-----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, U0wJhCHMVNwFsKnJ19zcAvxgGQYdOenzBQqDqdi2OlCDHix9q/72eQeuuVtwIobv xH2383N9xUyeC7V9Bs44zg== 0000950123-99-007233.txt : 19990809 0000950123-99-007233.hdr.sgml : 19990809 ACCESSION NUMBER: 0000950123-99-007233 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTEC INTERNATIONAL INC CENTRAL INDEX KEY: 0000889992 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 113068704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27368 FILM NUMBER: 99679205 BUSINESS ADDRESS: STREET 1: 3960 BROADWAY STREET 2: BLDG 28 CITY: NEW YORK STATE: NY ZIP: 10032 BUSINESS PHONE: 7183264698 10-Q 1 ORTEC INTERNATIONAL INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q ------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO _________________ COMMISSION FILE NUMBER 0-27368 ORTEC INTERNATIONAL, INC. (EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER) DELAWARE 11-3068704 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3960 BROADWAY NEW YORK, NEW YORK 10032 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (212) 740-6999 ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE --------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the issuer's common stock is 6,562,753 (as of August 5, 1999) 2 ORTEC INTERNATIONAL, INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q FILED WITH THE SECURITIES AND EXCHANGE COMMISSION QUARTER ENDED JUNE 30, 1999 ITEMS IN FORM 10-Q
Page ---- Facing page Part I Item 1. Financial Statements. 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 10 Item 3. Quantitative and Qualitative Disclosures About None Market Risk Part II Item 1. Legal Proceedings and Claims. None Item 2. Changes in Securities and Use of Proceeds. 17 Item 3. Default Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. 17 Signatures 18
3 PART I Item 1. FINANCIAL STATEMENTS ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS (Unaudited)
JUNE 30, DECEMBER 31, 1999 1998 ----------- ----------- ASSETS Current assets: Cash and equivalents $ 8,597,305 $ 9,449,679 Marketable securities 2 765,660 Other current assets 3,224 1,662 ----------- ----------- Total current assets 8,600,531 10,217,001 ----------- ----------- Property and equipment, at cost: Laboratory equipment 1,030,077 891,109 Office furniture and equipment 733,713 611,624 Leasehold improvements 1,217,339 1,199,407 ----------- ----------- 2,981,129 2,702,140 Accumulated depreciation and amortization 1,264,137 1,011,713 ----------- ----------- 1,716,992 1,690,427 ----------- ----------- Other assets: Patent application costs net of accumulated amortization of $84,868 at June 30, 1999 and $64,355 at December 31, 1998 484,858 451,914 Deposits 35,818 31,697 ----------- ----------- Total other assets 520,676 483,611 ----------- ----------- Total Assets $10,838,199 $12,391,039 ----------- -----------
See notes to condensed unaudited financial statements. 1 4 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS (Unaudited)
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 954,717 $ 706,170 Capital lease obligations - current 13,236 30,341 Loans payable - current 116,187 111,589 ------------ ------------ Total current liabilities 1,084,140 848,100 ------------ ------------ Long-term liabilities: Capital lease obligations - noncurrent 5,516 Loans payable - noncurrent 1,087,398 1,146,664 ------------ ------------ Total long-term liabilities 1,087,398 1,152,180 ------------ ------------ Commitments and contingencies Shareholders' equity: Common stock, $.001 par value; authorized, 25,000,000 shares; 6,575,453 shares issued, 6,562,753 shares outstanding, at June 30, 1999 and 6,182,220 shares issued, 6,175,620 outstanding at December 31, 1998 6,575 6,182 Additional paid-in capital 34,585,517 31,550,954 Deficit accumulated during the development stage (25,801,325) (21,099,105) Treasury stock, at cost (12,700 shares at June 30, 1999 and 6,600 shares at December 31, 1998) (124,106) (67,272) ------------ ------------ Total shareholders' equity 8,666,661 10,390,759 ------------ ------------ Total Liabilities and Shareholders' Equity $ 10,838,199 $ 12,391,039 ------------ ------------
See notes to condensed unaudited financial statements. 2 5 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (Unaudited)
