-$8; double the exercise price] per share for ten consecutive trading days, we may purchase up to 100% of the Class E Warrants at a price of $0.10 multiplied by the number of shares issuable upon the exercise of the Class E Warrants, but the holder of the Class E Warrant may, within 20 days after we notify such holder of our election to purchase his warrant, exercise his warrant. Preferred Stock Our certificate of incorporation currently provides that we are authorized to issue up to 1,000,000 shares of "blank check" preferred stock. Without any further approval by our stockholders, our Board of Directors may designate and authorize the issuance, upon the terms and conditions the directors may determine, of one or more classes or series of preferred stock with prescribed preferential dividend and liquidation rights, voting, conversion, redemption and other rights. The issuance of preferred stock, while providing flexibility for securing needed financing and for possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of the common stock. Under certain circumstances, the issuance of preferred stock could also make it more difficult for a third party to gain control of Ortec, discourage bids for the common stock at a premium or otherwise adversely affect the market price of our common stock. 29 Series A Convertible Preferred Stock Prior to the issuance of our Series B Preferred Stock, there were 187.012 shares of our Series A Convertible Preferred Stock issued and outstanding. In connection with the issuance of our Series B Preferred Stock, the one holder of our Series A Convertible Preferred Stock exchanged its Series A Preferred shares for shares of Series B Preferred Stock, shares of our common stock and warrants to purchase our common stock. There are no shares of Series A Convertible Preferred Stock currently outstanding and we intend to file a certificate of cancellation with the Secretary of State of the State of Delaware with respect to the certificate of designation of preferences for our Series A shares. Series B Convertible Preferred Stock Designation and Rank On November 13, 2002, in connection with our board of director's authority to issue "blank check" preferred stock, we filed an amendment to our certificate of incorporation in which amendment we designated the relative rights and preferences of our Series B Preferred Stock pursuant to which our board of directors authorized the issuance of 1,200 shares of Series B Preferred Stock, par value $0.001 per share. The Series B Preferred Stock ranks senior to our common stock and to all other classes and series of our equity securities that by their terms do not rank senior to the Series B Preferred Stock. The Series B Preferred Stock is subordinate to, and ranks junior to, all of our indebtedness. The Series B Preferred Stock has a stated value of $10,000 per share. As of the date of this prospectus there are 50 shares of Series B Preferred Stock outstanding. Dividends Each holder of Series B Preferred Stock is entitled to receive dividends at the rate of 12% per annum of the Series B Preferred Stock's stated liquidation preference amount of $10,000 per share (the "Series B Liquidation Preference Amount"), payable by us semi-annually and at our option in either cash or shares of our common stock that have been registered for resale by the Series B Preferred Stockholder pursuant to an effective registration statement. The formula for determining the number of shares of our common stock to be paid as a dividend on each Series B Preferred share is the number equal to the quotient of (i) the dividend payment divided by (ii) the Series B Conversion Price (defined below). Upon our issuance of the Series B Preferred Stock, we prepaid our first year dividend, by issuing approximately 373,525 shares of our common stock to the holders of record of the Series B Preferred Stock. Dividends on the Series B Preferred Stock are cumulative, accrue and are payable semi-annually or upon conversion of the Series B Preferred Stock, at our option, in either cash or shares of our common stock. Dividends paid on the Series B Preferred Stock are paid prior and in preference to any declaration or distribution on any outstanding share of common stock or any other equity securities of ours which rank junior to the Series B Preferred Stock. 30 As long as any shares of Series B Preferred Stock are outstanding, we will not declare, pay or set apart for payment any dividend or make any distribution on any junior stock (other than dividends or distributions payable in additional shares of junior stock), unless at the time of such dividend or distribution the we will have paid all accrued and unpaid dividends on the outstanding shares of Series B Preferred Stock. In the event of our dissolution, liquidation or winding up, all accrued and unpaid dividends on the Series B Preferred Stock shall be payable on the day immediately preceding the date of payment of the liquidation preference amount to the holders of Series B Preferred Stock. In the event of (i) a mandatory redemption of the Series B Preferred Stock, (ii) a redemption upon the occurrence of a Major Transaction (as defined below) or (iii) a redemption upon the occurrence of a Series B Triggering Event (as defined below), all accrued and unpaid dividends on the Series B Preferred Stock shall be payable on the day immediately preceding the date of such redemption. In the event of a voluntary conversion of the Series B Preferred Stock, all accrued and unpaid dividends on the Series B Preferred Stock being converted shall be payable on the day immediately preceding the voluntary conversion. "Major Transaction" means: o the consolidation, merger or other business combination of Ortec with or into another person (other than (A) pursuant to a merger effected solely for the purpose of changing the jurisdiction of our incorporation or (B) a consolidation, merger or other business combination in which holders of our voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors of such entity or entities); o the sale or transfer of more than 20% of the our assets other than inventory in the ordinary course of business; or o consummation of a purchase, tender or exchange offer made to the holders of more than 30% of the outstanding shares of our Common Stock. "Series B Triggering Event" means: o if any shares of Series B Preferred Stock are outstanding, the effectiveness of the Registration Statement lapses for any reason or is unavailable to the holders of the Series B Preferred Stock for sale of the shares of common stock into which the Series B Preferred Stock is convertible, and such lapse or unavailability continues for a period of ten consecutive trading days, and the shares of common stock into which such holder's Series B Preferred Stock can be converted cannot be sold in the public securities market pursuant to Rule 144(k), provided that the cause of such lapse or unavailability is not due to factors solely within the control of such holder of Series B Preferred Stock; 31 o the suspension from listing or the failure of the Common Stock to be listed on the OTC Bulletin Board, Nasdaq SmallCap Market, The New York Stock Exchange, Inc. or The American Stock Exchange, Inc., for a period of five consecutive days; o our notice to any holder of Series B Preferred Stock of our inability to comply or our intention not to comply with proper requests for conversion of any Series B Preferred Stock; o our failure to comply with a conversion notice within ten business days after the receipt by us of the conversion notice and the Series B Preferred Stock certificates; or o we breach any representation, warranty, covenant or other term or condition of the Series B Preferred Stock purchase agreement, the Series B Preferred Stock Certificate of Designation or any other agreement, document, certificate or other instrument delivered in connection with the sale of the Series B Preferred Stock, except to the extent that such breach would not have a material adverse effect and except, in the case of a breach of a covenant which is curable, only if such breach continues for a period of at least ten days. Voting Rights Except as described below and otherwise required by Delaware law, the Series B Preferred Stock has no voting rights. As long as any shares of the Series B Preferred Stock remain outstanding, we will not, without the affirmative vote or consent of the holders of at least 75% of the shares of the Series B Preferred Stock outstanding at the time, voting separately as a class: o authorize, create, issue or increase the authorized or issued amount of any class or series of stock, including any more shares of previously authorized common stock or preferred stock, ranking senior to the Series B Preferred Stock, with respect to the distribution of assets on liquidation, dissolution or winding up; o amend, alter or repeal the provisions of the Series B Preferred Stock, whether by merger, consolidation or otherwise, so as to adversely affect any right, preference, privilege or voting power of the Series B Preferred Stock; o repurchase, redeem or pay dividends on, shares of our junior stock; o amend our certificate of incorporation or by-laws so as to affect materially and adversely any right, preference, privilege or voting power of the Series B Preferred Stock; 32 o effect any distribution with respect to junior stock; or o reclassify our outstanding securities. Liquidation Preference In the event of our liquidation, dissolution or winding up, the holders of shares of the Series B Preferred Stock then outstanding shall be entitled to receive, out of our assets, a Series B Liquidation Preference Amount equal to $10,000 per share of the Series B Preferred Stock plus any accrued and unpaid dividends before any payment shall be made or any assets distributed to the holders of our common stock or any other junior stock. If our assets are not sufficient to pay in full the Series B Liquidation Preference Amount (plus any accrued and unpaid dividends) to the holders of the Series B Preferred Stock and any series of preferred stock or any other class of stock on a parity, as to rights on liquidation, dissolution or winding up, with the Series B Preferred Stock, then all of our assets will be distributed among the holders of the Series B Preferred Stock and the other classes of stock on a parity with the Series B Preferred Stock, if any, ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. After payment of the full Series B Liquidation Preference Amount (plus any accrued and unpaid dividends), the holders of shares of Series B Preferred Stock will not be entitled to any further participation as such in any distribution of our assets. Conversion Voluntary Conversion Each holder of Series B Preferred Stock may, at such holder's option, subject to the certain limitations described below, elect to convert all or any portion of the shares of Series B Preferred Stock held by such holder into a number of fully paid and nonassessable shares of our common stock equal to the quotient of (i) the Series B Liquidation Preference Amount divided by (ii) the Series B Conversion Price (as defined below). Mandatory Conversion Upon the occurrence of a Mandatory Series B Redemption Date, each share of Series B Preferred Stock outstanding on the Mandatory Series B Conversion Date shall, automatically convert into a number of fully paid and nonassessable shares of our common stock equal to the quotient of (i) the liquidation preference amount divided by (ii) the applicable conversion price in effect on the Mandatory Series B Conversion Date. "Mandatory Series B Conversion Date" means o the date which is not earlier than six months after the effective date of the registration statement registering the common stock into which the Series B Preferred Stock is convertible, for sale in the public securities markets, provided, 33 that the closing bid price of our common stock exceeds $20.00 for a period of twenty consecutive trading days; o the date that we consummate an underwritten public offering that is not later than November 26, 2003 where we receive gross proceeds of at least $8 million. Provided, however, that on the Mandatory Series B Conversion Date, such registration statement must be effective or the shares of our common stock into which the Series B Preferred Stock can be converted may be offered for sale to the public pursuant to Rule 144(k) under the Securities Act of 1933, as amended. Series B Conversion Price The Series B Preferred Stock is subject to a fixed conversion price and an alternate conversion price. The fixed conversion price is equal to $3.00 per share, subject to certain adjustments described below, and at no time will the fixed conversion price be less than $3.00 per share. The holders of the Series B Preferred Stock may elect to apply an alternative conversion price, equal to 90% of the average of the five lowest volume weighted average prices for our common stock during the twenty trading days immediately prior to conversion, subject to certain adjustments described below. At no time will the alternative conversion price be less than $2.50 per share. In no event shall the alternative conversion price exceed the fixed conversion price. In the event that we enter into a letter of intent with respect to a merger, acquisition or business combination pursuant to which we will own at least 40% of such combined entity and we enter into a definitive agreement related to such merger, acquisition or business combination within thirty days of executing the letter of intent, the period in which the holders of the Series B Preferred Stock may elect to apply the alternative conversion price shall be deferred until the earlier of o ninety days following the closing of such merger, acquisition or business combination; and o one hundred twenty days following the execution of such definitive agreement. In addition to the adjustments to the conversion price described above, the certificate of designation sets forth customary adjustments to the Series B Conversion Price in the event of stock splits, combinations, dividends, distributions, reclassifications and other corporate events. Conversion Restrictions At no time may a holder of shares of Series B Preferred Stock convert such shares if the number of shares of our common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of our common stock owned by such holder at such time, 34 the number of shares of our common stock which would result in such holder beneficially owning ("Beneficially Owning" or "Beneficially Owned", as determined in accordance with Section 13(d) of the Securities and Exchange Act of 1934 and the rules thereunder) more than 4.99% or 9.99% of all of our common stock outstanding at such time. However, this restriction may be waived by such holder if we are provided with a sixty-one day written notice by such holder that such holder desires to waive this restriction. This restriction will not be applicable during the sixty-one days immediately preceding the Mandatory Conversion Date. Redemption Redemption by Holders of Series B Preferred Stock Upon the occurrence of a Major Transaction or a Series B Triggering Event, each holder of Series B Preferred Stock will have the right, at such holder's option, to require us to redeem all or a portion of such holder's shares of Series B Preferred Stock at a price per share equal to 100% of the Series B Liquidation Preference Amount if paid in cash or 120% of the liquidation preference amount in the case of a Major Transaction and 150 percent in the case of a Triggering Event if paid in shares of our common stock, plus any accrued but unpaid dividends and liquidated damages (the "Major Transaction Series B Redemption Price"). We will have the right to decide whether to pay the Major Transaction Series B Redemption Price in cash or shares of our common stock. If we elect to pay the Major Transaction Series B Redemption Price in shares of our common stock, the price per share will be based upon the conversion price then in effect on the day preceding the date of delivery of written notice by the holder of our Series B Preferred Stock of its election to have us redeem its Series B Preferred Stock, provided that we will only be required to issue shares of our common stock up to a number equal to 200% of the number of shares of our common stock to effect conversion of the Series B Preferred Stock and exercise of the warrants issued in connection with the purchase of the Series B Preferred Stock being converted, that we would have had to issue assuming such Series B Preferred Stock had been converted on the date the shares of Series B Preferred Stock in question was issued. The balance of the unpaid portion of the Major Transaction Series B Redemption Price, if any, will be exchanged for a non-redeemable preferred convertible security of ours accruing interest at a rate of eighteen percent per annum, such interest payable in kind. Ortec's Redemption Option We may redeem all or a portion of the Series B Preferred Stock outstanding upon five days prior written notice at a price per share equal to 150% of the Series B Liquidation Preference Amount plus any accrued but unpaid dividends and liquidated damages. If a holder of Series B Preferred Stock has, prior to our redemption notice, delivered a conversion notice to us or delivers a conversion notice to us within twenty-four hours of such holder's receipt of our redemption notice, up to 50% of the shares of Series B Preferred Stock designated to be redeemed may be converted by such holder. If during the period between delivery of our redemption notice and the redemption date a holder would become entitled to deliver a notice of redemption at the option of the holder because of a Major Transaction, then the right of such holder shall take precedence over our previously delivered redemption notice. 