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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________
TO_______________
Commission file number 0-27368
ORTEC INTERNATIONAL, INC.
(Exact name of issuer as specified in its charter)
Delaware 11-3068704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3960 Broadway
New York, NY
(Address of principal 10032
executive offices) (Zip Code)
Registrant's telephone number, (212) including area code: 740-6999
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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 |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
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The number of shares outstanding of the Registrant's common stock is 9,691,608
(as of 3/26/01). The aggregate market value of the voting stock held by
nonaffiliates of the Registrant was approximately $52,433,556 as of March 26,
2001, based upon a closing price on such date of $6.25, as listed on the Nasdaq
SmallCap Market.
DOCUMENTS INCORPORATED BY REFERENCE - None
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ORTEC INTERNATIONAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 2000
ITEMS IN FORM 10-K
Page
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Facing page
Part I
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Item 1. Business .................................................... 1
Item 2. Properties .................................................. 13
Item 3. Legal Proceedings ........................................... 14
Item 4. Submission of Matters to
a Vote of Security Holders .................................. None
Part II
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Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters ............................. 14
Item 6. Selected Financial Data ..................................... 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............... 17
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk ................................................. None
Item 8. Financial Statements and Supplementary Data ................. 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...................... None
Part III
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Item 10. Directors and Executive Officers of the Registrant .......... 21
Item 11. Executive Compensation ...................................... 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management ....................................... 27
Item 13. Certain Relationships and Related Transactions .............. 29
Part IV
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Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K...................................... 31
Signatures............................................................... 32
Financial Statements..................................................... F-1
PART I
Item 1. BUSINESS
Overview
We are a development stage tissue engineering company that has developed a
proprietary and patented technology which we call Composite Cultured Skin, which
is used to stimulate the repair and regeneration of human skin. We often refer
to our Composite Cultured Skin by its initials, CCS. Our Composite Cultured Skin
is a two layered tissue engineered dressing that consists of human derived skin
cells, both dermal and epidermal, supported within a porous collagen matrix. The
composite matrix is seeded with keratinocytes for epidermal growth and
fibroblasts for dermal growth. This active dressing stimulates the repair,
replacement and regeneration of human skin. When our CCS is applied to the wound
site, it produces a mix of growth factors that stimulates wound closure.
We have recently achieved a number of milestones toward our goal of the
commercial sale of our CCS including:
o On February 21, 2001, the FDA granted our application for commercial
sale of our product for use on patients with recessive dystrophic
epidermolysis bullosa undergoing hand reconstruction, as well as to treat
donor site wounds created during that surgery. This is the most severe
form of epidermolysis bullosa, a condition in which a newborn'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. While the epidermolysis bullosa patient population that
our CCS will address is small, the FDA's approval gives us our first
opportunity for the commercial sale of CCS. We plan to launch a focused
marketing program for sale of our CCS for the treatment of these
epidermolysis bullosa wounds. Our marketing program will be directed to a
small number of regional hospitals with expertise in treating
epidermolysis bullosa.
o We have completed the pivotal clinical trial for the use of our CCS for
the treatment of donor site wounds and we have filed our application with
the FDA to permit us to make commercial sales of our CCS for the treatment
of donor site wounds. The results of that trial which we submitted to the
FDA show that there was a clinically and statistically shorter time to
100% wound closure when our CCS was used compared to the use of a current
standard of care in that trial. The median differential in those healing
times ranged from four to seven days.
o We have received encouraging results, to date, from the pivotal clinical
trial of our CCS for the treatment of venous ulcers. These results show
our CCS significantly
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more effective in treating venous ulcer wounds than a standard of care now
used. Eight weeks after treatment the CCS treated group achieved 100%
healing in 47% of the patients treated, compared to 26% of the patients in
the standard of care treated group. The results in that trial for the CCS
treated group compared favorably with the reported results of the clinical
trials that were conducted by Organogenesis for its Apligraf product. In
the clinical trial for use of Apligraf for the treatment of venous ulcers,
six months after treatment (as compared to eight weeks after treatment in
the clinical trial of our CCS) 47% of the patients treated achieved 100%
healing, compared to 19% of the patients in the standard of care treated
group in the Apligraf trial.
o In September 2000, our manufacturing facilities were inspected and
approved by the FDA for the manufacture and commercial sale of our CCS.
o We have released a preliminary analysis of our pilot trial using our CCS
for the treatment of diabetic ulcers. That analysis shows that at 12 weeks
56% of the patients treated with our CCS achieved 100% wound closure
compared to 29% of the patients in the group treated with the current
standard of care used in that trial. We expect to receive 12 week data for
all the diabetic ulcers patients treated in that pilot trial in the second
quarter of 2001.