Six months Cumulative from Quarter ended June 30, ended June 30, March 12, 1991 (inception) to 1999 1998 1999 1998 June 30, 1999 ------------ ------------ ------------ ------------ ------------ Revenue Interest income $ 106,198 $ 150,593 $ 218,092 $ 318,486 $ 1,320,458 ------------ ------------ ------------ ------------ ------------ Expenses Research and development 741,907 405,515 1,518,597 787,430 7,985,726 Rent 108,013 66,381 233,265 106,546 815,109 Consulting 232,863 131,615 413,129 237,378 2,553,928 Personnel 905,406 1,061,104 1,678,409 2,077,256 9,515,845 General and administrative 546,603 380,629 1,025,832 680,700 5,905,893 Interest and other expense 25,147 32,451 51,080 49,465 345,282 ------------ ------------ ------------ ------------ ------------ 2,559,939 2,077,695 4,920,312 3,938,775 27,121,783 ------------ ------------ ------------ ------------ ------------ Net loss $ (2,453,741) $ (1,927,102) $ (4,702,220) $ (3,620,289) $(25,801,325) ------------ ------------ ------------ ------------ ------------ Net loss per share $ (.37) $ (.33) $ (.73) $ (.62) $ (7.51) ------------ ------------ ------------ ------------ ------------ Weighted average common stock outstanding (basic and diluted) 6,562,625 5,869,588 6,433,597 5,817,797 3,434,335 ------------ ------------ ------------ ------------ ------------
See notes to condensed unaudited financial statements. 3 6 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Deficit accumulated Common Stock Additional in the Paid-in development Treasury Shares Amount Capital stage Stock Total --------- ------ ------------ ------------ ---------- ------------ Issuance of stock: Founders 1,553,820 $1,554 $( 684) $ 870 First private placement 217,440 217 64,783 65,000 The Director 149,020 149 249,851 250,000 Second private placement 53,020 5 499,947 500,000 Share issuance expenses ( 21,118) ( 21,118) Net loss for the period from March 12, 1991 (inception) to December 31, 1991 $( 281,644) ( 281,644) --------- ------ ------------ ------------ ------------ Balance - December 31, 1991 1,973,300 1,973 792,779 ( 281,644) 513,108 Issuance of stock: Second private placement 49,320 49 465,424 465,473 Stock purchase agreement with The Director 31,820 32 299,966 299,998 Share issuance expenses ( 35,477) ( 35,477) Net loss for the year ended December 31, 1992 ( 785,941) ( 785,941) --------- ------ ------------ ------------ ------------ Balance - December 31, 1992 2,054,440 2,054 1,522,692 ( 1,067,585) 457,161 Issuance of stock: Third private placement 132,150 132 1,321,368 1,321,500 Stock purchase agreement with Home Insurance Company 111,111 111 999,888 999,999 Stock purchase agreement with The Director 21,220 21 199,979 200,000 Shares issued in exchange for commissions earned 600 1 5,999 6,000 Share issuance expenses ( 230,207) ( 230,207) Net loss for the year ended December 31, 1993 ( 1,445,624) ( 1,445,624) --------- ------ ------------ ------------ ------------ Balance - December 31, 1993 2,319,521 $2,319 $ 3,819,719 $( 2,513,209) $ 1,308,829 --------- ------ ------------ ------------ ------------
See notes to condensed unaudited financial statements. 4 7 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Deficit accumulated Common Stock Additional in the Paid-in development Treasury Shares Amount Capital stage Stock Total --------- ------ ------------ ------------ ---------- ------------ (brought forward) 2,319,521 $2,319 $ 3,819,719 $( 2,513,209) $ 1,308,829 Issuance of stock: Fourth private placement 39,451 40 397,672 397,712 Stock purchase agreement with Home Insurance Company 50,000 50 499,950 500,000 Share issuance expenses ( 8,697) ( 8,697) Net loss for the year ended December 31, 1994 ( 1,675,087) ( 1,675,087) --------- ------ ------------ ------------ ------------ Balance - December 31, 1994 2,408,972 2,409 4,708,644 ( 4,188,296) 522,757 Rent forgiveness 40,740 40,740 Net loss for the year ended December 31, 1995 ( 1,022,723) ( 1,022,723) --------- ------ ------------ ------------ ------------ Balance - December 31, 1995 2,408,972 2,409 4,749,384 ( 5,211,019) ( 459,226) Issuance of stock: Initial public offering 1,200,000 1,200 5,998,800 6,000,000 Exercise of warrants 33,885 34 33,851 33,885 Fifth private placement 959,106 959 6,219,838 6,220,797 Share issuance expenses ( 1,580,690) ( 1,580,690) Non-cash stock compensation and interest 152,000 152,000 Net loss for the year ended December 31, 1996 ( 2,649,768) ( 2,649,768) --------- ------ ------------ ------------ ------------ Balance - December 31, 1996 4,601,963 $4,602 $ 15,573,183 $( 7,860,787) $ 7,716,998 --------- ------ ------------ ------------ ------------