35 There are no restrictions on the repurchase or redemption of the shares of Series B Preferred Stock because of any arrearage in the payment of dividends. Series C Convertible Preferred Stock Designation and Rank On May 23, 2003 in connection with our board of director's authority to issue "blank check" preferred stock, we filed an amendment to our certificate of incorporation in which amendment we designated the relative rights and preferences of our Series C Preferred Stock pursuant to which our board of directors authorized the issuance of 2000 shares of Series C Preferred Stock, par value $0.001 per share. The Series C Preferred Stock ranks senior to our common stock and to all other classes and series of our equity securities that by their terms do not rank senior to the Series C Preferred Stock. The Series C Preferred Stock is subordinate to, and ranks junior to, all of our indebtedness. The Series C Preferred Stock has a stated value of $6,000 per share. As of the date of this prospectus there are 930.266 shares of Series C Preferred Stock outstanding. Dividends Each holder of Series C Preferred Stock is entitled to receive dividends at the rate of 10% of the Series C Preferred Stock's stated liquidation preference amount of $6,000 per share (the "Series C Liquidation Preference Amount"), payable by us upon conversion or redemption of the Series C Preferred Stock and at our option in either cash or shares of our common stock that have been registered for resale by the Series C Preferred Stockholder pursuant to an effective registration statement. The formula for determining the number of shares of our common stock to be paid as a dividend on each Series C Preferred share is the number equal to the quotient of (i) the dividend payment divided by (ii) the Conversion Price (defined below). Dividends paid on the Series C Preferred Stock are paid prior and in preference to any declaration or distribution on any outstanding share of common stock or any other equity securities of ours which rank junior to the Series C Preferred Stock. As long as any shares of Series C Preferred Stock are outstanding, we will not declare, pay or set apart for payment any dividend or make any distribution on any junior stock (other than dividends or distributions payable in additional shares of junior stock), unless at the time of such dividend or distribution the we will have paid all accrued and unpaid dividends on the outstanding shares of Series C Preferred Stock. In the event of our dissolution, liquidation or winding up, all accrued and unpaid dividends on the Series C Preferred Stock shall be payable on the day immediately preceding the date of payment of the liquidation preference amount to the holders of Series C Preferred Stock. In the event of (i) a mandatory redemption of the Series C Preferred Stock, (ii) a redemption upon the occurrence of a Major Transaction (as defined below)or (iii) a redemption upon the occurrence of a Series C Triggering Event (as defined below), all accrued and unpaid dividends on the Series C Preferred Stock shall be payable on the day immediately preceding the date of 36 such redemption. In the event of a voluntary conversion of the Series C Preferred Stock, all accrued and unpaid dividends on the Series C Preferred Stock being converted shall be payable on the day immediately preceding the voluntary conversion. "Major Transaction" means: o the consolidation, merger or other business combination of Ortec with or into another person (other than (A) pursuant to a merger effected solely for the purpose of changing the jurisdiction of our incorporation or (B) a consolidation, merger or other business combination in which holders of our voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors of such entity or entities); o the sale or transfer of more than 50% of the our assets other than inventory in the ordinary course of business; or o acquisition by a third party of more than 50% of the outstanding shares of our Common Stock. "Series C Triggering Event" means: o if any shares of Series C Preferred Stock are outstanding, the effectiveness of the registration statement of which this prospectus is a part, lapses for any reason or is unavailable to the holders of the Series C Preferred Stock for sale of the shares of common stock into which the Series C Preferred Stock is convertible, and such lapse or unavailability continues for a period of ten consecutive trading days, and the shares of common stock into which such holder's Series C Preferred Stock can be converted cannot be sold in the public securities market pursuant to Rule 144(k), provided that the cause of such lapse or unavailability is not due to factors solely within the control of such holder of Series C Preferred Stock; o the suspension from listing or the failure of the Common Stock to be listed on the OTC Bulletin Board, Nasdaq SmallCap Market, The New York Stock Exchange, Inc. or The American Stock Exchange, Inc., for a period of five consecutive days; o our notice to any holder of Series C Preferred Stock of our inability to comply or our intention not to comply with proper requests for conversion of any Series C Preferred Stock; o our failure to comply with a conversion notice within ten business days after the receipt by us of the conversion notice and the Series C Preferred Stock certificates; or 37 o we breach any representation, warranty, covenant or other term or condition of the Series C Preferred Stock purchase agreement, the Series C Preferred Stock Certificate of Designation or any other agreement, document, certificate or other instrument delivered in connection with the sale of the Series C Preferred Stock, except to the extent that such breach would not have a material adverse effect and except, in the case of a breach of a covenant which is curable, only if such breach continues for a period of at least ten days. Voting Rights Except as described below and otherwise required by Delaware law, the Series C Preferred Stock has no voting rights. As long as any shares of the Series C Preferred Stock remain outstanding, we will not, without the affirmative vote or consent of the holders of at least 75% of the shares of the Series C Preferred Stock outstanding at the time, voting separately as a class: change to our certificate of incorporation or the certificate of designation of the relative rights and preferences of the Series C preferred stock, which would amend, alter, change or repeal any of the powers, designations, preferences and rights of the Series C preferred; or o issue any additional shares of Series C preferred stock. Liquidation Preference In the event of our liquidation, dissolution or winding up, the holders of shares of the Series C Preferred Stock then outstanding shall be entitled to receive, out of our assets, a liquidation preference amount equal to $6,000 per share of the Series C Preferred Stock plus any accrued and unpaid dividends before any payment shall be made or any assets distributed to the holders of our common stock or any other junior stock. If our assets are not sufficient to pay in full the Series C Liquidation Preference Amount (plus any accrued and unpaid dividends) to the holders of the Series C Preferred Stock and any series of preferred stock or any other class of stock on a parity, as to rights on liquidation, dissolution or winding up, with the Series C Preferred Stock, then all of our assets will be distributed among the holders of the Series C Preferred Stock and the other classes of stock on a parity with the Series C Preferred Stock, if any, ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. After payment of the full Series C Liquidation Preference Amount (plus any accrued and unpaid dividends), the holders of shares of Series C Preferred Stock will not be entitled to any further participation as such in any distribution of our assets. Conversion Voluntary Conversion 38 Each holder of Series C Preferred Stock may, at such holder's option, subject to the certain limitations described below, elect to convert all or any portion of the shares of Series C Preferred Stock held by such holder into a number of fully paid and nonassessable shares of our common stock equal to the quotient of (i) the Series C Liquidation Preference Amount divided by (ii) the Series C Conversion Price (as defined below). Mandatory Conversion Upon the occurrence of a Mandatory Series C Redemption Date, each share of Series C Preferred Stock outstanding on the Mandatory Series C Conversion Date shall, automatically convert into a number of fully paid and nonassessable shares of our common stock equal to the quotient of (i) the Series C Liquidation Preference Amount divided by (ii) the applicable conversion price in effect on the Mandatory Series C Conversion Date. "Mandatory Series C Conversion Date" means the date which is not earlier than six months after the effective date of the registration statement of which this prospectus is a part, provided, that the closing bid price of our common stock exceeds $6.00 for a period of ten consecutive trading days and such registration statement must be effective or the shares of our common stock into which the Series C Preferred Stock can be converted may be offered for sale to the public pursuant to Rule 144(k) under the Securities Act of 1933, as amended. Series C Conversion Price The Series C Conversion Price is equal to $2.00 per share, subject to certain adjustments described below, and at no time will the Series C Conversion Price exceed $2.00 per share. The certificate of designation for the Series C Preferred Stock sets forth customary adjustments to the Series C Conversion price in the event of stock splits, combinations, dividends, distributions, reclassifications and other corporate events. If we issue or sell any additional shares of common stock at a price per share less than $2.00, or without consideration, the Series C Conversion Price will be reduced to a price equal to that price determined by multiplying the Series C Conversion Price by a fraction: (i) the numerator of which shall be equal to the sum of (A) the number of shares of common stock outstanding immediately prior to the issuance of the additional shares of common stock plus (B) the number of shares of common stock which the aggregate consideration paid for the additional shares would purchase at a price equal to the Series C Conversion Price, and (ii) the denominator of which shall be equal to the number of shares of common stock outstanding immediately after the issuance of the additional shares. Conversion Restrictions At no time may a holder of shares of Series C Preferred Stock convert such shares if the number of shares of our common stock to be issued pursuant to such conversion would exceed, 39 when aggregated with all other shares of our common stock owned by such holder at such time, the number of shares of our common stock which would result in the holder Beneficially Owning more than 4.99% or 9.99%of all of our common stock outstanding at such time. However, this restriction may be waived by such holder if we are provided with a sixty-one day written notice by such holder that such holder desires to waive this restriction. This restriction will not be applicable during the sixty-one days immediately preceding the Mandatory Series C Conversion Date. Redemption Redemption by Holders of Series C Preferred Stock Upon the occurrence of a Major Transaction or a Series C Triggering Event, each holder of Series C Preferred Stock will have the right, at such holder's option, to require us to redeem all or a portion of such holder's shares of Series C Preferred Stock at a price per share equal to 100% of the liquidation preference amount if paid in cash or 120% of the liquidation preference amount in the case of a Major Transaction and 150% in the case of a Series C Triggering Event if paid in shares of our common stock, plus any accrued but unpaid dividends and liquidated damages (the "Major Transaction Series C Redemption Price"). We will have the right to decide whether to pay the Major Transaction Series C Redemption Price in cash or shares of our common stock. If we elect to pay the Major Transaction Series C Redemption Price in shares of our common stock, the price per share will be based upon the Series C Conversion Price then in effect on the day preceding the date of delivery of written notice by the holder of our Series C Preferred Stock of its election to have us redeem its Series C Preferred Stock. Ortec's Redemption Option We may redeem all or a portion of the Series C Preferred Stock outstanding upon five days prior written notice at a price per share equal to 150% of the liquidation preference amount plus any accrued but unpaid dividends and liquidated damages. If a holder of Series C Preferred Stock has, prior to our redemption notice, delivered a conversion notice to us or delivers a conversion notice to us within twenty-four hours of such holder's receipt of our redemption notice, up to 50% of the shares of Series C Preferred Stock designated to be redeemed may be converted by such holder. If during the period between delivery of our redemption notice and the redemption date a holder would become entitled to deliver a notice of redemption at the option of the holder because of a Major Transaction, then the right of such holder shall take precedence over our previously delivered redemption notice. There are no restrictions on the repurchase or redemption of the shares of Series C Preferred Stock because of any arrearage in the payment of dividends. Series D Convertible Preferred Stock Designation and Rank 40 On August 19, 2003, in connection with our board of director's authority to issue "blank check" preferred stock, we filed an amendment to our certificate of incorporation in which amendment we designated the relative rights and preferences of our Series D Preferred Stock pursuant to which our board of directors authorized the issuance of 2,000 shares of Series D Preferred Stock, par value $0.001 per share. The Series D Preferred Stock shall rank prior to the Common Stock for purposes of liquidation preference and to all other classes and series of equity securities of the Company that by their terms do not rank senior to the Series D Preferred Stock, except that the Series D Preferred Stock shall be subordinate to and rank junior to all other classes of preferred stock of the Company outstanding as of the date hereof (the Series B and Series C Preferred Stock) or hereafter created unless any series of preferred stock hereafter created by its terms ranks junior to the Series D Preferred Stock. The Series D Preferred Stock shall be subordinate to and rank junior to all indebtedness of the Company now or hereafter outstanding. The Series D Preferred Stock has a stated value of $10,000 per share. As of the date of this prospectus there are 482.085 shares of Series D Preferred Stock outstanding. Dividends In the event we declare a cash dividend on our common stock we will be required to pay a dividend on each share of our Series D Preferred Stock in an amount equal to the cash dividend paid on one share of our common stock multiplied by the number of shares of our common stock into which such one share of our Series D Preferred Stock can be converted. Voting Rights Except as described below and otherwise required by Delaware law, the Series D Preferred Stock has no voting rights. As long as any shares of the Series D Preferred Stock remain outstanding, we will not, without the affirmative vote or consent of the holders of at least 75% of the shares of the Series D Preferred Stock outstanding at the time, voting separately as a class: o amend, alter or repeal the provisions of the Series D Preferred Stock so as to adversely affect any right, preference, privilege or voting power of the Series D Preferred Stock; o effect any distribution with respect to junior stock except that we may effect a distribution on our common stock if we make a like kind distribution on each share of our Series D Preferred Stock outstanding in an amount equal to the distribution on one share of our common stock multiplied by the number of shares of our common stock into which one share of our Series D Preferred Stock can be converted at such time. 41 Liquidation Preference In the event of our liquidation, dissolution or winding up, the holders of shares of the Series D Preferred Stock then outstanding shall be entitled to receive, out of our assets, a Series D Liquidation Preference Amount equal to $10,000 per share of the Series D Preferred Stock before any payment shall be made or any assets distributed to the holders of our common stock or any other junior stock. However, no Series D Liquidation Preference Amount shall be paid on any Series D Preferred Stock unless we have first finished paying all liquidation preference amounts on all other classes of our outstanding preferred stock which do not by their terms rank junior to the Series D Preferred Stock. If our assets can pay some of, but are not sufficient to pay in full, the Series D Liquidation Preference Amount to the holders of the Series D Preferred Stock, then all of our assets available to pay any portion of the Series D Liquidation Preference Amount will be distributed among the holders of the Series D Preferred Stock ratably on a per share basis. After payment of the full Series D Liquidation Preference Amount, the holders of shares of Series D Preferred Stock will not be entitled to any further participation as such in any distribution of our assets. Conversion Voluntary Conversion Each holder of Series D Preferred Stock may, at such holder's option, subject to certain limitations described below, elect to convert all or any portion of the shares of Series D Preferred Stock held by such holder into a number of fully paid and nonassessable shares of our common stock equal to the quotient of (i) the Series D Liquidation Preference Amount divided by (ii) the Series D Conversion Price (as defined below). Conversion Restrictions At no time may a holder of shares of Series D Preferred Stock convert shares of the Series D Preferred Stock if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of our common stock owned by such holder at such time, the number of shares of common stock which would result in such holder Beneficially Owning in excess of 9.99% of all of our common stock outstanding at such time; provided, however, that upon a holder of Series D Preferred Stock providing us with sixty-one days notice that such holder would like to waive this provision with regard to any or all shares of common stock issuable upon conversion of his Series D Preferred Stock, this provision shall be of no force or effect with regard to those shares of Series D Preferred Stock designated in such notice. Mandatory Conversion Upon our written request a holder of Series D Preferred Stock shall advise us in writing as to the number of shares of our common stock that are Beneficially Owned by such holder. If the shares of our common stock Beneficially Owned by such holder amount to less than 9.99% of the shares of our common stock outstanding at such time, we may, at our option, compel such 42 holder to convert such portion of the Series D Preferred Stock owned by him into so many shares of our common stock so that the total number of shares of our common stock Beneficially Owned by such holder after such conversion shall equal 9.99%, but not more, of the shares of our common stock outstanding after such conversion. Series D Conversion Price The Series D Preferred Stock is subject to a fixed conversion price equal to $2.50 per share, subject to customary adjustments to the Series D Conversion Price in the event of stock splits, combinations, dividends, distributions, reclassifications and other corporate events. Reservation of Shares of Common Stock As long as any shares of Series D Preferred Stock are outstanding, we are required to reserve and keep available out of our authorized and unissued common stock, solely for the purpose of effecting the conversion of the Series D Preferred Stock, 100% of such number of shares of common stock that will be sufficient to effect the conversion of all of the Series D Preferred Stock then outstanding. Certain Other Warrants We issued the following warrants to the purchasers of our Series B Preferred Stock and our Series C Preferred Stock and to the designees of the placement agent who arranged our Series B Preferred Stock financings in 2002 and 2003, and our Series C Preferred Stock financing in 2003. Series B-1 Warrants Exercisable for the purchase of 692,963 shares of our common stock. Exercise price: $4.00 per share except for one warrant which is exercisable for the purchase of 25,000 shares of our common stock at a price of $15 per share. Expiration dates: November 13, 2009 for warrants to purchase 471,841 shares December 13, 2009 for warrants to purchase 121,122 shares February 26, 2010 for warrants to purchase 100,000 shares Series B-2 Warrants Exercisable for the purchase of 568,665 shares of our common stock. Exercise price: $5.00 per share except for one warrant which is exercisable for the purchase of 25,000 shares of our common stock at a price of $20 per share. 