Our CCS addresses large markets. We intend to utilize our CCS for the
treatment of numerous skin wounds, such as venous stasis ulcers, autograft donor
site wounds, diabetic foot ulcers, indeterminate depth burns and epidermolysis
bullosa. We believe that our CCS could be used for up to 1 million patients,
representing a potential market of approximately $3.5 billion. Each market is
explained briefly below. See "Forward Looking Statements."
Venous Stasis Ulcers. Approximately 700,000 Americans are plagued with
venous stasis ulcers. This type of ulcer is generally found in the lower
leg proximate to the ankle and can result from trauma, but is typically
associated with chronic venous insufficiency. Chronic venous insufficiency
occurs when the venous valves don't close completely and blood is allowed
to flow back from the deep venous system through the perforator veins into
the superficial venous system. The weight of the backlogged blood pushes
on the surrounding tissues of the lower leg and produces swollen,
hyperpigmented ankles. Over time the pressure will cause tissue breakdown
and an ulcer will form. Roughly 50% of venous leg ulcers are successfully
treated with traditional methods, which include compression therapy
followed by suggested regular walking and resting with the legs elevated
for two hours a day. The remaining 50% of venous ulcers patients, totaling
about 350,000, are candidates for our CCS. We believe that the average
selling price for our CCS will be $975 per unit for all the medical
conditions described above. Our belief is based on the known selling price
of our primary competitor's product. If each patient suffering with venous
ulcers has only one ulcer and each ulcer has to be treated with four units
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of our CCS (in our venous ulcers clinical trial we have so far used up to
four units per ulcer), the potential market revenue for venous ulcers is
approximately $1.4 billion.
Donor Site Wounds. There are about 1.2 million people treated annually for
burns at medical facilities across the United States. A vast majority of
the burns, about 96%, cover a relatively small portion of the total body
surface area and are treated on an outpatient basis in doctors' offices,
hospitals and burn units. Roughly 4%, or 50,000, of the burn cases are
severe and, we believe, require autograft transplants, thereby creating
donor site wounds. A donor site wound is the result of an autograft, which
involves removing a piece of healthy skin from an uninjured part of the
body to cover an open wound at another location on the body. We estimate
that the typical severe burn case in which autograft transplant procedures
are required to be used creates four donor site wounds per patient, or a
total of approximately 200,000 donor site wounds created in the United
States each year. Due to differing severity of burns, we estimate that our
CCS can be used to treat the donor site wounds resulting from autograft
transplants in about 43% of the 50,000 (or 21,500) severely burned
patients. At an average of eight of our CCS units per patient, (2 units of
our CCS per donor site wound and 4 donor sites wounds per patient), we
estimate potential market revenues of approximately $167 million per year
from the use of our CCS for the treatment of donor site wounds.
Indeterminate Depth Burns. While we are pursuing approval from the FDA to
market our CCS for treatment of donor site wounds in burn patients, we
believe there is also the opportunity to use our CCS for the treatment of
certain indeterminate depth wounds directly without involvement of
autograft transplants. In order to do so we will have to design and
conduct a clinical trial for the use of our CCS for the treatment of
indeterminate depth burns. To date, we have not allocated resources for a
clinical trial for indeterminate depth burns because we have committed our
resources to concentrate on the venous and diabetic ulcers markets.
However, the market for treatment of indeterminate depth burns with our
CCS is one that we could pursue in the future. As we noted above, there
are approximately 50,000 severely burned patients each year in the United
States and we believe that 43% of those patients require autograft
transplants. The other 57% of these 50,000 patients with severe burns,
about 28,500 patients, do not require autograft transplants. It is this
group whose burns we believe can be treated directly with our CCS. In such
treatment we assume that we will need six CCS units to treat each patient,
creating a potential market revenue of approximately $167 million.
Of the other 1.15 million people who are treated for lesser burns, we
believe that about 15%, or 170,000 patients, can be treated with our CCS.