See notes to condensed unaudited financial statements. 5 8 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Deficit accumulated Common Stock Additional in the Paid-in development Treasury Shares Amount Capital stage Stock Total --------- ------ ------------ ------------ ---------- ------------ (brought forward) 4,601,963 $4,602 $ 15,573,183 $( 7,860,787) $ 7,716,998 Exercise of warrants 1,158,771 1,159 10,821,632 10,822,791 Share issuance costs ( 657,508) ( 657,508) Stock options and warrants issued for services 660,000 660,000 Net loss for the year ended December 31, 1997 ( 4,825,663) ( 4,825,663) --------- ------ ------------ ------------ ------------ Balance - December 31, 1997 5,760,734 5,761 26,397,307 (12,686,450) 13,716,618 Exercise of warrants 221,486 221 1,281,736 1,281,957 Stock options and warrants issued for services 1,920,111 1,920,111 Sixth private placement 200,000 200 1,788,498 1,788,698 Warrants issued in Sixth private placement 211,302 211,302 Share issuance costs ( 48,000) ( 48,000) Purchase of treasury stock (at cost) $( 67,272) ( 67,272) Net loss for the year ended December 31, 1998 ( 8,412,655) ( 8,412,655) --------- ------ ------------ ------------ --------- ------------ Balance - December 31, 1998 6,182,220 6,182 31,550,954 (21,099,105) ( 67,272) 10,390,759 Exercise of warrants 4,077 4 4,073 4,077 Stock options issued for services ( 17,604) ( 17,604) Seventh private placement 389,156 389 3,400,396 3,400,785 Warrants issued in Seventh private placement 236,291 236,291 Share issuance costs ( 588,593) ( 588,593) Purchase of treasury stock (at cost) ( 56,834) ( 56,834) Net loss for the six months ended June 30, 1999 ( 4,702,220) ( 4,702,220) --------- ------ ------------ ------------ --------- ------------ Balance - June 30, 1999 6,575,453 $6,575 $ 34,585,517 $(25,801,325) $(124,106) $ 8,666,661 --------- ------ ------------ ------------ --------- ------------
See notes to condensed unaudited financial statements. 6 9 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (Unaudited)
Six months Cumulative from Quarter ended June 30, ended June 30, March 12, 1991 (inception) to 1999 1998 1999 1998 June 30, 1999 ------------ ------------ ------------ ------------ ------------ Cash flows from operating activities: Net loss $ (2,453,741) $ (1,927,102) $ (4,702,220) $ (3,620,289) $(25,801,325) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 139,808 120,516 272,937 201,715 1,359,242 Unrealized loss on marketable securities 11,404 Realized loss on marketable securities 5,250 Non cash stock compensation and interest (1,041) 556,247 (17,604) 1,082,500 2,714,507 Purchases of marketable securities (3,670,356) (6,298) (13,795,622) (19,075,122) Sales of marketable securities 4,045,000 771,956 5,622,000 19,130,920 Changes in operating assets and liabilities Other current assets (161) (129,621) (1,562) (126,012) (3,224) Accounts payable and accrued liabilities 16,216 (88,921) 248,547 (166,065) 1,042,544 ------------ ------------ ------------ ------------ ------------ Net cash used in operating activities (2,298,919) (1,094,237) (3,434,244) (10,801,773) (20,615,804) ------------ ------------ ------------ ------------ ------------ Cash flows from investing activities: Purchases of property and equipment, excluding capital leases (180,559) (735,107) (278,989) (797,717) (2,894,063) Payments for patent application (21,618) (13,545) (53,457) (16,087) (569,726) Organization costs (10,238) Deposits (2,548) 38,300 (4,121) 19,820 (33,835) Purchases of marketable securities (594,986) Sales of marketable securities 522,532 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities (204,725) (710,352) (336,567) (793,984) (3,580,316) ------------ ------------ ------------ ------------ ------------
See notes to condensed unaudited financial statements. 7 10 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (Unaudited)
Six months Cumulative from Quarter ended June 30, ended June 30, March 12, 1991 (inception) to 1999 1998 1999 1998 June 30, 1999 ------------ ------------ ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of notes payable $ 515,500 Repayment of notes payable (515,500) Proceeds from issuance of common stock $ 1,983 $ 402,110 $ 3,409,153 $ 444,203 34,769,136 Share issuance expenses (40,000) (20,000) (356,593) (20,000) (2,932,290) Purchase of treasury stock (9,529) (56,834) (124,106) Proceeds from issuance of loans payable 600,000 600,000 1,425,850 Repayment of loans payable (27,610) (35,779) (54,668) (40,884) (251,197) Repayment of capital lease obligations (9,127) (10,431) (22,621) (19,657) (93,968) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities (84,283) 935,900 2,918,437 963,662 32,793,425 ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (2,587,927) (868,689) (852,374) (10,632,095) 8,597,305 Cash and cash equivalents at beginning of period 11,185,232 2,187,287 9,449,679 11,950,693 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ 8,597,305 $ 1,318,598 $ 8,597,305 $ 1,318,598 $ 8,597,305 ------------ ------------ ------------ ------------ ------------ Supplemental disclosure of cash flow information: Non-cash financing activities Share issuance expenses - warrants $ 232,000 $ 232,000 ------------ ------------