43 Expiration dates: November 13, 2009 for warrants to purchase 367,543 shares December 13, 2009 for warrants to purchase 101,122 shares February 26, 2010 for warrants to purchase 100,000 shares Both the Series B-1 and the Series B-2 Warrants contain customary provisions with respect to adjustments to the exercise price and the number of shares of our common stock issuable upon exercise of the Warrants in the event we are a party to any recapitalization, reorganization, reclassification, consolidation, merger, sale, stock dividend, stock split or reverse stock split involving our common stock. Both the Series B-1 and the Series B-2 Warrants also have price protection in the event we issue any of our common stock, or securities convertible into, or warrants or options to purchase, our common stock, at a price lower than the exercise price of the Warrant. Subject to certain other conditions, if more than 12 months, (in the case of the B-1 Warrants and 24 months in the case of the B-2 Warrants) after the issue date of the warrant, our common stock is trading for 15 consecutive trading days equal to or greater than $30.00 (in the case of the B-1 Warrants, $40.00 in the case of the B-2 Warrants) per share, we may purchase up to 100% of the Series B-1 and Series B-2 Warrants, as the case may be, at a price of $0.10 multiplied by the number of shares issuable upon exercise of the Warrants. However, the holder of a B-1 Warrant or a B-2 Warrant may exercise such warrant within 20 days after we notify such holder of our election to purchase its warrant Series C Warrants Exercisable for the purchase of 1,707,000 shares of our common stock. Exercise price: $3.60 per share Expiration dates: May 22, 2008 for warrants to purchase 1,602,000 shares July 28, 2008 for warrants to purchase 105,000 shares The Series C Warrants contain customary provisions with respect to adjustments to the exercise price and the number of shares of our common stock issuable upon exercise of the warrants in the event we are a party to any recapitalization, reorganization, reclassification, consolidation, merger, sale, stock dividend, stock split or reverse stock split involving our common stock. If we issue or sell any additional shares of our common stock, or common stock equivalents (that is, securities which give the holders the right to acquire our common stock), at a price which in effect is lower than the exercise price of the Series C Warrants, or for no consideration, then the exercise price of the Series C Warrants will be adjusted to a price determined by multiplying the exercise price by a fraction: (i) the numerator of which shall be equal to the sum of (A) the number of shares of common stock outstanding immediately prior to the issuance of the additional shares of common stock plus (B) the number of shares of common stock which the aggregate consideration paid for the additional shares would purchase at a price equal to the exercise price, and 44 (ii) the denominator of which shall be equal to the number of shares of common stock outstanding immediately after the issuance of the additional shares. Similar adjustments of the exercise price would be made if we issue or grant common stock equivalents at a price (including the exercise or conversion price of the common stock equivalent) which makes the effective purchase of our common stock less than the exercise price of the Series C Warrants. Subject to certain other conditions, if after May 23, 2005 (July 29, 2005 as to two Series C Warrants to purchase an aggregate of 105,000 shares of our common stock) our common stock has been trading at or greater than $10.80 per share for ten consecutive trading days, we may purchase up to 100% of the Series C Warrants at a price of $0.10 multiplied by the number of shares issuable upon the exercise of the warrants, but the holder of the Series C Warrant may, within 20 days after we notify such holder of our election to purchase his warrant, exercise his warrant. Other Warrants and Options We also have other warrants outstanding which entitle the holders to purchase an aggregate of 188,667 shares of our common stock, of which warrants to purchase 150,000 shares are exercisable at $2.00 per share and warrants to purchase the other 38,667 shares are exercisable at prices of $45.00 and $150.00 per share. We have granted options under our employee stock option plan, and options outside the plan, to our employees, directors, consultants and vendors, to purchase an aggregate of 1,702,541 shares of our common stock at exercise prices ranging from $1.80 to $10.00 per share for 1,585,610 shares, and at exercise prices in excess of $10.00 per share for 116,931 shares. The transfer agent for our common stock is Registrar and Transfer Company, Cranford, New Jersey. 45 LEGAL MATTERS The legality of the common stock offered hereby will be passed upon for us by Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine LLP, New York, New York. EXPERTS Our consolidated financial statements as of December 31, 2001, 2002 and 2003 and for the period from March 12, 1991 (inception) to December 31, 2003, incorporated by reference in this prospectus, have been audited by Grant Thornton LLP, Independent Registered Public Accounting Firm, as stated in their report incorporated by reference herein and are included in reliance upon the report of that firm given upon their authority as experts in accounting and auditing. INFORMATION WITH RESPECT TO ORTEC INTERNATIONAL, INC. This prospectus is being delivered with a copy of our Form 10-K for the fiscal year ended December 31, 2003 and an amendment thereto and our Form 10-QSB for the quarter ended March 31, 2004. WHERE YOU CAN FIND MORE INFORMATION We are subject to the information requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), and in accordance with the Exchange Act we file reports, proxy statements and other information with the SEC. Our reports, proxy statements and most other information that we file with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549. Copies of this material may be obtained by mail from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains our reports, proxy statements and other information as well as documents from other companies that file electronically with the SEC. The Internet address is http://www.sec.gov. This prospectus is only a part of a registration statement we filed with the SEC under the Securities Act of 1933 and, therefore, it does not include all the information contained in the registration statement. We have also filed exhibits and schedules to the registration statement that are excluded from this prospectus and the accompanying supplement. Among such exhibits are a number of our material corporate documents, and you should refer to the applicable exhibit for the complete text of any such document described in this prospectus. You may inspect or obtain a copy of the registration statement, including exhibits and schedules, as described in the previous paragraph. 46 Our Internet address is www.ortecinternational.com. The information contained on our website and on any websites linked by our website, however, is not part of this prospectus and you should not rely on such information in deciding whether to invest in our securities. Our common stock is listed on the Over the Counter Bulletin Board "ORTN." INFORMATION INCORPORATED BY REFERENCE The SEC allows us, under certain circumstances, to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus. We incorporate by reference the documents listed below. o Our Annual Report on Form 10-K, for our fiscal year ended December 31, 2003, and an amendment thereto. o Our report on Form 10-QSB for the three months ended March 31, 2004. o The "Description of Registrant's Securities to be Registered" contained in our Registration Statement on Form 8-A, filed December 5, 1995 including any amendment or report filed for the purpose of updating such description. Any statement contained in this prospectus or in a document incorporated by reference shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in those documents modifies or supersedes that statement. Any statements so modified or superseded will not be deemed to constitute a part of this prospectus, except as so modified or superseded. In addition, any prospectus supplement filed in relation to this prospectus shall be deemed to supercede for all purposes any earlier prospectus supplement filed in relation to this prospectus. We will provide without charge to each person to whom this prospectus is delivered, upon written or oral request, a copy of any or all of the documents referred to above which have been incorporated by reference in this prospectus. Requests for these documents should be directed to by mail to Mr. Ron Lipstein, Secretary, Ortec International, Inc., 3960 Broadway, New York, NY 10032, or by telephone at (212) 740-6999. You should rely only on the information contained in or incorporated by reference into this prospectus. Neither we nor any Selling Stockholder have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The information in this prospectus is current as of its date. 47 SEC POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Our certificate of incorporation provides that the personal liability of our directors shall be limited to the fullest extent permitted by the provisions of Section 102(b)(7) of the General Corporation Law of the State of Delaware (the "DGCL"). Section 102(b)(7) of the DGCL generally provides that no director shall be liable personally to us or our shareholders for monetary damages for breach of fiduciary duty as a director, provided that our certificate of incorporation does not eliminate the liability of a director for (i) any breach of the director's duty of loyalty to us or our shareholders; (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) acts or omissions in respect of certain unlawful dividend payments or stock redemptions or repurchases; or (iv) any transaction from which such director derives improper personal benefit. The effect of this provision is to eliminate our rights and the rights of our shareholders through stockholders' derivative suits on our behalf, to recover monetary damages against a director for breach of her or his fiduciary duty of care as a director including breaches resulting from negligent or grossly negligent behavior except in the situations described in clauses (i) through (iv) above. The limitations summarized above, however, do not affect our or our shareholders ability to seek non-monetary remedies, such as an injunction or rescission, against a director for breach of her or his fiduciary duty. In addition, our certificate of incorporation provides that we shall, to the fullest extent permitted by Section 145 of the DGCL, indemnify all persons who we may indemnify pursuant to Section 145 of the DGCL. Section 145 of the DGCL permits a company to indemnify an officer or director who was or is a party or is threatened to be made a party to any proceeding because of his or her position, if the officer or director acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of such company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. We maintain a directors' and officers' liability insurance policy covering certain liabilities that may be incurred by our directors and officers in connection with the performance of their duties. The entire premium for such insurance is paid by us. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors and officers, and to persons controlling Ortec pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 48 PART II - INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION It is expected that the following expenses will be incurred in connection with the issuance and distribution of the Common Stock being registered. All such expenses are being paid by the Issuer: SEC Registration fee ................................................ $ 2,507 *Printing and Edgarization .......................................... 30,000 *Accountants' fees and expenses ..................................... 10,000 *Attorneys' fees and expenses ....................................... 79,000 *NASD filing fee .................................................... 2,900 *Miscellaneous ...................................................... 593 -------- *Total .............................................................. $125,000
- ---------- *Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrant's Certificate of Incorporation provides that the personal liability of the directors of the Registrant shall be limited to the fullest extent permitted by the provisions of Section 102(b)(7) of the General Corporation Law of the State of Delaware (DGCL). Section 102(b)(7) of the DGCL generally provides that no director shall be liable personally to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that the Certificate of Incorporation does not eliminate the liability of a director for (1) any breach of the director's duty of loyalty to the Registrant or its stockholders; (2) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (3) acts or omissions in respect of certain unlawful dividend payments or stock redemptions or repurchases; or (4) any transaction from which such director derives an improper personal benefit. The effect of this provision is to eliminate the rights of the Registrant and its stockholders to recover monetary damages against a director for breach of her or his fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (1) through (4) above. The limitations summarized above, however, do not affect the ability of the Registrant or its stockholders to seek nonmonetary remedies, such as an injunction or rescission, against a director for breach of her or his fiduciary duty. In addition, the Certificate of Incorporation provides that the Registrant shall, to the fullest extent permitted by Section 145 of the DGCL, indemnify all persons whom it may indemnify pursuant to Section 145 of the DGCL. In general, Section 145 of the DGCL permits the Registrant to indemnify a director, officer, employee or agent of the Registrant or, when so II-1 serving at the Registrant's request, another company who was or is a party or is threatened to be made a party to any proceedings because of his or her position, if he or she acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Registrant and, with respect to any criminal action or proceeding, has no reasonable cause to believe his or her conduct was unlawful. The Registrant maintains a directors' and officers' liability insurance policy covering certain liabilities that may be incurred by any director or officer in connection with the performance of his or her duties and certain liabilities that may be incurred by the Registrant, including the indemnification payable to any director or officer. The entire premium for such insurance is paid by the Registrant. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to directors, officers, or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. II-2 ITEM 16. EXHIBITS
Exhibit Number Description - -------------- ----------- 1.1 Placement Agent Agreement(1) 1.2 Modification of Placement Agent Agreement(4) 4.1 Form of certificate evidencing shares of common stock(2) 4.2 Form of Class E Warrant(1) 5.1 Opinion of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, counsel for the Registrant(1) 10.1 Agreement between Registrant and Cambrex Bio Science Walkersville, Inc. dated as of October 29, 2003, redacted(1)(4) 10.2 Second Amendment to Lease with the Trustees of Columbia University(1) 23.1 Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm(4) 23.2 Consent of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP (included in Exhibit 5.1)(1) 24.1 Power of Attorney(1)
- ---------- (1) Previously filed with this Registration Statement or amendments thereto. (2) 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. (3) Certain portions marked by asterisks have been omitted subject to a confidential treatment request and filed separately with the Securities and Exchange Commission. (4) Filed herewith. II-3 ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424 (b) if, in the aggregate the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bonafide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on July 26, 2004. ORTEC INTERNATIONAL, INC. By: /s/ Steven Katz, Ph.D. ----------------------------------------- Steven Katz Chairman, Board of Directors Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated:
Signature Title Date - --------- ----- ---- /s/ Steven Katz, Ph.D. Chairman, Board of Directors July 26, 2004 - -------------------------------- (Principal Executive Officer) Steven Katz, Ph.D. /s/ Ron Lipstein Vice Chairman, Board of Directors, July 26, 2004 - -------------------------------- Chief Executive Officer, Chief Ron Lipstein Financial Officer, Secretary, Treasurer and Director, (Principal Financial and Accounting Officer) /s/ Ron Lipstein Director July 26, 2004 - -------------------------------- Dr. Mark Eisenberg by Ron Lipstein, his attorney in fact pursuant to Power of Attorney dated September 19, 2003 /s/ Ron Lipstein Director July 26, 2004 - -------------------------------- Steven Lilien, Ph.D. by Ron Lipstein, his attorney in fact pursuant to Power of Attorney dated September 19, 2003 /s/ Ron Lipstein Director July 26, 2004 - -------------------------------- Allen I. Schiff, Ph.D. by Ron Lipstein, his attorney in fact
pursuant to Power of Attorney dated September 19, 2003 /s/ Ron Lipstein Director July 26, 2004 - -------------------------------- Gregory Brown by Ron Lipstein, his attorney in fact pursuant to Power of Attorney dated September 19, 2003
EX-1 2 ex1-2.txt EXHIBIT 1.2 EXHIBIT 1.2 July 27, 2004 Mr. Ron Lipstein Chief Executive Officer Ortec International Inc. 3960 Broadway New York, NY 10032 Gentlemen: This letter Agreement (the "Agreement") confirms the engagement of Burnham Hill Partners ("BHP"), a division of Pali Capital, Inc., and ViewTrade Securities, Inc. ("ViewTrade") by Ortec International (the "Company") to jointly act as the Company's exclusive placement agent in connection with the Company's issuance of common stock and warrants pursuant to the S-2 registration statement initially filed with the Securities and Exchange Commission on September 22, 2003 ("Financing"). Such registration statement and all amendments thereto, whether such amendments have heretofore been, or will hereafter be, filed are collectively referred to in this agreement as the "Registration Statement." This agreement modifies and replaces in whole the agreement relating to the Financing dated February 4, 2004, between the Company and BHP and any modification of such February 4, 2004 agreement subsequently entered into between the Company and BHP. The Financing shall be for 6,000,000 shares of the Company's common stock and 3,000,000 five year Class E Warrants, each Warrant entitling the holder to purchase one share of the Company's common stock at the exercise price to be set forth in the pricing amendment to the Registration Statement (the "Pricing Amendment") to be hereafter filed. The 6,000,000 shares and the 3,000,000 Class E Warrants will be offered in units, each unit consisting of two detachable shares and one detachable Class E Warrant, at an offering price to be set forth in the Pricing Amendment. The offering will be on a best efforts, 2,500,000 units (5,000,000 shares and 2,500,000 Class E Warrants), or none, minimum basis, so that no units will be sold unless a minimum of 2,500,000 units are sold. The proceeds from the sale of the units will be held in an escrow account with the law firm of Jenkens & Gilchrist Parker Chapin LLP. The proceeds held in escrow shall be paid by the escrow agent only upon the joint written instructions signed by BHP, ViewTrade and the Company, it being understood that unless 2,500,000 units are sold all proceeds from the sale of units will be refunded in whole to the purchasers of the units. As compensation for the Financing, BHP and ViewTrade shall be paid an aggregate cash commission of up to $875,000. However, no commission will be payable by the Company unless the minimum of 2,500,000 units are sold. BHP and ViewTrade or their assigns shall be issued Placement Agent Warrants in an aggregate amount equal to 10% of the units sold (minimum of 2,500,000) in the Financing. The Placement Agent Warrants shall be exercisable at a price equal to one hundred twenty five (125%) percent of the purchase price of the units sold in the Financing (which is currently anticipated to range from $4-$8) and shall expire five years from the issuance date. The shares issuable upon the exercise of the (a) Placement Agent Warrants and of the (b) Class E Warrants issuable upon exercise of the Placement Agent Warrants, shall have standard piggyback registration rights after the closing of the Financing, a cashless exercise provision, shall be non-redeemable and shall become exercisable six months and one day after the closing of the Financing. Notice given pursuant to any of the provisions of this Agreement shall be given in writing and shall be sent by recognized overnight courier or personally delivered (a) if to the Company, to the Company's office at 3960 Broadway, New York, NY 10032. Attention: Ron Lipstein, Chief Executive Officer; and (b) if to BHP, to its office at 570 Lexington Avenue, New York, NY 10022. Attention: Jason Adelman, Managing Director, and if to ViewTrade, to its office at 7280 W. Palmetto Park Rd., Ste 105, Boca Raton, FL 33433, Attention: James St. Clair. BHP's and ViewTrade's engagement related to the Financing hereunder shall expire upon the earlier of the completion of the Financing or ninety (90) days from the effective date of the Registration Statement, which date may be extended in thirty day intervals upon written agreement of the Company, BHP and ViewTrade. BHP is a division of Pali Capital Inc., a European American Investment Group Company. This letter Agreement shall remain in full force and effect as to BHP and the Company in the event that BHP becomes an independent entity. In connection with this engagement, BHP is acting as an independent contractor with duties owing solely to the Company. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of law principles thereof. This Agreement may not be amended or modified except in writing signed by each of the parties hereto. This letter and the indemnification agreement contain the entire agreement of the parties with respect to the Financing. The invalidity or unenforceability of any provision of this letter Agreement shall not affect the validity or enforceability of any other provisions of this Agreement or the indemnification agreement. [THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK] We are delighted to accept this engagement and look forward to working with you on this assignment. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate of this Agreement. Very truly yours, Burnham Hill Partners By: /s/ Jason Adelman ------------------------------- Name: Jason Adelman Title: Managing Director ViewTrade Securities, Inc. By: /s/ James St. Claire ------------------------------- Name: James St. Claire Title: Chief Executive Officer Accepted and Agreed to as of the date first written above: Ortec International, Inc. By: /s/ Ron Lipstein -------------------------------------------- Name: Ron Lipstein Title: Vice Chairman and Chief Executive Officer EX-10 3 ex10-1.txt EXHIBIT 10.1 Exhibit 10.1 Certain portions marked by asterisks have been omitted subject to a confidential treatment request and filed separately with the Securities & Exchange Commission. This Cell Therapy Manufacturing Agreement (the "Agreement") is made as of October 29, 2003, (the "Effective Date") between Cambrex Bio Science Walkersville, Inc., a Delaware corporation ("CBSW"), and Ortec International, Inc., a Delaware corporation ("Client")(each of CBSW and Client, a "Party" and, collectively, the "Parties"). RECITALS A. CBSW operates a multi-client production facility located at 8830 Biggs Ford Road, Walkersville, Maryland 21793 (the "Facility"). B. Client desires to have CBSW optimize one or more processes to produce a product containing human cells and intended for therapeutic use in humans, and thereafter to produce such product for commercial sale, and CBSW desires to optimize such processes and produce such product. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants hereinafter set forth, CBSW and Client, intending to be legally bound, hereby agree as follows: AGREEMENT 1. DEFINITIONS When used in this Agreement, capitalized terms will have the meanings as defined below and throughout the Agreement. Unless the context indicates otherwise, the singular will include the plural and the plural will include the singular. 1.1 "Affiliate" means a legal entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with a Party. For purposes of this definition only, "control" and, with correlative meanings, the terms "controlled by" and "under common control with" means (a) the possession, directly or indirectly, of the power to direct the management or policies of a legal entity, whether through the ownership of voting securities or by contract relating to voting rights or corporate governance, or (b) the ownership, directly or indirectly, of more than 50% of the voting securities or other ownership interest of a legal entity; provided, however, that if local law restricts foreign ownership, control will be established by direct or indirect ownership of the maximum ownership percentage that may, under such local law, be owned by foreign interests. 1.2 "Additional Production Suite" has the meaning set forth in Section 3.3.4 1.3 "Batch" means a specific quantity of Product that is intended to have uniform character and quality, within specified limits, and is produced according to a single manufacturing order during the same cycle of manufacture. Page 1 of 42 1.4 "Batch Record" means the production record pertaining to a Batch. 1.5 "CBSW Inventions" means any know-how, media, assays, methods or other inventions, whether or not patentable, conceived, developed or reduced to practice by CBSW: (a) on or before the Effective Date; or (b)(i) in connection with the performance of a Development Plan or Production Plan, and (ii) relating generally to CBSW's business of producing biological materials. However, if any such know-how, media, assays, methods or other inventions incorporates any Client Inventions or portions thereof, such Client Invention or portion thereof shall not constitute a part of the CBSW Invention. 1.6 "CBSW Operating Documents" means the standard operating procedures, standard manufacturing procedures, raw material specifications, protocols, validation documentation, and supporting documentation, such as environmental monitoring, for operation and maintenance of the Facility and CBSW equipment used in the process of producing the Product, excluding any of the foregoing that are unique to the manufacture of Product. 1.7 "CBSW Parties" has the meaning set forth in Section 17.1. 1.8 "cGMP" means current Good Manufacturing Practices as contained in 21 CFR Parts 210 and 211 as amended from time to time. 1.9 "Change Order" has the meaning set forth in Section 4.2. 1.10 "Client Development Materials" has the meaning set forth in Section 4.3. 1.11 "Client Inventions" means: (a) any know-how or inventions, whether or not patentable, that are conceived, developed or reduced to practice by Client (i) on or before the Effective Date, or (ii) in connection with the performance of a Development Plan or Production Plan; and (b) any patentable inventions conceived, developed or reduced to practice by CBSW, solely or jointly with Client, directly in the course of performance of a Development Plan or Production Plan and specifically claiming the Product and/or the manufacture or use thereof, including, without limitation, the Process and any related Master Production Record (excluding any CBSW Operating Documents or CBSW Confidential Information included therein). 1.12 "Client Materials" means the Client Development Materials and the Client Production Materials. 1.13 "Client Personnel" has the meaning set forth in Section 6.5.1 1.14 "Client Production Materials" has the meaning set forth in Section 2.2. 1.15 "Commencement Date" means (a) with respect to Phase I, November 1, 2003, and (b) with respect to Phase II, the date of completion of commissioning and validation of the Custom Production Suite. 1.16 "Cryopreserved Product" has the meaning set forth in Schedule 1.15 attached hereto and hereby incorporated herein by reference. Page 2 of 42 1.17 "Cryopreserved Product Specifications" has the meaning set forth in Schedule 1.15 attached hereto and hereby incorporated herein by reference. 1.18 "Cryopreserved Product Unit" has the meaning set forth in Schedule 1.15 attached hereto and hereby incorporated herein by reference. 1.19 "Custom Production Suite" means a Production Suite at the Facility designed and constructed pursuant to this Agreement for the dedicated purpose of producing Product. 1.20 "Development Plan" has the meaning set forth in Section 4.1. 1.21 "Facility" means the entire CBSW manufacturing facility, which consists of considerably more than the Production Suite and/or the Custom Production Suite. 1.22 "FDA" means the U.S. Food and Drug Administration, and any successor agency thereof. 1.23 "Fresh Product" has the meaning set forth in Schedule 1.15 attached hereto and hereby incorporated herein by reference. 1.24 "Fresh Product Specifications" has the meaning set forth in Schedule 1.15 attached hereto and hereby incorporated herein by reference. 1.25 "Fresh Product Unit" has the meaning set forth in Schedule 1.15 attached hereto and hereby incorporated herein by reference. 1.26 "Lead Time" has the meaning set forth in the Production Plan. 1.27 "Master Production Record" means a detailed description of a Process and any other instructions to be followed in the production of Product by means of such Process. 1.28 "Materials" means all raw materials and supplies to be used in the production of Product. 1.29 "Monthly Fee" has the meaning set forth in Schedule 11.1 attached hereto and hereby incorporated herein by reference. 1.30 "Phase I" means the period of time commencing on the Effective Date and ending upon the occurrence of one or more events described in Section 2.6. 1.31 "Phase I Production Plan" has the meaning set forth in Section 2.1. 1.32 "Phase II" means the period of time commencing as set forth in Section 3.1 and ending upon the occurrence of one or more events described in Section 3.5. 1.33 "Phase II Production Plan" has the meaning set forth in Section 3.2. 1.34 "Plan Approval Date" has the meaning set forth in section 3.3.2. Page 3 of 42 1.35 "Process" means a manufacturing process for Product. 1.36 "Product" means Fresh Product and/or Cryopreserved Product. 1.37 "Product Warranties" has the meaning set forth in Section 7.1 1.38 "Production Plan" means a plan describing the activities to be performed by CBSW, or to be subcontracted by CBSW to Third Parties, in the production of Product, including, without limitation, the creation of a Master Production Record for such Product. 1.39 "Production Rerun" has the meaning set forth in Section 7.4.1. 1.40 "Production Rerun Expenses" has the meaning set forth in Section 7.4.1. 1.41 "Production Suite" means a production facility and associated common space that is validated and meets FDA standards and applicable guidelines. 1.42 "Production Term" means (a) with respect to Phase I, the period commencing on the Commencement Date of Phase I and ending on the Commencement Date of Phase II or upon termination of this Agreement, whichever is sooner; and (b) with respect to Phase II, the period commencing on the Commencement Date of Phase II and ending upon termination of this Agreement. 1.43 "Regulatory Approval" means the approval by the FDA to market and sell Product in the United States. 1.44 "SOP" means a standard operating procedure. 1.45 "Third Party" means any party other than CBSW, Client or their respective Affiliates. 2. MANUFACTURE OF PRODUCT - PHASE I 2.1 Production Plan. Promptly after the Effective Date, the Parties will discuss and prepare a Production Plan covering the production of Product during Phase I (the "Phase I Production Plan"). A draft outline of the Phase I Production Plan is included in Schedule 2.1 attached hereto and hereby incorporated herein by reference. After the Parties have verbally agreed on a Phase I Production Plan, CBSW will deliver such plan to Client for approval. The Phase I Production Plan will not be binding on the Parties until signed by both Parties. 2.2 Technology Transfer. Promptly after the Effective Date, Client will provide CBSW with Client's complete manufacturing process for Fresh Product and Cryopreserved Product and any protocols, SOPs and other information and documentation in possession or control of Client and necessary for the manufacture of such Products by means of such process in conformance with cGMP, including, without limitation, manufacturing process information, SOPs, development data and reports, quality control assays, raw material specifications (including vendor, grade and sampling/testing requirements), product and sample packing and Page 4 of 42 shipping instructions, and product specific cleaning and decontamination information (collectively, the "Client Production Materials"). The provision of the Client Production Materials by Client to CBSW shall not constitute a transfer or assignment of ownership of any portion thereof and the ownership thereof shall remain with Client. 2.3 Master Production Records. Based on the Client Production Materials, CBSW will prepare Master Production Records for Fresh Product and Cryopreserved Product under the terms and conditions set forth in Section 5. 2.4 Commencement Date. Client understands and agrees that CBSW has no obligation under this Agreement to produce Product for Client prior to November 1, 2003, the Commencement Date for production of Product during Phase I. 2.5 Manufacture by CBSW. During the Production Term for Phase I CBSW will, provided that Client has timely provided the Client Production Materials to CBSW, manufacture, package, ship, handle quality assurance and quality control for Product, all as set forth in greater detail in the Phase I Production Plan, and deliver to Client or deliver to a third party at Client's direction as provided in Section 6.3, the quantities of Product ordered by Client up to the amounts set forth in Section 6.2 attached hereto, all in accordance with the terms and conditions set forth in this Agreement. During the Production Term for Phase I, CBSW will provide sufficient appropriately trained and supervised personnel to effect such manufacture. 2.6 Production Facility. During the Production Term for Phase I, CBSW will provide, in its Facility, a Production Suite, as further described in the third paragraph of Section 3 of Schedule 11.1 attached hereto, which Production Suite will be used exclusively for the manufacture of the Product. 2.7 Termination. Phase I will commence on the Effective Date and will continue until the initiation of Phase II pursuant to Section 3.1 or until termination of this Agreement, whichever is sooner. 3. MANUFACTURE OF PRODUCT - PHASE II 3.1 Initiation. At any time during Phase I, Client may elect to initiate Phase II of this Agreement by written notice to CBSW. Client will accompany such notice with a one-time, non-refundable initiation fee in the amount of [***] (the "Phase II Initiation Fee"). Such notice will become effective upon receipt by Client of written confirmation by CBSW of the initiation of Phase II, which confirmation will not be unreasonably withheld or delayed, and Phase II will commence as of such receipt. 3.2 Production Plan. Promptly after initiation of Phase II, CBSW and Client will meet to create a Production Plan covering (a) the design and construction of the Custom Production Suite (including dimension, layout, and equipment requirements, as agreed upon by the Parties based on projections of commercial demand for Product), and (b) the transfer of Product production to the Custom Production Suite (the "Phase II Production Plan"). The Phase II Production Plan will include a date for initiation of construction of the Custom Page 5 of 42 Production Suite as well as the Commencement Date for production of Product during Phase II. CBSW understands and agrees that the date set forth in the Phase II Production Plan for initiation of construction of the Custom Production Suite may be no later than the date of Regulatory Approval by the FDA of Cryopreserved Product for any chronic wound indication, unless agreed otherwise by both Parties. A draft outline of the Phase II Production Plan is included in Schedule 3.1. After the Parties have verbally agreed on a Phase II Production Plan, CBSW will deliver such plan to Client for approval. The Phase II Production Plan will not be binding on the Parties until signed by both Parties. 3.3 Custom Production Suite. 3.3.1 Following approval of the Phase II Production Plan by the Parties, CBSW will propose a design and engineering team consisting of CBSW and Client personnel, along with outside consultants with expertise in the construction of cell therapy clean room facilities, and CBSW will submit a list of such members to Client for approval, which approval will not be unreasonably withheld. CBSW will retain the approved team (the "D&E Team") to create design and engineering plans for the Custom Production Suite based on the requirements set forth in the Phase II Production Plan. Such plans will include an estimate of costs relating to the construction and validation of the Custom Production Suite. Upon completion of such plans, the D&E Team will present its proposal to the Parties for approval. CBSW will bear all costs and expenses relating to any activities performed by the D&E Team in connection with the design and engineering of the Custom Production Suite. 3.3.2 The Client will pay [***] of the Custom Production Suite construction costs in an amount corresponding to [***] of the estimated costs set forth in such approved plans for the construction and validation of the Custom Production Suite, provided, however, that the amount of such payment will not exceed [***] (such payment, the "Construction Fee"). The Construction Fee will be paid by Client in [***] installments as follows: [***] of the Construction Fee shall be paid within [***] days after [***] (the "[***] "); an additional [***] of the Construction Fee shall be paid [***]; the remaining [***] of the Construction Fee shall be paid in [***] equal monthly installments [***]. 3.3.3 CBSW will, at its sole expense, use reasonable efforts to assure that construction of the Custom Production Suite meets the specifications and the schedule set forth in the Phase II Production Plan. As of the Effective Date, the Parties anticipate that final commissioning and validation of the Custom Production Suite will be complete within [***] following approval of the Phase II Production Plan and the final design and engineering plans for the Custom Production Suite by the Parties. CBSW will have sole decision-making authority over the management of Custom Production Suite construction and validation. CBSW will own the Custom Production Suite, including any equipment therein, and will maintain the Custom Production Suite in a manner consistent with regulatory guidelines and CBSW's maintenance of other suites at the Facility. The Custom Production Suite shall be used exclusively for manufacture of the Product during the Term of this Agreement. Page 6 of 42 3.3.4 If CBSW is unable to provide the Custom Production Suite pursuant to the Phase II Production Plan, then instead of providing the Custom Production Suite, CBSW will, in addition to refunding to Client the portion of the Construction Fee paid by Client, continue to provide the Production Suite used in Phase I and provide an additional pre-existing Production Suite (the "Additional Production Suite") at the Facility , both to be used exclusively for manufacture of the Product during the Terms of this Agreement. The Production Suite used in Phase I and the Additional Production Suite [***] produced in the Production Suite used in Phase I during the month immediately preceding CBSW's provision of the Additional Production Suite for Client's benefit. 3.3.5 Client acknowledges and agrees that its sole remedy with respect to CBSW's failure to provide the Custom Production Suite in its entirety is as set forth in Section 3.3.4, and in furtherance thereof Client hereby waives all other remedies at law or in equity regarding any claim arising under or relating to such failure. If CBSW is unable to provide the Custom Production Suite, the Construction Fee will be refunded to Client in full. 3.3.6 Upon final commissioning and validation of the Custom Production Suite CBSW will provide Client with written notice of completion of such commissioning and validation. Within [***] days after completion of such final commissioning and validation, CBSW will relocate the production of the Product from the Production Suite used to produce the Product during Phase I to the Custom Production Suite. Client will relinquish all rights to use the Phase I Production Suite upon completion of such relocation. If relocation will be delayed beyond such [***] day period because of acts or omissions of Client, Client will relinquish all rights to use the Phase I Production Suite at the end of such 30 day period 3.4 Manufacture by CBSW. During the Production Term for Phase II CBSW will manufacture, package, ship, handle quality assurance and quality control for Product, all as set forth in the Phase II Production Plan, and to deliver to Client, or at Client's direction, the quantities of Product ordered by Client, all in accordance with the terms and conditions set forth in this Agreement. During the Production Term for Phase II CBSW will provide sufficient appropriately trained and supervised technicians to effect such manufacture. 