We assume
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that if one unit of our CCS is used for the treatment of each of those
170,000 patients, there is a potential market revenue of approximately
$166 million. All together, the potential market revenue for the treatment
of indeterminate depth burns with our CCS is approximately $336 million
annually. However, as we have noted above, we cannot use our CCS to treat
burns until we conclude an FDA approved clinical trial to prove the safety
and the efficacy of our CCS in the treatment of indeterminate depth burns.
We are not conducting that clinical trial now.
Diabetic Foot Ulcers. Diabetic foot ulcers will affect about 2 million of
the 14 million diabetics in the United States during their lifetime. We
estimate that there are between 800,000 and 1,200,000 Americans infected
with diabetic foot ulcers each year. The ulcers are open sores that remain
after the destruction of surface tissue. There are approximately 67,000
amputations each year from the complications created by these ulcers.
Current treatments, which include off-loading of pressure, debridement,
maintenance of a moist wound environment, wound cleansing and nutritional
support, will cure between 50% and 60% of most diabetic ulcers. Assuming
that there are 800,000 persons infected with diabetic foot ulcers each
year and that 50% are cured with traditional treatments, the remaining
nearly 400,000 patients are candidates for use of our CCS to treat their
ulcers. In our pilot clinical trial for the use of our CCS to treat
diabetic foot ulcers, we have up to now used up to six units of our CCS to
treat each ulcer. If we assume the use of four units of our CCS to treat
each diabetic foot ulcer, there is a potential annual market of $1.5
billion from the sale of our CCS to treat diabetic foot ulcers.
Epidermolysis Bullosa. Few babies born with severe epidermolysis bullosa
survive the first year and those that do are bombarded with constant
blistering, which causes scarring that constricts the skin so much that
the hands can become disfigured and fingers and toes can fuse together
requiring reconstructive surgery. In 1986 a national registry was
established to track the number of people with epidermolysis bullosa. Our
CCS is for use by epidermolysis bullosa patients who have the dystrophic
and junctional form of the disease, a population of about 900 according to
the national registry's database. Advocacy groups for epidermolysis
bullosa patients argue that the registry's estimate is significantly under
reported. Although we have received FDA approval for the sale of our CCS
for treatment of patients with recessive dystrophic epidermolysis bullosa
undergoing hand reconstruction, as well as to treat donor site wounds
created during that surgery, our sales efforts will be focused on a small
number of regional hospitals with expertise in treating epidermolysis
bullosa. Consequently, we do not expect to have significant revenues from
the sale of our CCS for the treatment of epidermolysis bullosa.
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We have developed the technology for the cryopreservation of our product
without diminishing its effectiveness. Cryopreservation is the freezing of our
product which gives it a minimum shelf life of six months, as opposed to a few
days when our product is not cryopreserved. We are using our product in its
cryopreserved form in our pivotal clinical trial for the treatment of venous
ulcers and we intend to use it in our pivotal trial for the treatment of
diabetic ulcers.
Our immediate focus is to use our CCS to treat acute and chronic skin
wounds. However, we believe that there is an opportunity to apply our core
technologies to repair selected structural tissues such as tendon, ligament,
cartilage, bone and blood vessels.
While we believe that our bi-layered product will be effective in treating
the medical conditions in our target markets, many companies and academic
institutions have developed, or are capable of developing, products or other
technologies that are or may be competitive with our CCS. We know of only one
other company, Organogenesis, Inc., that has developed a bi-layered product,
Apligraf, to treat the same wounds as our CCS. Organogenesis has licensed
Novartis, Inc. to market Apligraf and Apligraf, having received FDA approval, is
currently being sold for the treatment of venous and diabetic ulcers. We believe
that our CCS will have certain competitive advantages over other comparable
bio-engineered products in that our CCS: (i) has demonstrated superior clinical
results in recently released clinical data, accelerating healing in comparison
to standard of care and other competitive products; (ii) has the capability to
be less expensive to produce and easier for the physician to handle and use; and
(iii) can be stored and delivered in a cryopreserved form, providing production
and distribution efficiencies.