See notes to condensed unaudited financial statements. 8 11 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 AND 1998 NOTE 1 - FINANCIAL STATEMENTS The condensed balance sheet as of June 30, 1999 and the statements of operations, shareholders' equity and cash flows for the three and six month periods ended June 30, 1999 and 1998 and for the period from March 12, 1991 (inception) to June 30, 1999 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring accrual adjustments) necessary to present fairly the financial position, results of operations and cash flows at June 30, 1999 and for all periods presented have been made. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto in the Company's December 31, 1998 annual report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the six months ended June 30, 1999 is not necessarily indicative of the operating results for the full year. NOTE 2 - FORMATION OF THE COMPANY AND BASIS OF PRESENTATION FORMATION OF THE COMPANY Ortec International, Inc. ("Ortec" or the "Company") was incorporated in March 1991 as a Delaware corporation to secure and provide funds for the further development of the technology developed by Dr. Mark Eisenberg of Sydney, Australia, to replicate in the laboratory, Composite Cultured Skin for use in skin replacement procedures (the "Technology"). Pursuant to a license agreement dated September 7, 1991, Dr. Eisenberg had granted Ortec a license for a term of ten years, with automatic renewals by Ortec for two additional ten-year periods, to commercially use and exploit the Technology for the development of products. In April, 1998, Dr. Eisenberg assigned his patent for the Technology to Ortec. 9 12 BASIS OF PRESENTATION The Company is a development stage enterprise, and has neither realized any operating revenue nor has any assurance of realizing any future operating revenue. Successful future operations depend upon the successful development and marketing of the Company's Composite Cultured Skin to be used in skin replacement procedures. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING INFORMATION MAY PROVE INACCURATE This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company that are based on the beliefs of Management, as well as assumptions made by and information currently available to the Company. When used in this document, the words "anticipate," "believe," "estimate," and "expect" and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions, including those described in this discussion and elsewhere in this Quarterly Report on Form 10-Q. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-looking statements. General Since its inception the Company has been principally engaged in the research and development of its skin regeneration product for use in the treatment of chronic and acute wounds, such as venous and diabetic skin ulcers, burns, donor site wounds and chronic skin ulcers in Epidermolysis Bullosa ("EB") patients. The Company has not had any revenues from operations since its founding in 1991 since the Company cannot make any sales of its product until it receives approval from the Food and Drug Administration ("FDA") to do so. The Company has incurred a cumulative net loss of approximately $25.8 million as of June 30, 1999. The Company expects to continue to incur substantial and increasing losses for the next several years due to continued and increased spending on research and development programs, the funding of preclinical and clinical testing and trials and regulatory activities and the costs of manufacturing, marketing, sales, distribution and administrative activities. The Company's revenues consist only of interest income. To date, the Company has received no revenue from the sale of its product, and the Company is not permitted to engage in commercial sales of its product until such time, if ever, as the Company receives 10 13 requisite FDA and/or other foreign regulatory approvals. As a result, the Company does not expect to record significant product sales until such approvals are received. The Company anticipates that future revenues and results of operations may continue to fluctuate significantly depending on, among other factors, the timing and outcome of applications for regulatory approvals, the Company's ability to successfully manufacture, market and distribute its product and/or the establishment of collaborative arrangements for the manufacturing, marketing and distribution of its product. The Company anticipates its operating activities will result in substantial net losses for