3.4.1 Master Production Record. Should CBSW need to create additional Master Production Records as the result of commencement of Phase II or the production of Product in the Custom Production Suite, CBSW will prepare such additional Master Production Records under the terms and conditions set forth in Section 5. 3.5 Termination. Phase II will commence on the date of receipt by Client of confirmation from CBSW pursuant to Section 3.1 and will continue until termination of this Agreement. 3.5.1 Scale-Down Period. During the Production Term for Phase II, either Party may initiate a period of declining production of Product, culminating in termination of this Agreement (the "Scale-Down Period"), by written notice to the other Party under the terms and Page 7 of 42 conditions set forth in Schedule 3.5.1 attached hereto and hereby incorporated herein by reference. 4. PROCESS DEVELOPMENT 4.1 Development Plan. From time to time during the Term, Client may request that CBSW perform certain process development activities relating to a Process. Upon such request, the Parties will collaborate to develop a final plan describing the activities to be performed by CBSW, or to be subcontracted by CBSW to Third Parties, in the development of such Process and the associated Master Production Record (each such plan, a "Development Plan"). A draft outline of the initial Development Plan is included in Schedule 4.1 attached hereto and hereby incorporated herein by reference. No final Development Plan will be binding on the Parties until signed by both Parties. 4.2 Modification of Development Plan. Should Client want to change a Development Plan or to include therein additional services to be provided by CBSW, Client may propose to CBSW an amendment to such Development Plan with the desired changes or additional services ("Change Order"). If CBSW determines that it has the resources and capabilities to accommodate such Change Order, CBSW will prepare a modified version of the applicable Development Plan reflecting such Change Order and will submit such modified Development Plan to Client for review and comment. The modified Development Plan shall be binding on the Parties only if signed by both Parties, whereafter such modified version of the Development Plan will be deemed to have replaced the prior version of the Development Plan. 4.3 Client Deliverables. Within the time period specified in a Development Plan, Client will provide CBSW with (a) the materials listed in such Development Plan, and any handling instructions, protocols, SOPs and other documentation necessary to maintain the properties of such materials for the performance of such Development Plan, and (b) any protocols, SOPs and other information and documentation in possession or control of Client and necessary for the performance of such Development Plan, the preparation of the Master Production Record, and the manufacture of Product pursuant to the Master Production Record in conformance with cGMP, including, without limitation, process information, SOPs, development data and reports, quality control assays, raw material specifications (including vendor, grade and sampling/testing requirements), product and sample packing and shipping instructions, and product specific cleaning and decontamination information (collectively, the "Client Development Materials"). 4.4 Performance by CBSW. Subject to the provision by Client of the Client Development Materials, CBSW will use reasonable efforts to perform, directly or, subject to approval by Client (such approval not to be unreasonably withheld), through a Third Party contractor, each Development Plan in a professional and workmanlike manner in accordance with the terms of this Agreement. CBSW will use reasonable efforts promptly to notify Client of any material delays that arise during the performance of a Development Plan. Page 8 of 42 5. MASTER PRODUCTION RECORD 5.1 Preparation. CBSW will prepare and Client will cooperate in the preparation of all Master Production Records for each Process developed or implemented by CBSW pursuant to this Agreement. Client will inform CBSW of any specific requirements Client may have relating to such Master Production Record, including, without limitation, any information or procedures Client wishes to have incorporated therein. If CBSW intends to include in a Master Production Record the use of any assay, medium, or other technology that is not commercially available, CBSW will inform Client of such intention and the Parties will meet to discuss and attempt to agree in good faith on the terms of use of such non-commercially available materials or technology in the Process. 5.2 Client Production Materials. Client will cooperate with CBSW to assist CBSW to develop each Master Production Record and Process, including, without limitation, by providing CBSW with additional information and procedures as may be required to create the applicable Master Production Record, Process, and/or any of the following: (i) manufacturing process information, SOPs, development data and reports, (ii) quality control assays, (iii) raw material specifications (including vendor, grade and sampling/testing requirements), (iv) Product and sample packing and shipping instructions, (v) Product specific cleaning and decontamination information. Each of the foregoing, to the extent provided by Client to CBSW, will be deemed "Client Production Materials" for purposes of this Agreement. 5.3 Approval. CBSW will deliver a proposed final draft of the Master Production Record to Client for its review and approval upon the completion of such draft. Client will notify CBSW in writing of any objections it has to such Master Production Record, and upon such notification, representatives of CBSW and Client will meet promptly to resolve such objections. Upon Client's written notification to CBSW that a draft Master Production Record is satisfactory, or in the event that Client does not submit a written notice setting forth Client's objections to the draft Master Production Record within [***] days from receipt of such draft by Client, such draft will be deemed approved by Client. 5.4 Confidentiality. Any Process, Master Production Record, Specifications, and any improvements or modifications thereto developed during the term of this Agreement, but excluding any CBSW Operating Documents or CBSW Confidential Information included in any of the foregoing, will (i) be deemed Confidential Information of Client and subject to the provisions set forth in Section 12 and (ii) be owned by Client. 6. ORDER PROCESS; DELIVERIES 6.1 Requirements. During Phase I Client will have [***] under this Agreement. During Phase II Client will order [***] from CBSW under this Agreement, subject to the reductions set forth in Schedule 3.5.1 relating to manufacture of Product during the Scale-Down Period. Provided, however, [***], at any time thereafter Client must purchase from CBSW [***] Page 9 of 42 [***], and Client shall have the right to order and purchase [***]. 6.2 Forecasting and Order Process. 6.2.1 For Phase I no later than [***], and for Phase II no later than [***], unless otherwise agreed by the Parties, Client will provide to CBSW a forecast of Client's monthly requirements of commercial Product to be delivered under this Agreement during the [***] period starting with the Commencement Date. Client will provide an updated [***] rolling forecast no later than [***]. CBSW will notify Client if any portion of the forecast exceeds CBSW's production capacity. The quantities of Product set forth in the first [***] months contained in any such forecast will be firm and binding on both Parties, so long as CBSW has not previously notified Client that the forecast for such [***] month period exceeds CBSW's production capacity, subject to Section 6.2.2. The quantities of Product set forth in the [***] months in any such forecast will be non-binding good faith estimates of Client's commercial Product requirements to be delivered under this Agreement. 6.2.2 At any time, Client may submit to CBSW binding orders for delivery of Product during a Production Term, which orders will include at a minimum the quantity of Product ordered and the requested delivery date thereof; provided, however, that no such order will be binding to the extent that it includes (a) a delivery date that does not allow for the Lead Time listed in the applicable Production Plan from the date Client submits such order, (b) quantities exceeding the Production Capacity listed in such Production Plan for any given time period; or (c) quantities exceeding the quantity of Product set forth in the binding portion of the last forecast covering the calendar month during which such Product is to be delivered (unless CBSW consents to supply such overage). Client is obligated to order for delivery, and CBSW is obligated to deliver up to the Production Capacity, during each calendar month in a Production Term the quantities of Product set forth in the binding portion of the last forecast covering such calendar month. 6.2.3 No term or provision set forth in any order or similar document submitted by Client for purposes of ordering Product will be construed to amend or supersede any provision of this Agreement, and any such terms or provisions are hereby expressly rejected. 6.3 Packaging and Shipping. CBSW will package and label Product for shipment in accordance with the applicable Master Production Record and CBSW's standard practices in effect at the time of performance by CBSW. Product will be shipped FCA (Incoterms 2000), delivered at the Facility by CBSW to a common carrier designated by Client to CBSW in writing. Such written designation must be submitted by Client not less than ten days prior to the scheduled delivery date set forth in the applicable order submitted pursuant to Section 6.2 or such other date specified by Client and reasonably agreed to by CBSW. Client will provide to CBSW its account number with the selected carrier and will pay for all shipping costs in Page 10 of 42 connection with each shipment of Product. Each shipment will be accompanied by the documentation listed in the applicable Production Plan. On the delivery date specified in the purchase order submitted pursuant to Section 6.2 or such other date specified by Client and agreed to by CBSW, CBSW will (i) deliver each shipment of Product to the common carrier designated by Client or (ii) at Client's request, place such Product in inventory for future delivery to Client's designated common carrier on a date specified by Client and agreed to by CBSW. Should CBSW at any time during the term of this Agreement have reason to believe that it will be unable to meet a delivery date, CBSW will promptly notify Client. 6.4 Records. CBSW will maintain accurate records for the production of Product, as required by applicable laws and regulations. CBSW will retain possession and ownership of all Batch Records and CBSW Operating Documents, and will make copies thereof available to Client upon Client's request and at Client's expense. CBSW Operating Documents will remain CBSW Confidential Information. Client will have the right to use and reference any of the foregoing in connection with a filing for or maintenance of Regulatory Approval of Product or as otherwise authorized by the Agreement. CBSW may not, without Client's written approval, use Product specific information contained in the Batch Records or the Master Production Record other than to produce the Product or in connection with Regulatory Approval of a Product. 6.5 Client Access. 6.5.1 Client's employees and agents (including its independent contractors) (collectively, "Client Personnel") may with prior notice participate in the production of the Product in such capacities as may be approved in writing in advance by CBSW, which approval shall not be unreasonably withheld. Client Personnel working at the Facility are required to comply with CBSW's Operating Documents and any other applicable CBSW Facility and/or safety policies. 6.5.2 Client Personnel working at the Facility will be and remain employees of Client, and Client will be solely responsible for the payment of compensation for such Client Personnel (including applicable Federal, state and local withholding, FICA and other payroll taxes, workers' compensation insurance, health insurance, and other similar statutory and fringe benefits). Client covenants and agrees to maintain workers' compensation benefits and employers' liability insurance as required by applicable Federal and Maryland laws with respect to all Client Personnel working at the Facility. 6.5.3 Client will pay for the reasonable cost of repairing or replacing (to the extent that CBSW determines, in its reasonable judgment, that repairs cannot be adequately effected) any property of CBSW damaged or destroyed by Client Personnel, provided the Client shall not be liable for repair or replacement costs resulting from ordinary wear and tear. 6.5.4 Client Personnel authorized to have access to the Facility will abide by the security procedures established by CBSW. Client will be liable for any breaches of security by Client Personnel. In addition, Client will reimburse CBSW for the cost of any lost security cards issued to Client Personnel, at the rate of US$50 per security card. All Client Personnel will Page 11 of 42 agree to abide by CBSW policies and SOPs established by CBSW, and will sign a confidentiality agreement in the then-current form used by CBSW. 6.6 Disclaimers. Client acknowledges and agrees that CBSW Parties will not engage in any Product refinement or development of the Product, other than as expressly set forth in this Agreement. Client acknowledges and agrees that CBSW Parties have not participated in the invention or testing of any Product, and have not evaluated its safety or suitability for use in humans or otherwise. 6.7 Insurance. Client will maintain, at all times during the Term of this Agreement and for five years thereafter, to cover Products manufactured by CBSW, a products liability insurance policy (the "Insurance Policy") with limits of not less than [***] per occurrence, and will provide a Certificate of Insurance to CBSW that the Insurance Policy has been endorsed to designate CBSW as an additional named insured. [***] All other portions of this Section shall remain unchanged. Client will maintain the Insurance Policy with an insurance company that is licensed to do business in the State of Maryland and that is reasonably acceptable to CBSW. The Insurance Policy will contain a provision requiring at least 30 days' prior written notice to CBSW before it can be terminated. 7. PRODUCT WARRANTIES; ACCEPTANCE AND REJECTION OF PRODUCTS 7.1 Product Warranties. CBSW warrants that any Product manufactured by CBSW pursuant to this Agreement, at the time of delivery pursuant to Section 6.3: (a) conforms to the applicable Specifications; (b) was manufactured in accordance with the applicable Master Production Record; (c) was manufactured in accordance with cGMP (collectively, the "Product Warranties"). CBSW also warrants to Client that it has the capacity and ability to manufacture the Product in accordance with the terms of this Agreement. 7.2 Approval of Shipment. 7.2.1 When a shipment of Product ordered by Client pursuant to Section 6.2 is ready for delivery, CBSW will notify Client and supply Client with the required shipping documentation set forth in the Production Plan. CBSW will not ship any shipment of Product until the required shipping documentation for such shipment has been approved in writing by Client. 7.2.2 Client will have [***] days after receipt of documentation regarding each shipment of Product (such period, the "Acceptance Period") to review such documentation. If Client asserts that the Product does not comply with the Product Warranties, Client will deliver to CBSW, in accordance with the notice provisions set forth in Section 18.4 hereof, written notice of disapproval (the "Disapproval Notice") of such Product, stating in reasonable detail the basis for such assertion of non-compliance with the Product Warranties. If a valid Disapproval Notice is received by CBSW during the Acceptance Period, then CBSW and Client Page 12 of 42 will provide one another with all related paperwork and records (including, but not limited to, quality control tests) relating to both the production of the Product and the Disapproval Notice. 7.2.3 If Client does not approve within the Acceptance Period documentation regarding a shipment of Product that complies with the Product Warranties, CBSW will charge storage fees at the then-current rate for such shipment of Product until such time as such Product has been shipped. CBSW's current storage rates are set forth in Schedule 11.1. 7.3 Dispute Resolution. 7.3.1 CBSW and Client will attempt to resolve any dispute regarding the conformity of a Batch of Product or portion thereof with the Product Warranties. If such dispute cannot be settled within 30 days of the submission by each Party of such related paperwork and records to the other Party, then such dispute will be resolved as follows. (a) If the Product is alleged not to conform with the Product Warranties set forth in Section 7.1(a), then Client will submit a sample of the Batch of the disputed shipment to an independent testing laboratory of recognized repute selected by Client and approved by CBSW (such approval not to be unreasonably withheld) for analysis, under Quality Assurance approved procedures, of the conformity of such shipment of Product with the Specifications. The costs associated with such analysis by such independent testing laboratory will be paid by the Party whose assessment of the conformity of the shipment of Product with the Specifications was mistaken. The determination by the independent testing laboratory, unless clearly erroneous, will be final and binding. (b) If the Product is alleged not to conform with the Product Warranties set forth in Section 7.1(b) or 7.1(c), such dispute will be submitted to an arbitrator located in the state where the Product is manufactured, with adequate scientific background and training, and selected jointly by CBSW and Client. Such arbitrator, employing the Commercial Arbitration rules of the American Arbitration Association, will determine whether the Product is in non-conformance with the Product Warranties set forth in Section 7.1(b) or 7.1(c), and such arbitrator's findings will be final and binding. The costs and expenses associated with the retention of such arbitrator will be borne by CBSW in the event that such arbitrator orders CBSW to produce a Production Rerun pursuant to Section 7.4 below. In all other events, Client will be responsible for the payment of all such costs and expenses. 7.4 Remedies for Non-Conforming Product. 7.4.1 In the event that the Parties agree, or an independent testing laboratory or an arbitrator determines, pursuant to Section 7.3, that a Batch of Product or a portion thereof materially fails to conform to the Product Warranties due to the failure of: (a) CBSW personnel properly to execute the Master Production Record, (b) CBSW personnel to comply with cGMP, (c) CBSW or its personnel otherwise, or (d) the Facility utilities, then CBSW will produce for Client sufficient quantities of Product to replace the non-conforming Batch of Product or portion thereof (the "Production Rerun"), in accordance with the provisions of this Agreement without charging Client monthly fees or portion thereof for the time needed for such Production Page 13 of 42 Rerun, (ii) for Hourly Fees (as set forth on Schedule 11.1), (iii) for Materials needed for the Production Rerun and (iv) other expenses incurred in The Production Rerun (collectively the "Production Rerun Expenses"). In addition, [***] . 7.4.2 In the event that the Parties agree, or an independent testing laboratory or an arbitrator determines, pursuant to Section 7.3, that a Batch of Product or portion thereof materially fails to conform to the Product Warranties for any reason other than as set forth in Section 7.4.1, then CBSW will perform a Production Rerun at Client's expense and Client will bear the expenses of any resulting required Product recall. 7.4.3 Client acknowledges and agrees that its sole remedy with respect to the failure of Product to conform with any of the Product Warranties is as set forth in this Section 7.4, and in furtherance thereof, Client hereby waives all other remedies at law or in equity regarding the foregoing claims. 7.4.4 Nothing in this Section 7.4 or elsewhere in this Agreement shall preclude Client from making a claim against CBSW [***] . 8. DAMAGE OR DESTRUCTION OF MATERIALS AND/OR PRODUCT 8.1 Remedies. If during the manufacture of Product pursuant to this Agreement, Product and/or Materials are destroyed or damaged by CBSW Personnel, and such damage or destruction resulted from CBSW's material failure to execute the applicable Process in conformity with the Master Production Record, then, except as provided in Section 8.2 below, CBSW will provide Client with additional Product production time equal to the actual time lost because of the destruction or damage of the Product and/or Materials, without charging Client a Monthly Fee or any portion thereof for such additional time or for any other Product Rerun Expenses and will replace such Product and/or Materials at no cost to Client. Client acknowledges and agrees that its sole remedy with respect to damaged or destroyed Materials and/or Product (except for the non-conformity of shipped Product described in Section 7) is as set forth in this Section 8.1, and in furtherance thereof, Client hereby waives all other remedies at law or in equity regarding the foregoing claims. 8.2 Limitations. Notwithstanding anything to the contrary set forth in the preceding Section 8.1, if during the manufacture of Product pursuant to this Agreement, Product or Materials are destroyed or damaged by CBSW Personnel while CBSW Personnel were acting at the direction of Client Personnel, and without negligence or other fault of CBSW Personnel, then CBSW will have no liability to Client as the result of such destruction or damage. 8.3 Dispute Resolution. CBSW and Client will attempt to resolve any dispute regarding the liability of CBSW under Section 8.1, but if such dispute cannot be settled within 30 days after the occurrence of the applicable damage or destruction, then the dispute will be Page 14 of 42 submitted to an arbitrator, with the requisite scientific background and training, and selected jointly by CBSW and Client. Such arbitrator, employing the Commercial Arbitration Rules of the American Arbitration Association, will determine the cause of such damage or destruction, and such arbitrator's findings will be final and binding. The costs and expenses of such arbitrator will be borne by the party that does not prevail in the arbitration proceeding. If the arbitration proceeding is commenced by Client the arbitrator will be located in, and the hearing held in Baltimore, Maryland. If the arbitration proceeding is commenced by CBSW the arbitrator will be located in, and the hearing held in, New York City, New York. 9. STORAGE AND ACQUISITION OF MATERIALS 9.1 Pre-Production. CBSW will store at the expense of Client any Client Materials, equipment or other property delivered pursuant to the Development Plan or the Production Plan to the Facility by Client more than [***] days prior to the Commencement Date. The storage rates are set forth in Schedule 11.1, as may be amended from time to time by CBSW. No storage fees will be charged during the period starting [***] days prior to a Commencement Date and ending upon the expiration or termination of the applicable Production Term. 9.2 Production Period. During the Production Term, CBSW will store at the Facility, without charge to Client, so much of supplies, other Client Materials, equipment or other property needed to manufacture the Product. In addition, Client will supply to CBSW a cryogenic means for CBSW to store Cryopreserved Product at the Facility and CBSW will store such Cyropreserved Product during the Production Term up to the time specified for delivery in accordance with Section 6.3. 9.3 Post-Production. CBSW will store at the Facility free of charge any Product, in-process materials, Client Materials, equipment and other Client property that remains at the Facility on the date of termination of this Agreement (collectively "Remaining Client Property"), for up to [***] business days. If Client has not provided any instructions as to the shipment or other disposition of Remaining Client Property prior to the expiration of such [***] day period, CBSW may, in its sole discretion, destroy such Remaining Client Property, or continue to store such Remaining Client Property at the Facility or elsewhere. In the event that CBSW continues to store such Remaining Client Property, Client will pay to CBSW a storage charge at CBSW's then-standard storage rates for the period beginning on the [***] day after the expiration or termination of the Production Term through the date that the storage terminates. CBSW's current storage rates are set forth in Schedule 11.1. 9.4 Materials Management. CBSW will use reasonable efforts to have on hand enough supplies, other Client Materials, equipment or other property necessary to the manufacture of the Product, so as to avoid creating delays in the production of the Product. 10. REGULATORY MATTERS 10.1 Permits and Approvals. During the Production Term, CBSW will maintain any licenses, permits and approvals necessary for the manufacture of the Product in the Facility. Page 15 of 42 CBSW will promptly notify Client if CBSW receives notice that any such license, permit, or approval is or may be revoked or suspended. 10.2 Client Audits. Up to [***] times during any [***] period during the Production Term and upon not less than [***] prior written notice, CBSW will permit Client to inspect the parts of the Facility where the manufacture of the Product is carried out in order to assess CBSW's compliance with cGMP, and to discuss any related issues with CBSW's management personnel. Client Personnel engaged in such inspection will abide by the terms and conditions set forth in Section 6.5.4. 10.3 Inspections by Regulatory Agencies. CBSW will allow representatives of any regulatory agency to inspect the relevant parts of the Facility where the manufacture of the Product is carried out and to inspect the Master Production Record and Batch Records to verify compliance with cGMP and other practices or regulations and will promptly notify Client of the scheduling of any such inspection relating to the manufacture of Product. CBSW will promptly send to Client a copy of any reports, citations, or warning letters received by Client or by CBSW in connection with an inspection of a regulatory agency to the extent such documents relate to or affect the manufacture of the Product. 11. FINANCIAL TERMS 11.1 Payments. Client will make payments to CBSW in the amounts and on the dates set forth in Schedule 11.1. 11.2 Security Deposit. Subject to the provisions of Section 16.5.4 of this Agreement, the balance of the Security Deposit, if any, will be returned to Client within [***] days after the date of termination of this Agreement but only after deducting therefrom all fees, charges, or other payments due from Client to CBSW in connection with charges incurred prior to the termination of this Agreement, including, but not limited to, fees as provided in Section 16.4.5, charges for lost, destroyed, stolen or damaged property of CBSW (all such fees, charges, or other payments, "Obligations"). The amount of the Security Deposit remaining, if any, after such deductions will be returned to Client. Client will remain liable to CBSW for any deficiencies remaining after the application of the Security Deposit against the Obligations. 11.3 Construction Fee. The Construction Fee, as defined in Section 3.3.2, will be credited against amounts payable by Client to CBSW under this Agreement for services contracted under this Agreement during Phase II (including, without limitation, any fees or costs set forth on Schedule 11.1), as follows: [***] of the initial Construction Fee will be credited to Client's account and will be applied against amounts payable by Client to CBSW which are not disputed by Client. 11.4 Invoices. Within [***] days of the end of each month during which charges were incurred, CBSW will provide Client with an invoice setting forth a detailed account of any fees, expenses, or other payments payable by Client under this Agreement for the preceding month. Page 16 of 42 The amounts set forth in each such invoice will be due and payable within [***] days of receipt of such invoice by Client. 11.5 Taxes. Client agrees that it is responsible for and will pay any sales, use or other taxes resulting from CBSW's production of Product under this Agreement (except for income, real property or personal property taxes payable by CBSW). To the extent not paid by Client, Client will indemnify and hold harmless the CBSW Parties from and against any and all penalties, fees, expenses and costs whatsoever in connection with the failure by Client to pay such taxes. CBSW will not collect any sales and use taxes from Client in connection with the production of any Product hereunder if Client provides to CBSW the appropriate valid exemption certificates. 11.6 Interest. Any fee, charge or other payment due to CBSW by Client under this Agreement that is not paid within [***] days after it is due will accrue interest from the date when the same was due and payable, at the [***] payable on demand. 11.7 Method of Payment. All payments to CBSW hereunder by Client will be in United States currency and will be by check, wire transfer or money order. 11.8 Cost Adjustments. [***] and on each anniversary thereafter, the various costs and rates set forth in Schedule 11.1 [***] will increase by [***]. 12. CONFIDENTIAL INFORMATION 12.1 Definition. "Confidential Information" means all technical, scientific and other know-how and information, trade secrets, knowledge, technology, means, methods, processes, practices, formulas, instructions, skills, techniques, procedures, specifications, data, results and other material, pre-clinical and clinical trial results, manufacturing procedures, test procedures and purification and isolation techniques, and any tangible embodiments of any of the foregoing, and any scientific, manufacturing, marketing and business plans, any financial and personnel matters relating to a Party or its present or future products, sales, suppliers, customers, employees, investors or business, that has been disclosed by or on behalf of such Party to the other Party either in connection with the discussions and negotiations pertaining to this Agreement or in the course of performing this Agreement. Without limiting the foregoing, the terms of this Agreement will be deemed "Confidential Information" and will be subject to the terms and conditions set forth in this Section 12. 12.2 Exclusions. Notwithstanding the foregoing Section 12.1, any information disclosed by a Party to the other Party will not be deemed "Confidential Information" to the extent that such information: (a) at the time of disclosure is in the public domain; (b) becomes part of the public domain, by publication or otherwise, through no fault of the Party receiving such information; Page 17 of 42 (c) at the time of disclosure is already in possession of the Party who received such information, as established by contemporaneous written records; (d) is received by a Party in good faith from any Third Party independent of the disclosing Party, where the receiving Party has no reason to believe that such Third Party has obtained such information by any wrongful means; or (e) is independently developed by a Party without use of or reference to the other Party's Confidential Information, as established by contemporaneous written records. 12.3 Disclosure and Use Restriction. Except as expressly provided herein, the Parties agree that, for the longer of (i) fifteen years from the Effective Date, and (ii) the term of the Agreement and the ten-year period following any termination of the Agreement, each Party and its Affiliates will keep completely confidential and will not publish or otherwise disclose any Confidential Information of the other Party, its Affiliates or sublicensees. Neither Party will use Confidential Information of the other Party except as necessary to perform its obligations or to exercise its rights under this Agreement. 12.4 Permitted Disclosures. The obligations of Section 11.3 will not apply to any disclosure of Confidential Information to the extent such disclosure is required by operation of the law or the requirement of a court or governmental agency; provided, however, that: (i) the Party subject to such required disclosure will have promptly notified the other Party prior to such disclosure and such other Party will have been given the opportunity to oppose such disclosure by the Party subject to the required disclosure by seeking a protective order or other appropriate remedy; (ii) the Party subject to such required disclosure will disclose only that portion of Confidential Information legally required to be disclosed; and (iii) the Party subject to such required disclosure will exercise all reasonable efforts to maintain the confidential treatment of Confidential Information. 12.5 Publicity. Neither Party will refer to, display or use the other's name, corporate style, trademarks or trade names confusingly similar thereto, alone or in conjunction with any other words or names, in any manner or connection whatsoever, including any publication, article, or any form of advertising or publicity, except with the prior written consent of the other Party. 13. INTELLECTUAL PROPERTY 13.1 Ownership. 13.1.1 As between the Parties, Client will own all right, title and interest in and to the Client Inventions. CBSW agrees to assign and hereby assigns to Client all of CBSW's right, title and interest in and to the Client Inventions. 13.1.2 As between the Parties, CBSW will retain all right, title and interest in and to the CBSW Inventions. Client agrees to assign and hereby assigns to CBSW all of Client's right, title and interest in and to the CBSW Inventions. Page 18 of 42 13.2 License Grants. Client hereby grants to CBSW a non-exclusive, royalty-free, paid-up, license to use any Client Invention solely as needed by CBSW to perform its obligations under this Agreement. 13.3 Further Assurances; Inventorship; Patentability. Each Party agrees to take all necessary and proper acts, and will cause its employees, Affiliates, contractors, and consultants to take such necessary and proper acts to effectuate the ownership provisions set forth in this Section 13. Inventorship with respect to any invention or discovery made pursuant to work carried out under this Agreement that is or may be patentable will be determined in accordance with this Agreement and the laws of the United States. The Parties hereby agree to meet in good faith to resolve any dispute regarding whether a particular invention developed hereunder is "patentable." In the event that the Parties are unable to resolve such a dispute, the invention in question will be deemed "patentable" if the Party claiming that such invention is patentable promptly files a United States patent application claiming such invention, and such invention will remain "patentable" for purposes of this Agreement until such application is rejected or abandoned or has not issued into a patent within 5 years from the date of filing. 13.4 Prosecution of Patents. 13.4.1 CBSW will have the sole right and discretion to file, prosecute and maintain patent applications and patents claiming CBSW Inventions at CBSW's expense. Client will cooperate with CBSW to file, prosecute and maintain patent applications and patents claiming CBSW Inventions. 13.4.2 Client will have the sole right and discretion to file, prosecute and maintain patent applications and patents claiming Client Inventions at Client's expense. CBSW will cooperate with Client to file, prosecute and maintain patent applications and patents claiming Client Inventions. 14. REPRESENTATIONS AND WARRANTIES 14.1 By Client. Client hereby represents and warrants to CBSW that, to the best of its knowledge, (i) it has the requisite intellectual property and legal rights related to the Client Deliverables and the Product to authorize the performance of CBSW's obligations under this Agreement, and (ii) the performance of the Development Plan and the production by CBSW of the Product as contemplated in this Agreement will not give rise to a potential cause of action by a third party against CBSW for infringement or another violation of intellectual property rights. Such representation and warranty will not apply to any production equipment supplied by CBSW. 14.2 By CBSW. CBSW hereby represents and warrants to Client that, to the best of its knowledge, (i) it has the requisite intellectual property rights in its equipment and Facility to be able to perform its obligations under this Agreement, and (ii) that CBSW's use of its equipment and Facility as contemplated in this Agreement will not give rise to a potential cause of action by a Third Party against Client for infringement or another violation of intellectual property rights. Page 19 of 42 15. DISCLAIMER; LIMITATION OF LIABILITY 15.1 DISCLAIMER. EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH IN THIS AGREEMENT, CBSW MAKES NO REPRESENTATIONS AND GRANTS NO WARRANTIES, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, WITH RESPECT TO THE PRODUCTS, MATERIALS, AND SERVICES PROVIDED UNDER THIS AGREEMENT, AND CBSW SPECIFICALLY DISCLAIMS ANY OTHER WARRANTIES, WHETHER WRITTEN OR ORAL, OR EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF QUALITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OR PURPOSE WITH RESPECT TO SUCH PRODUCTS, MATERIALS, OR SERVICES. 15.2 Limitation of Liability. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR LOST PROFITS OR LOSS OF DATA, OR FOR ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED, ON ANY THEORY OF LIABILITY AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING UNDER ANY CAUSE OF ACTION AND ARISING IN ANY WAY OUT OF THIS AGREEMENT, EXCEPT FOR DAMAGES OR PAYMENTS ARISING UNDER SECTION 12 OR 17 OF THIS AGREEMENT OR AS OTHERWISE PROVIDED FOR BY THE TERMS OF THIS AGREEMENT. CLIENT HEREBY AGREES THAT TO THE FULLEST EXTENT PERMITTED BY LAW, CBSW'S LIABILITY TO CLIENT FOR ANY AND ALL INJURIES, CLAIMS, LOSSES, EXPENSES, OR DAMAGES WHATSOEVER, ARISING UNDER ANY CAUSE OF ACTION AND ARISING IN ANY WAY OUT OF THIS AGREEMENT, WILL NOT EXCEED THE TOTAL CHARGES PAID BY CLIENT TO CBSW HEREUNDER. 16. TERM AND TERMINATION 16.1 Term. The term of this Agreement will commence on the Effective Date and will continue until terminated pursuant to the terms of this Agreement. 16.2 Termination at Will. 16.2.1 During Phase I only, either Party may terminate this Agreement by providing the other Party with written notice of termination, in the case of Client not less than 6 months and in the case of CBSW not less than one year in advance of the effective date of such termination; provided, however, that no such termination will be effective prior to the date 12 months after the Commencement Date for Phase I. 16.2.2 At any time after the first anniversary of the Commencement Date for Phase II, Client may terminate this Agreement by providing CBSW with written notice of termination, effective upon receipt, if such termination is expressly required in connection with a merger, acquisition, or consolidation of Client, or a transfer or sale of all or substantially all of the assets of Client relating to the Product line. Page 20 of 42 16.2.3 At any time after the fifth anniversary of the Commencement Date for Phase II, either Party may terminate this Agreement upon giving one year's written notice prior to the date selected by such Party as the effective date of such termination. 16.2.4 During the Production Term for Phase II, either Party may initiate the Scale-Down Period according to the following terms and the Agreement will terminate upon the expiration of any Scale-Down Period: 16.2.4.1 CBSW may initiate the Scale-Down Period (a) at any time after the 3rd anniversary of the Commencement Date for Phase II; or (b) if, at the end of any calendar year during the Production Term for Phase II, with the exception of the first full calendar year, Client has failed to order at least 50% of the quantities of Product forecast by Client pursuant to Section 6.2 for delivery during such period. 