several years more. The Company is currently conducting clinical trials of its product in the treatment of autograft donor site wounds and venous stasis ulcers, and expects to file, during the third quarter of 1999, an application for FDA approval to conduct a clinical trial to use its product in the treatment of diabetic ulcers. The Company has completed a clinical trial for the use of its product in the treatment of chronic ulcers in patients with EB and expects to file, during the third quarter of 1999, an application with the FDA for a Humanitarian Device Exemption which, if approved, will allow commercial sales of the Company's product for the treatment of EB patients. The Company recently filed an application with the FDA for approval to proceed with a multi-center pivotal trial using a cryopreserved version of the Company's product on human donor site wounds. If the application is approved by the FDA the Company expects to begin the clinical trial during the third quarter of 1999. Results of Operations Three Months Ended June 30, 1999 and June 30, 1998 Revenues. The Company has had no revenues from operations other than interest income from its inception in 1991 to date. Interest income decreased by approximately $44,000 from approximately $150,000 for the three months ended June 30, 1998 to approximately $106,000 for the three months ended June 30, 1999, because of smaller average cash and marketable securities balances in the 1999 quarter resulting from cash used by the Company in its operations. Research and Development. The Company's research and development expenses for the three months ended June 30, 1999 increased to approximately $742,000 from approximately $405,000 for the three months ended June 30, 1998, which amounts do not include consulting expenses, a significant portion of which was also paid for the Company's research and development. The consulting expenses, substantially all of which is for research and development, amounted to approximately $233,000 for the three months ended June 30, 1999 as opposed to approximately $132,000 for the three months ended June 30, 1998. The increase in research and development expenses relates primarily to the costs associated with the increase in clinical trial activity, cryopreservation research and for enhancement and other applications of the Company's product. In addition, research and development expenses continue to increase in conjunction with the Company's progression 11 14 through the various stages of preclinical and clinical trials and the increased costs associated with the purchase of raw materials and supplies for the production of the Company's product used in those trials. Future research and development expenses may increase depending on the continued expenses incurred in clinical trials and the costs associated with the Company's manufacturing scale-up and the expansion of its research and development programs, which includes the increased hiring of personnel and continued expansion of preclinical and clinical testing. General and Administrative. The Company's general and administrative expenses for the three months ended June 30, 1999 increased to approximately $547,000 from approximately $381,000 for the three months ended June 30, 1998. The increase in general and administrative expenses is a result of the increased overhead costs resulting from the increase in personnel, professional fees, depreciation, filing fees and investor and public relations expenses. Future general and administrative expenses may increase as additional personnel are employed, there are increases in corporate development, use of professional services, compensation expense associated with stock options, use of financial consultants and other general corporate matters. Personnel. The Company's personnel expenses for the three months ended June 30, 1999 decreased by approximately $156,000 from $1.1 million for the three months ended June 30, 1998. The cash compensation paid by the Company for personnel actually increased in the second quarter of 1999 compared to the second quarter of 1998, as a result of the increase in the number of persons employed in the second quarter of 1999. However, non cash compensation in the grant of warrants amounted to approximately $556,000 in the second quarter of 1998 compared to a negative figure resulting from a reversal of compensation expense, of approximately $1,000 in the second quarter of 1999, due to a remeasurement of the value of an outstanding option. Future personnel costs are expected to increase since the Company intends to expand its clinical trial program for the use of its product in treating different medical