16.2.4.2 Client may initiate the Scale-Down Period (a) at any time after the 1st anniversary of the Commencement Date for Phase II, subject to payment of the scale-down fees described below in Section 16.2.4.5(d); (b) at any time after the 3rd anniversary of the Commencement Date for Phase II, without payment of scale-down fees; or (c) if, at the end of any calendar year during the Production Term for Phase II, CBSW has failed to provide at least 80% of the quantities of Product ordered by Client pursuant to Section 6.2 for delivery during such period, without payment of scale-down fees. 16.3 Termination for Material Breach. 16.3.1 Any failure by a Party to comply with any of its material obligations contained herein shall constitute a material breach and shall entitle the Party not in breach to give to the Party in breach written notice specifying the nature of the breach. Such notice shall require the breaching Party to make good or otherwise cure such breach. 16.3.2 If such breach is not cured within [***] days after the receipt of notice pursuant to Section 16.3.1 above (or, if such default cannot be cured within such [***]-day period, and the Party in breach does not commence actions to cure such breach within such period and thereafter diligently continue such actions and cure such breach within [***] days after the receipt of such notice, except in the case of a payment default, as to which the breaching Party will have only a [***]-day cure period), then the Party not in breach will be entitled, without prejudice to any of the other rights conferred on it by this Agreement, to terminate this Agreement upon written notice to the other Party. 16.4 Effects of Termination. 16.4.1 Accrued Rights. Termination of this Agreement for any reason will be without prejudice to any rights that will have accrued to the benefit of a Party prior to such termination. Such termination will not relieve a Party of obligations that are expressly indicated to survive the termination of this Agreement. 16.4.2 Disposition of Remaining Client Property and Confidential Information. Upon termination or expiration of this Agreement, CBSW will store any Page 21 of 42 Remaining Client Property as set forth in Section 9.2 and, at Client's option, return or destroy any Client Confidential Information in the possession or control of CBSW. Likewise, Client will, at CBSW's option, return or destroy any CBSW Confidential Information in the possession or control of Client. Notwithstanding the foregoing provisions: (i) CBSW may retain and preserve, at its sole cost and expense, samples and standards of each Product following termination or expiration of this Agreement solely for use in determining CBSW's rights and obligations hereunder; and (ii) each Party may retain such of the other Party's Confidential Information as may be necessary for securing or maintaining Regulatory Approval, or as otherwise required by applicable laws, regulations, or guidelines. 16.4.3 Construction Fee. 16.4.3.1 Upon any termination of this Agreement pursuant to Sections 16.2.2, or 16.2.3, CBSW will have the right to retain any amount of the Construction Fee that has not been returned to Client under Section 3.3.4 or credited to Client under Section 11.3. 16.4.3.2 Upon any termination of this Agreement pursuant to Section 16.2.4.1(a) or pursuant to Section 16.2.4.2(c), CBSW shall upon the effective date of the termination of this Agreement, refund to Client any amount of the Construction Fee that has not been returned to Client under Section 3.3.4 or credited to Client under Section 11.3. 16.4.3.3 Upon any termination of this Agreement pursuant to Section 16.3, (i) if such termination is based on a material breach of this Agreement by CBSW, CBSW shall refund the amount of the Construction Fee that has not been returned to Client under Section 3.3.4 or credited to Client under Section 11.3 or (ii) if such termination is based upon a material breach of this Agreement by Client, CBSW will have the right to retain any amount of the Construction Fee that has not been returned to Client under Section 3.3.4 or credited to Client under Section 11.3. 16.4.3.4 Any retainment by CBSW of the uncredited portion of the Construction Fee shall not limit any of CBSW's rights in law or in equity under this Agreement. 16.4.4 Security Deposit. Upon termination of this Agreement by CBSW pursuant to Section 16.3, CBSW will have the right to retain the full amount of the Security Deposit, without limiting any of its rights in law or in equity under this Agreement. Upon any other termination or expiration of this Agreement, the disposition of the Security Deposit will be made pursuant to Section 11.2. 16.4.5 Fees. 16.4.5.1 Upon any termination of this Agreement by Client pursuant to Section 16.2.2, Client will pay a one-time non-refundable close-out fee as set forth on Schedule 16.4.5., attached hereto and hereby incorporated herein by reference, in addition to any other payments due and payable under this Agreement accrued prior to such termination. 16.4.5.2 Upon any termination of this Agreement pursuant to Section 16.2.3, there shall be no close-out fee, but Client shall pay to CBSW any payments due and Page 22 of 42 payable under this Agreement accrued prior to such termination and Client shall not be entitled to any refund of any uncredited portion of the Construction Fee. 16.4.5.3 Upon any termination of this Agreement pursuant to Section 16.2.4: (i) If CBSW initiates the Scale Down Period pursuant to Section 16.2.4.1 then Client shall not pay any scale down fees. (ii) If Client initiates the Scale-Down Period pursuant to Section 16.2.4.2(a), then upon termination of this Agreement at the end of such Scale-Down Period, Client will pay to CBSW a one-time, non-refundable scale-down fee as set forth in Schedule 3.5.1, in addition to any other payments due and payable upon such termination. (iii) If Client initiates the Scale Down Period pursuant to Section 16.2.4.2(b) or (c) then Client shall not pay any scale down fees. (iv) Upon initiation of the Scale-Down Period, Client's obligation under Section 6.1 to order from CBSW its full requirements of Product intended for commercial sale will be reduced as follows. During the first [***] of the Scale-Down Period Client must order from CBSW [***] it would otherwise be required to order from CBSW under this Agreement. During the second 12 months of the Scale-Down Period Client must order [***] it would otherwise be required to order from CBSW under this Agreement. During the final 12 months of the Scale-Down Period Client must order [***] it would otherwise be required to order from CBSW under this Agreement. 16.4.5.4 Upon any termination of this Agreement by CBSW pursuant to Section 16.3, Client will pay to CBSW a one-time, non-refundable close-out fee as set forth on Schedule 16.4.5, such close-out fee will be in addition to any other payments due and payable upon such termination. 16.4.5.5 Upon any termination of this Agreement by Client pursuant to Section 16.3, [***]. 16.4.6 Survival. Sections 1, 5.4, 6.7, 7.4.3, 11.2, 12, 13.1, 15, 16.5, 17 and 18 of this Agreement, together with any schedules referenced therein, will survive any termination of this Agreement. 17. INDEMNIFICATION 17.1 Indemnification of CBSW. Client will indemnify CBSW and its Affiliates, and their respective directors, officers, employees and agents (the "CBSW Parties"), and defend and hold each of them harmless, from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and expenses) in connection with any and all liability suits, investigations, claims or demands (collectively, "Losses") arising from or Page 23 of 42 occurring as a result of or in connection with: (a) any material breach by Client of this Agreement, (b) the use or sale of Product, except to the extent such Losses relate to a breach by CBSW of the Product Warranties, (c) injuries suffered by Client Personnel while at the Facility or elsewhere, (d) the negligence or willful misconduct on the part of Client or its Affiliates in performing any activity contemplated by this Agreement, or (e) the use or practice by CBSW of any process, invention or other intellectual property supplied by Client to CBSW under this Agreement, except for those Losses for which CBSW has an obligation to indemnify Client pursuant to Section 17.2, as to which Losses each Party will indemnify the other to the extent of their respective liability for the Losses. 17.2 Indemnification of Client. CBSW will indemnify Client, its Affiliates, and their respective directors, officers, employees and agents, and defend and hold each of them harmless, from and against any and all Losses arising from or occurring as a result of or in connection with (a) any material breach by CBSW of this Agreement (except as precipitated by a breach by Client of this Agreement), or (b) the negligence or willful misconduct on the part of one or more of the CBSW Parties in performing any activity contemplated by this Agreement, except for those Losses for which Client has an obligation to indemnify CBSW and its Affiliates pursuant to Section 17.1, as to which Losses each Party will indemnify the other to the extent of their respective liability for the Losses. 17.3 Indemnification Procedure. 17.3.1 Notice of Claim. All indemnification claims in respect of a Party, its Affiliates or their respective directors, officers, employees and agents (each, an "Indemnitee") will be made solely by the applicable Party (the "Indemnified Party"). The Indemnified Party will give the indemnifying Party (the "Indemnifying Party") prompt written notice (an "Indemnification Claim Notice") of any Losses or discovery of fact upon which such Indemnified Party intends to base a request for indemnification under Section 17.1 or Section 17.2, but in no event will the Indemnifying Party be liable for any Losses that result from any delay in providing such notice. Each Indemnification Claim Notice must contain a description of the claim and the nature and amount of such Loss, to the extent that the nature and amount of such Loss are known at such time. The Indemnified Party will furnish promptly to the Indemnifying Party copies of all papers and official documents received in respect of any Losses. 17.3.2 Third Party Claims. The obligations of an Indemnifying Party under this Section 17 with respect to Losses arising from claims of any Third Party that are subject to indemnification as provided for in Section 17.1 or 17.2 (a "Third Party Claim") will be governed by and be contingent upon the following additional terms and conditions: At its option, the Indemnifying Party may assume the defense of any Third Party Claim by giving written notice to the Indemnified Party within thirty (30) days after the Indemnifying Party's receipt of an Indemnification Claim Notice. (a) Upon assuming the defense of a Third Party Claim, the Indemnifying Party may appoint as lead counsel in the defense of the Third Party Claim any legal counsel selected by the Indemnifying Party. In the event the Indemnifying Party assumes the defense of a Third Party Claim, the Indemnified Party will immediately deliver to the Page 24 of 42 Indemnifying Party all original notices and documents (including court papers) received by any Indemnitee in connection with the Third Party Claim. Should the Indemnifying Party assume the defense of a Third Party Claim, the Indemnifying Party will not be liable to the Indemnified Party or any other Indemnitee for any legal expenses subsequently incurred by such Indemnified Party or other Indemnitee in connection with the analysis, defense or settlement of the Third Party Claim. 17.3.3 Right to Participate in Defense. Without limiting Section 17.3.2(a) above, any Indemnitee will be entitled to participate in, but not control, the defense of such Third Party Claim and to employ counsel of its choice for such purpose; provided, however, that such employment will be at the Indemnitee's own expense unless (i) the employment thereof has been specifically authorized by the Indemnifying Party in writing, or (ii) the Indemnifying Party has failed to assume the defense and employ counsel in accordance with Section 17.3.2(a), in which case the Indemnified Party will control the defense. 17.3.4 Settlement. With respect to any Losses relating solely to the payment of money damages in connection with a Third Party Claim and that will not result in the Indemnitee's becoming subject to injunctive or other relief or otherwise adversely affect the business of the Indemnitee in any manner, and as to which the Indemnifying Party will have acknowledged in writing the obligation to indemnify the Indemnitee hereunder, the Indemnifying Party will have the sole right to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss, on such terms as the Indemnifying Party, in its sole discretion, will deem appropriate, and will transfer to the Indemnified Party all amounts which said Indemnified Party will be liable to pay prior to the entry of judgment. With respect to all other Losses in connection with a Third Party Claim, where the Indemnifying Party has assumed the defense of the Third Party Claim in accordance with Section 17.3.2(a), the Indemnifying Party will have authority to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss provided it obtains the prior written consent of the Indemnified Party (which consent will be at the Indemnified Party's sole and absolute discretion). The Indemnifying Party will not be liable for any settlement or other disposition of a Loss by an Indemnitee that is reached without the written consent of the Indemnifying Party. Regardless of whether the Indemnifying Party chooses to defend or prosecute any Third Party Claim, no Indemnitee will admit any liability with respect to, or settle, compromise or discharge, any Third Party Claim without the prior written consent of the Indemnifying Party. 17.3.5 Cooperation. Regardless of whether the Indemnifying Party chooses to defend or prosecute any Third Party Claim, the Indemnified Party will, and will cause each other Indemnitee to, cooperate in the defense or prosecution thereof and will furnish such records, information and testimony, provide such witnesses and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested in connection therewith. Such cooperation will include access during normal business hours afforded to the Indemnifying Party, and reasonable retention by the Indemnified Party of, records and information that are reasonably relevant to such Third Party Claim, and making Indemnitees and other employees and agents available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder, and the Indemnifying Party will Page 25 of 42 reimburse the Indemnified Party for all its reasonable out-of-pocket expenses in connection therewith. 17.4 Expenses. Except as provided above in this Section 17, the reasonable and verifiable costs and expenses, including fees and disbursements of counsel, incurred by the Indemnified Party in connection with any claim will be reimbursed on a calendar quarter basis by the Indemnifying Party, without prejudice to the Indemnifying Party's right to contest the Indemnified Party's right to indemnification and subject to refund in the event the Indemnifying Party is ultimately held not to be obligated to indemnify the Indemnified Party. 18. MISCELLANEOUS 18.1 Independent Contractors. Neither Party is authorized, nor will undertake, to bind the other Party in any way as agent, partner, joint venturer or otherwise, whether in the name of CBSW or Client or otherwise. CBSW is an independent contractor of Client, and neither CBSW nor any person or entity employed, contracted, or otherwise utilized by CBSW for any purposes will be deemed to be an employee, representative or agent of Client. 18.2 Force Majeure. In the event of a delay caused by war, terrorist act, civil unrest, riots, inclement weather, fire, flood, strike or other labor dispute, acts of God, acts of governmental officials or agencies, or any other cause beyond the control of CBSW or Client, CBSW and Client, as the case may be, will be excused from performance hereunder for the period or periods of time attributable to such delay. There will be no increase in compensation as a result of any event of delay under this Section 18.2 or otherwise. 18.3 Condemnation. If the Facility is condemned or taken as a result of the exercise of the power of eminent domain or will be conveyed to a governmental agency having power of eminent domain under the threat of the exercise of such power (any of the foregoing, a "Condemnation"), then this Agreement will terminate as of the date on which title to the Facility vests in the authority so exercising or threatening to exercise such power and Client will only have the right to a portion of the Condemnation proceeds if the Custom Production Suite was actually built. Client's right to a portion of the Condemnation proceeds shall be in the from of a refund and shall be calculated according to the following formula: the numerator equal to the uncredited portion of the Construction Fee and the denominator equal to the total cost of construction of the Custom Production Suite multiplied by a portion of the net proceeds received by CBSW as a result of such condemnation. 18.4 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been given when (i) delivered by hand (with written confirmation of receipt), (ii) sent by fax (with written confirmation of receipt), provided that a copy is mailed by U.S. registered mail, return receipt requested, (iii) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate address and fax numbers set forth below (or to such other addresses and fax numbers as a Party may designate by notice to the other Party): Page 26 of 42 If to CBSW, to: Cambrex Bio Science Walkersville, Inc. 8830 Biggs Ford Road Walkersville, Maryland 21793 Fax (301) 845-6099 Attention: David W. Smith, Business Director, Cell Therapy With a copy to: Cambrex Corporation 5901 E. Lombard St. Baltimore, MD 21224 Fax: (410) 563-9206 Attention: Shelly A. Upton, Corporate Counsel and If to Client, to: Ortec International, Inc. 3960 Broadway New York, NY 10032 Fax: Attention: Ron Lipstein, Vice Chairman With a copy to: Feder Kaszovitz Isaacson Weber Skala Bass &Rhine, LLP 750 Lexington Avenue, 23rd Floor New York, NY 10022 Fax: (212) 888-7776 Attention: Gabriel Kaszovitz, Esq. Either Party may change its address for notice by giving notice thereof in the manner set forth in this Section 18.4. 18.5 Entire Agreement. This Agreement, including the Schedules hereto, constitutes the entire agreement of the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral and written, among the Parties with respect to the subject matter hereof. The Recitals and Schedules hereto are hereby incorporated herein by reference. 18.6 Governing Law and Jurisdiction. This Agreement will be governed by and construed in accordance with the internal laws of the State of Maryland, without giving effect to any conflicts of laws provisions thereof that would cause the application of the laws of a Page 27 of 42 different jurisdiction. All suits, disputes, actions, and other legal proceedings (collectively, "Suits") related to or arising out of this Agreement, will be brought in the state or federal courts located [***]. 18.7 Counterparts. This Agreement and any Schedule hereto may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 18.8 Amendments. This Agreement (including any Schedule hereto) may not be amended or modified, and no provisions hereof may be waived, without the written consent of the Parties. 18.9 Severability. Each provision of this Agreement (and each Schedule hereto) will be treated as a separate and independent clause, and the unenforceability of any one clause will in no way impair the enforceability of any of the other clauses herein. If one or more of the provisions contained in this Agreement (or any Schedule hereto) will for any reason be held to be excessively broad as to scope, activity, subject or otherwise, so as to be unenforceable at law, such provision or provisions will be construed by the appropriate judicial body by limiting or reducing it or them so as to be enforceable to the maximum extent compatible with the applicable law as it will then appear. 