indications, possible increase in its other research and development activities, compensation expense associated with the grant of stock options and for corporate administrative personnel. Rent. The Company's expenses for rent for the three months ended June 30, 1999 increased to approximately $108,000 from approximately $66,000 for the three months ended June 30, 1998. The increase in rent expense is the result of the Company increasing the amount of space occupied by it at Columbia University's Audubon Biomedical Science and Technology Park in New York City for additional laboratories built for the Company's research and development, and to accommodate the additional personnel employed by the Company in 1999. Six Months Ended June 30, 1999 and June 30, 1998 Revenues. Interest income decreased by approximately $100,000 from approximately $318,000 for the six months ended June 30, 1998 to approximately $218,000 for the six 12 15 months ended June 30, 1999, because of smaller average cash and marketable securities balances in the 1999 period. Research and Development. The Company's research and development expenses for the six months ended June 30, 1999 increased to $1.5 million from $0.8 million for the six months ended June 30, 1998, which amounts do not include consulting expenses, substantially all of which was also paid for the Company's research and development. Such consulting expenses amounted to approximately $413,000 for the six months ended June 30, 1999 as opposed to approximately $237,000 for the six months ended June 30, 1998. The increase in research and development expenses relates primarily to the costs associated with the increase in clinical trial activity, cryopreservation research and for enhancement and other applications of the Company's product. General and Administrative. The Company's general and administrative expenses for the six months ended June 30, 1999 increased to $1.0 million from $0.7 million for the six months ended June 30, 1998. The increase in general and administrative expenses is a result of the increased overhead costs resulting from the increase in personnel, professional fees, depreciation, filing fees and investor and public relations expenses. Personnel. The Company's personnel expenses for the six months ended June 30, 1999 decreased by approximately $400,000 from $2.1 million for the six months ended June 30, 1998. The cash compensation paid by the Company for personnel actually increased in the first half of 1999 compared to the first half of 1998, as a result of the increase in the number of persons employed in the first half of 1999. However, non cash compensation in the grant of warrants amounted to $1.1 million in the first half of 1998 compared to a negative figure resulting from a reversal of compensation expense, of approximately $18,000 in the first half of 1999, due to a remeasurement of the value of an outstanding option. Rent. The Company's expenses for rent for the six months ended June 30, 1999 increased to approximately $233,000 from approximately $107,000 for the six months ended June 30, 1998. The increase in rent expense is the result of the Company increasing the amount of space occupied by it at Columbia University's Audubon Biomedical Science and Technology Park in New York City for additional laboratories built for the Company's research and development, and to accommodate the additional personnel employed by the Company in 1999. Liquidity and Capital Resources Since inception (March 12, 1991) through June 30, 1999, the Company has accumulated a deficit of approximately $25.8 million and expects to continue to incur substantial and increasing operating losses for the next several years. The Company has financed its operations primarily through private placements of its Common Stock, its initial public offering and the exercise of its publicly traded Class A warrants at the end of 1997. 13 16 From inception to June 30, 1999 the Company had received proceeds from the sale of equity securities, net of share issuance expenses, of approximately $34.6 million. For the first half ended June 30, 1999 the Company used net cash for operating activities of approximately $3.4 million compared to approximately $10.8 million for the comparable half in 1998. The decrease in cash used in operating activities resulted primarily from (i) a net cash outlay in the first half of 1998 of approximately $8.2 million which the Company used to purchase marketable securities with cash it had on hand, as opposed to net sales of approximately $766,000 in the first half ended June 30, 1999, (ii) a decrease of approximately $1.1 million attributable to non cash