18.10 Titles and Subtitles. The titles and subtitles used in this Agreement (including any Schedule hereto) are for convenience only and are not to be considered in construing or interpreting any term or provision of this Agreement (or any Schedule hereto). 18.11 Pronouns. Where the context requires, (i) all pronouns used herein will be deemed to refer to the masculine, feminine or neuter gender as the context requires, and (ii) the singular context will include the plural and vice versa. 18.12 Assignment. Neither Party will assign this Agreement (or any Schedule hereto), in whole or in part, without the prior written consent of the other party, which consent shall not be unreasonably withheld, and except that CBSW will be permitted to assign its rights and obligations hereunder to one or more of its Affiliates. Any purported assignment not permitted under this Section 18.12 will be null, void, and of no effect. Any permitted assignment shall not release the assignor from liability hereunder if such assignor's obligations hereunder are not performed by its assignee. 18.13 Waiver. The failure of any Party at any time or times to require performance of any provision of this Agreement (including any Schedule hereto) will in no manner affect its rights at a later time to enforce the same. No waiver by any Party of the breach of any term contained in this Agreement (including any Schedule hereto), whether by conduct or otherwise, in any one or more instances, will be deemed to be or construed as a further or continuing waiver of any such breach or the breach of any other term of this Agreement (including any Schedule hereto). Page 28 of 42 18.14 Waiver of Jury Trial. CBSW and Client hereby waive trial by jury in any suit brought by either of the parties hereto against the other or on any counterclaim in respect thereof on any matters, whatsoever, arising out of, or in any way in connection with, this Agreement (including any Schedule hereto). 18.15 No Presumption Against Drafter. For purposes of this Agreement, both Client and CBSW hereby waive any rule of construction that requires that ambiguities in this Agreement (including any Schedule hereto) be construed against the drafter. 18.16 Non-Solicitation. Each Party agrees not to employ or solicit for employment (or for use as an independent contractor), any employee of the other Party or its Affiliates during the term of this Agreement and [***] thereafter, except with such other Party's prior written consent. [Remainder of page intentionally left blank. Signatures appear on following page.] Page 29 of 42 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. WITNESS: ORTEC INTERNATIONAL, INC. By: By: ---------------------------------- ------------------------------ Ron Lipstein Vice Chairman, Board of Directors WITNESS: CAMBREX BIO SCIENCE WALKERSVILLE, INC. By: By: ---------------------------------- ------------------------------ N. David Eansor President BioProducts Strategic Business Unit Page 30 of 42 SCHEDULE 1.15 PRODUCTS Fresh Product & Cryopreserved Product Description: A bilayered cellular matrix in which normal human allogeneic skin cells (epidermal keratinocytes and dermal fibroblasts) are cultured in two separate layers on and within a Type I bovine collagen sponge matrix. Donor dermal fibroblasts are cultured on and within the porous sponge side of the collagen matrix while keratinocytes, from the same donor, are cultured on the coated, non-porous side of the collagen matrix. The Product serves as an absorbable biocompatible matrix that provides a favorable environment for host cell migration and has been shown to contain the following cell-expressed cytokines and growth factors: FGF-1 (bFGF), NGF, GM-CSF, IL-1(alpha), IL-1(beta), IL-6, HGF, KGF-1 (FGF-7), M-CSF, PDGF-AB, TGF-(alpha), TGF-(beta)1, TGF-(beta)2, and VEGF. The Product is not intended to be a human skin replacement and does not contain Langerhans cells, melanocytes, macrophages, lymphocytes, blood vessels or hair follicles. The Product is manufactured under aseptic conditions from human neonatal foreskin tissue. The donor's mother is tested and found to be negative for syphilis and for human viruses, including CMV, HSV I & II, HTLV I & II, Hepatitis A, B&C, HIV 1&2, EBV and HHV-6. The donor's fibroblast and keratinocyte cells are tested and found to be negative for viruses and retroviruses (including HTLV I&II, Hepatitis B, HIV 1&2, EBV, and HHV-6), bacteria, fungi, yeast, mycoplasma, and tumorigenicity. The donor cells are tested and are found to be normal human cells using karyology, isoenzyme, growth and morphological analyses. Prior to cell seeding, the sponge matrix is cross-linked and then coated on one side with a thin gel layer prepared from acid-soluble collagen. The final Product is tested for morphology, cell density, cell viability, metabolic activity, sterility, mycoplasma, endotoxins and physical container integrity. All animal derived reagents are tested for: viruses, bacteria, fungi, yeast, and mycoplasma before use, and all bovine material is obtained from countries free of Bovine Spongiform Encephalopathy (BSE). The device measures approximately 6 cm x 6 cm (minimally 36 cm(2)). Page 31 of 42 SCHEDULE 1.15 (cont.) Specifications:
============================================================================================================================= Specification, Fresh Specification, Characteristic Test Method Product Cryopreserved Product - ----------------------------------------------------------------------------------------------------------------------------- 1 Product in-process Visual [***] No Defects No Defects Inspection (pre-packaging) Client procedure WI o cracks 09-0393 o transparencies o color o other defects ============================================================================================================================= 2 Product final Visual [***] No Defects No Defects Inspection Client procedure WI (post-packaging) 09-0393 o seal integrity of inner pouch o seal integrity of outer pouch o label is present o blue and white mesh present o not folded - ----------------------------------------------------------------------------------------------------------------------------- 3 Cell Density CBSW procedure based [3 - 10 x 10'pp'5] cells/ cm'pp'2 [4 - 11 x 10'pp'5 cells/ cm'pp'2 on Client procedure TM 07-0004 & TM 07-0060 - ----------------------------------------------------------------------------------------------------------------------------- 4 Cell Viability [***] >= 70% >= 70% Client procedure TM 07-0004 & TM 07-0060 - ----------------------------------------------------------------------------------------------------------------------------- 5 Metabolic Activity [***] >= 6 FU/cm'pp'2/hr NA (Alamar Blue) Client procedure TM 07-0003 - ----------------------------------------------------------------------------------------------------------------------------- 6 Endotoxin [***] <= 0.5 EU/ml/unit <= 0.5 EU/ml/unit Client procedure TM 07-0001 LAL - Kinetic Chromogenic - ----------------------------------------------------------------------------------------------------------------------------- 7 Histology [***] Pass Pass Client procedure TM (Post-release to shipping) (Pre-release to shipping) 07-0037 =============================================================================================================================
Page 32 of 42 ======================================================================================================================= & Standard 08-0005 - ----------------------------------------------------------------------------------------------------------------------- 8 Sterility (in-process) [***] No Growth No Growth Client procedure TM (Pre-release) (Pre-release) 07-0058 - ----------------------------------------------------------------------------------------------------------------------- 9 Sterility (final) Gibraltar 56M, "Direct No Growth No Growth Transfer" (Post-release) (Pre-release) - ----------------------------------------------------------------------------------------------------------------------- 10 Mycoplasma Bionique M-700 Negative Negative (Post-release) (Pre-release) =======================================================================================================================
Page 33 of 42 SCHEDULE 2.1 PHASE I PRODUCTION PLAN Completion of Draft of Phase I Production Plan CBSW will complete a final draft of the Phase I Production Plan within [***] days after receipt by CBSW of all Client Production Materials pursuant to Section 2.2. Draft Outline of Phase I Production Plan [***] [***] [***] [***] Page 34 of 42 SCHEDULE 3.1 PHASE II PRODUCTION PLAN Completion of Draft of Phase II Production Plan CBSW will use commercially reasonable efforts to complete a final draft of the Phase II Production Plan within [***] days after initiation of Phase II. Draft Outline of Production Plan [***] [***] [***] [***] [***] [***] Page 35 of 42 SCHEDULE 3.5.1 TABLE OF SCALE-DOWN FEES
- ---------------------------------------------------------------------------------------------- Expiration of Scale-Down Period Scale-Down Fee - ---------------------------------------------------------------------------------------------- On or after 4th anniversary of Phase II Forfeiture of uncredited amount of Commencement Date, but before 5th Construction Fee, plus a payment equal to anniversary of Phase II Commencement Date [****] [$2,625,000] - ---------------------------------------------------------------------------------------------- On or after 5th anniversary of Phase II Forfeiture of uncredited amount of Commencement Date, but before 6th Construction Fee, plus a payment equal to anniversary of Phase II Commencement Date [****] [$1,050,000] - ----------------------------------------------------------------------------------------------
Page 36 of 42 SCHEDULE 4.1 DEVELOPMENT PLAN Draft Outline of Development Plan [***] [***] [***] [***] [***] [***] [***] Page 37 of 42 SCHEDULE 11.1 PAYMENTS 1. Security Deposit On the Effective Date, Client will pay to CBSW a security deposit in the amount of US$[****] (the "Security Deposit"). Within [****] after the Effective Date, Client will either: (a) pay to CBSW an additional security deposit of US$[****], or (b) provide CBSW a [****]. If the additional US$[****] is paid it will be added to the Security Deposit, making the total Security Deposit US$[****]. 2. Construction Fee Client will pay to CBSW the Construction Fee under the terms and conditions set forth in Section 3.3.2. 3. Monthly Fee ([****] Increase Applicable) During each Production Term, Client will pay to CBSW a monthly fee (the "Monthly Fee"). The amount of the Monthly Fee during Phase I will be US$[****]. The amount of the Monthly Fee will increase to US$[****] upon the Commencement Date for Phase II. If pursuant to the provisions of Section 3.3.4 CBSW is unable to provide the Custom Production Suite but instead provides the Additional Production Suite, the Monthly Fee for both the Production Suite used during Phase I and the Additional Production Suite shall be $[****]. During each Production Term, the Monthly Fee will initially be due and payable at least [****] days prior to the applicable Commencement Date, and will thereafter be due [****] during the applicable Production Term. If such Production Term includes a period of time which is less than a full month, the amount of the Monthly Fee for such partial month will be equal to the number of days in such partial month multiplied by the daily rate, which is the Monthly Fee divided by the number of days in such month. The Monthly Fee in the amount of US$[****] covers the following: a monitored and validated [****] Production Suite (approximately [****], excluding gowning in/out and staging area); [****] incubators; [****] biosafety hood; two refrigerator/freezer units; routine maintenance & installation qualification (IQ) and operational qualification (OQ) of the Production Suite and CBSW supplied equipment; Facility common areas, utilities, HEPA filters; routine environmental monitoring and testing of the Production Suite and associated common areas; standard gowning materials; and all documentation related to CBSW's quality assurance release of the Product to Client for further processing. The Monthly Fee in the amount of US$[****] covers the following (a) use of the Custom Production Suite (including any equipment therein); routine maintenance & IQ and OQ of the Custom Production Suite and CBSW supplied equipment; Facility common areas, utilities, HEPA filters; routine environmental monitoring and testing of the Custom Production Suite and associated common areas; standard gowning materials; and all documentation related to CBSW's quality assurance release of the Product to Client for further processing; or (b) the Page 38 of 42 Production Suite used during Phase I and the Additional Production Suite, each of which will be as described in the immediately preceding paragraph. The Monthly Fee specifically excludes the following: performance qualification (PQ) of any equipment used in any portion of the process used to manufacture Product; routine maintenance, IQ, OQ, PQ and repair of the cryogenic storage unit provided to CBSW by Client in accordance with Section 9.2. 4. Reimbursement of Costs: Client will pay for the following [****] within [****] days after receipt of a duly itemized invoice: [****] [****] 5. Capital Expenses Client will reimburse CBSW for costs and expenses incurred by CBSW in the acquisition of specialized or additional equipment (e.g., [****]) required for the performance of each Development Plan and Production Plan and approved by Client (collectively, "Capital Expenses"). CBSW will invoice Client [****] of [****], whichever is earlier. Upon any termination of this Agreement, any outstanding Capital Expenses will become due and payable within [****] days of the effective date of such expiration or termination. Client will own any movable equipment purchased pursuant to this Clause 5 upon receipt by CBSW of full payment for such equipment. 6. Hourly Fees ([****] Increase Applicable) For work performed by CBSW personnel pursuant to a Development Plan or Production Plan, Client will pay CBSW the following hourly fees: (a) Technology Transfer: [****] o Review of Client Materials o Evaluation of Client-specific processes and personnel training o Qualification of QC assays. Note: CBSW will not charge Client any Monthly Fee during technology transfer. (b) Process Development: [****] o Performance of the Development Plan, media optimization and/or the care and maintenance of cell lines or Products; Page 39 of 42 o Preparation of draft Master Production Record and Specifications, raw material specifications, SOPs; identification of equipment requirements & modifications (c) Regulatory and Audit Services: [****] o Preparation of CMC section of the application for Regulatory Approval o Other regulatory and tissue acquisition consulting activities o Services associated with internal audits by Client and audits of vendors by CBSW Prices have been set for some standard activities. o Preparation of new DMF: US$7500 o Annual update of DMF: US$2000; o Vendor audit: US$3000 (out-of-pocket costs charged separately) (d) Validation Services: [****] [****] o Client-specific validation of assays, cleaning procedures, equipment or processes. If these services require utilization of the clinical suite, the labor rate is $[****] plus the applicable Monthly Fee. If these services do not require utilization of the clinical suite, the labor rate is US$[****]. QA/QC/Validation/Supervisory support is included in the hourly rate of the technician. 7. Production Services ([****] Increase Applicable) Operation technicians provided by CBSW will be charged at a rate of (i) US$[****] for the first [****] of Phase I and (ii) US$[****] thereafter. CBSW and Client will mutually agree to the number of technicians necessary to perform each Production Plan and for maintenance of cell lines or Products. Client may request an increase to the number of technicians upon [****] prior written notice to CBSW; provided, however, that the effective date of such increase may be accelerated if CBSW agrees to provide such additional technicians. Client may decrease such number of technicians upon [****] prior written notice to CBSW, but in no event shall the number of technicians be reduced below the number of technicians necessary to produce the necessary quantities of Product ordered by Client pursuant to this Agreement. 8. Quality and Release Testing Testing prices will be charged [****]. 9. Handling/Shipping Fee Client shall be responsible for payment of a handling/shipping fee related to packaging, shipment, and storage of Product. Such fee shall be agreed to in writing by the Parties once Ortec has finalized the parameters for packaging, shipment and storage of Product. Absent mutual agreement of the Parties, CBSW will charge Client a reasonable Page 40 of 42 handling/shipping fee, such fee shall include (but shall not be limited to) costs related to: shipping supplies, validated storage, handling and inventory control of shipping supplies, and CBSW handling charges related to storage and shipment of Product. 10. Monthly Storage Rates ([****] Increase Applicable) (a) US$[****] for Room Temperature Storage (b) US$[****] for Refrigerated Storage (c) US$[****] for Freezer Storage Page 41 of 42 SCHEDULE 16.4.5 CLOSE-OUT FEE
- ----------------------------------------------------------------------------------------------- Effective Date of Termination Close-Out Fee - ----------------------------------------------------------------------------------------------- On or after 1st anniversary of the Phase II Forfeiture of uncredited amount of Commencement Date, but before 2nd Construction Fee, plus a payment equal to anniversary of Phase II Commencement Date [****] [$6,300,000] - ----------------------------------------------------------------------------------------------- On or after 2nd anniversary of the Phase II Forfeiture of uncredited amount of Commencement Date, but before 3rd Construction Fee, plus a payment equal to anniversary of Phase II Commencement Date [****] [$5,250,000] - ----------------------------------------------------------------------------------------------- On or after 3rd anniversary of the Phase II Forfeiture of uncredited amount of Commencement Date, but before 4th Construction Fee, plus a payment equal to anniversary of Phase II Commencement Date [****] [$3,675,000] - ----------------------------------------------------------------------------------------------- On or after 4th anniversary of the Phase II Forfeiture of uncredited amount of Commencement Date, but before 5th Construction Fee, plus a payment equal to anniversary of Phase II Commencement Date [****] [$2,625,000] - ----------------------------------------------------------------------------------------------- On or after 5th anniversary of the Phase II Forfeiture of uncredited amount of Commencement Date, but before 6th Construction Fee, plus a payment equal to anniversary of Phase II Commencement Date [****] [$1,575,000] - ----------------------------------------------------------------------------------------------- On or after 6th anniversary of Phase II Forfeiture of uncredited amount of Commencement Date Construction Fee, plus a payment equal to [****] [$1,050,000] - -----------------------------------------------------------------------------------------------
Page 42 of 42 EX-23 4 ex23.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report, dated March 12, 2004, except for Note 14 as to which the date is March 23, 2004, accompanying the financial statements of Ortec International, Inc. (a development stage enterprise) included in the Annual Report on Form 10-K for the year ended December 31, 2003, which is incorporated by reference in this Registration Statement. We consent to the incorporation by reference in the Registration Statement of the aforementioned report and to the use of our name as it appears under the caption "Experts". GRANT THORNTON LLP New York, New York July 23, 2004 -----END PRIVACY-ENHANCED MESSAGE-----