expense consisting of grants of stock options and warrants ($1.1 million in the first half of 1998 and minus $17,600 in the first half of 1999 for the reasons set forth in the discussion of personnel expenses above), (iii) increases in accounts payable and accrued liabilities and depreciation and amortization, and (iv) an increase of approximately $1.1 million in the net loss in the first half of 1999 compared to the first half of 1998. In the six months ended June 30, 1999 the Company realized cash provided by its financing activities of approximately $2.9 million as compared to cash provided by its financing activities of approximately $1.0 million in the six months ended June 30, 1998. The larger amount of cash received from financing activities is primarily accounted for by approximately $3.1 million of net proceeds received by the Company from issuance of its Common Stock in 1999. The Company invested a total of approximately $279,000 in property, plant and equipment during the six months ended June 30, 1999 compared to approximately $798,000 in the six months ended June 30, 1998. Since inception, the Company has spent $2.9 million for property, plant and equipment excluding capital lease agreements. The capital lease agreements consist primarily of laboratory equipment. The Company's capital funding requirements will depend on numerous factors, including the progress and magnitude of the Company's research and development programs and preclinical testing and clinical trials, the time involved in obtaining regulatory approvals, the cost involved in filing and maintaining patent claims, technological advances, competitor and market conditions, the ability of the Company to establish and maintain collaborative arrangements, the cost of manufacturing scale-up and the cost and effectiveness of commercialization activities and arrangements. The Company is likely to require substantial funding to continue its research and development activities, preclinical testing and clinical trials and manufacturing scale up, marketing, sales, distribution, and administrative activities. The Company has raised funds in the past through the public or private sale of securities, and may raise funds in the future through public or private financings, collaborative arrangements or from other sources. The success of such efforts will depend in large part upon continuing developments in the Company's clinical trials. The Company continues to explore and, as appropriate, enter into 14 17 discussions with other companies regarding the potential for equity investment, collaborative arrangements, license agreements or development or other funding programs with the Company in exchange for manufacturing, marketing, distribution or other rights to the Company's product. However, there can be no assurance that discussions with other companies will result in any investments, collaborative arrangements, agreements or funding, or that the necessary additional financing through debt or equity financing will be available to the Company on acceptable terms, if at all. Further, there can be no assurance that any arrangements resulting from these discussions will successfully reduce the Company's funding requirements. If additional funding is not available to the Company when needed, the Company will be required to scale back its research and development programs, preclinical testing and clinical trials and administrative activities and the Company's business and financial results and condition would be materially adversely affected. At its current rate of spending the Company's cash and cash equivalents on hand at June 30, 1999 (approximately $8.6 million) will enable the Company to continue its operations through March of 2000. Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Failure of a computer program to recognize a date using "00" as 2000 instead of 1900 could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to operate equipment, process accounting, payroll, database, network, and software transactions, possible disruption of environmental, lighting, and security controls, possible disruption of copier and fax capabilities, and loss of telephone voicemail messages, in addition to other similar normal business activities. The Company has utilized both internal and external resources to assess whether it needs any Year 2000 remediation for its information technology or its embedded technology and to ascertain whether its suppliers of goods and services and the hospitals at which the clinical trials of its Composite Cultured Skin are conducted, are Year 2000 compliant. The Company does not anticipate any Year 2000 problem significantly affecting its operations. -Information Technology. The Company has been advised by computer consultants that its 50 stand alone computers are Year 2000 compliant. The Company is in the process of installing a local area network, which the Company expects will cost $125,000, to connect its stand alone computers, standardize its software, facilitate communications and improve their file back-up system. -Embedded Technology. The computer driven system which monitors the conditions in the Company's two clean rooms where it produces, and the laboratory instruments used for quality assurance testing of, its Composite Cultured Skin, are all Year 2000 compliant. Other instruments which are used for research and development, and therefore are not critical in that they are not needed to produce and test Ortec's Composite Cultured Skin, can be used 15 18 even if they are not Year 2000 compliant. They are being reviewed to determine if they are Year 2000 compliant. The Company's administrative support systems (telephone, facsimile transmission and copier) are Year 2000 compliant. -Suppliers. The Company is in the process of requesting its suppliers of materials and services to advise it as to whether they are Year 2000 compliant. The supplier of one of two services critical to the conduct of the human clinical trials in which the Company's Composite Cultured Skin is being tested has advised the Company that it is Year 2000 compliant and the Company has been advised that the other supplier's response should be received by the end of September, 1999. The Company continues to seek written confirmation from the vendors from whom it purchases the collagen and the media culture used in the production of its Composite Cultured Skin. Any negative response will not affect the Company's ability to produce its Composite Cultured Skin because there are other suppliers of such materials selling them at comparable cost. -Hospitals. While the Company does not anticipate that patient treatment will be affected at hospitals because of Year 2000 problems, the Company has been advised by one hospital which is conducting, and which the Company anticipates will in the future conduct, an important number of the clinical trials of the Company's Composite Cultured Skin, that such hospital is in the process of insuring that its equipment is Year 2000 compliant. There are a large number of hospitals and clinics in the United States at which such clinical trials can be conducted. The Company expects to substantially complete its Year 2000 assessment by September 30, 1999. 16 19 PART II ITEM 2. CHANGES IN SECURITIES (c) Recent Sales of Unregistered Securities. During the second quarter of 1999 the Company granted to four employees and one non-employee consultant five to seven year options under its Employee Stock Option Plan to purchase an aggregate of 8,500 shares of Common Stock, at an exercise price of $9.00 per share. Such grants were in consideration for services rendered to the Company. The grant of such options were exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to the provisions of Section 4(2) of the Act, as not involving any public offering. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description ----------- ----------- 3.1 Agreement of Merger of the Skin Group, Ltd. and the Company dated July 9, 1992 (1) 3.2 Original Certificate of Incorporation (1) 3.3 By-Laws (1) 27.1 Financial Data Schedule *
- ------------------------ * Filed herewith. (1) Filed as an Exhibit to the Company's Registration Statement on Form SB-2 (File No. 33-96090), or Amendment 1 thereto, and incorporated herein by reference. (b) Reports on Form 8-K One report on Form 8-K was filed by the Company in the second quarter of 1999 reporting the action taken by the Company's Board of Directors extending the expiration date of the Company's publicly traded Class B Warrants from May 28, 1999 to November 30, 1999. No financial statements were included in that report. 17 20 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized. Registrant: ORTEC INTERNATIONAL, INC. Date: August 6, 1999 By: /s/ Steven Katz --------------------------------- Steven Katz, PhD President and Chief Executive Officer (Principal Executive Officer) Date: August 6, 1999 By: /s/ Ron Lipstein --------------------------------- Ron Lipstein Chief Financial Officer (Principal Financial Officer) 18 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 8,597,305 2 0 0 0 8,600,531 2,981,129 1,264,137 10,838,199 1,084,140 0 0 0 6,575 8,660,086 10,838,199 0 218,092 0 0 4,920,312 0 0 (4,702,220) 0 (4,702,220) 0 0 0 (4,702,220) (.73) 0
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