As a development stage company we have not yet sold any products. Our
activities have been limited to human clinical trials of our CCS and research
and development. From the creation of our company in March 1991 through December
31, 2000, we have spent approximately $13.8 million for human clinical trials
and research and development, not including employee salaries. From inception in
March 1991 through December 31, 2000, we have sustained a net loss of $43.3
million and expect to continue to incur substantial operating losses until at
least 2003.
At our current rate of spending, our cash and cash equivalents on hand at
December 31, 2000 (approximately $9.3 million) will enable us to continue our
operations through the end of 2001, assuming that we will not incur unexpected
costs. Before the end of 2001 we will be required to raise additional funds
(through sale of our securities or debt financing) to complete our clinical
trials and to produce and market our CCS. Our failure to receive additional
financing will have a material adverse effect on us and our operations. Also, in
order to produce our CCS for treatment of medical conditions with large patient
populations we may have to build larger production facilities which will require
significant additional funding. If we secure the additional funding we need,
receive FDA approval for commercial sales of our CCS for treatment of medical
conditions with large patient populations and successfully market
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our CCS, we believe that we will have the opportunity to reach cash break even
in 2003. Revenues from sales of our CCS to treat epidermolysis bullosa patients
could begin as early as the second half of this year.
Ortec was organized in 1991 under the laws of the State of Delaware for
the purpose of acquiring, developing, testing and marketing our skin replacement
product. Our executive offices are located at 3960 Broadway, New York, New York,
and our telephone number is (212) 740-6999.
The Product
Background
Human skin is composed of cells and matrix proteins that are tough yet
flexible and protect the body against abrasion, water loss, and infection. For
cells to function normally within tissues, the cells must interact with the
proteins that surround them. When certain tissues become damaged, normal healthy
cells attempt to repair the deficient site by moving into the damaged area,
dividing, and depositing new matrix proteins that very often result in scars.
Scars do not function like normal tissue since the area is surrounded by
excessive amounts of matrix proteins.
In the case of burns, wounds and other skin diseases, where the human body
cannot repair the tissue by spontaneous healing, there are several medical
treatments that are available, but no treatment that provides completely
satisfactory results. For chronic wounds like epidermolysis bullosa and diabetic
ulcers, the conventional approach is cleaning, disinfecting the site, and then
treating with moist dressings; while for venous stasis ulcers the conventional
treatment after cleaning and disinfecting is compression therapy.
Another approach is grafting the wound site with the patient's own healthy
tissue, which is called an autograft transplant. Physicians have for years been
using skin transplanted from one site of a patient's body onto a wound site that
no longer has the capacity to heal spontaneously. This approach creates a second
wound site where the healthy tissue is harvested and is of limited use when
patients are left with a minimal amount of healthy tissue for grafting.
Physicians have sought to replace autograft transplants with substitute
synthetic or natural materials which would eliminate the medically undesirable
problems that accompany autograft transplants, such as the creation of
additional wound sites, possible infection and scarring. Another approach that
has been developed in recent years is the replication of human skin in a
laboratory setting in order to create an artificial skin that can be
transplanted onto diseased or injured patients. Major problems encountered by
scientists include the rejection of the artificial skin by the patient's immune
system and significant contraction of the transplant after healing, causing
cosmetically undesirable scarring.
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Our Composite Cultured Skin
Our Composite Cultured Skin is a device consisting of two layers of
immature human-derived skin cells (dermal and epidermal) supported in a
permeable bi-layered collagen matrix. When applied to an area needing skin
regeneration, our Composite Cultured Skin stimulates the body's healthy cells to
rapidly regenerate and remodel the human skin.
Our Composite Cultured Skin is not a skin transplant or an artificial
skin, but rather a tissue engineered dressing which, we believe, provides an
optimal environment for the production and delivery of a multitude of growth
factors which appear to promote migration of the patient's own healthy cells
into the wound site resulting in accelerated skin regeneration and wound
healing. Rejection of our Composite Cultured Skin is mitigated because in
approximately two weeks the entire Composite Cultured Skin dressing is absorbed
by the body and the cells from our product are no longer present.
We believe that our Composite Cultured Skin's bi-layered structure and
porous collagen matrix are key differentiating product features which provide a
superior structure for cell migration and tissue regeneration. We believe that
the immature cells in our Composite Cultured Skin produce an optimal mixture of
growth factors that stimulate the patient's own natural healing process. The
open collagen structure also allows the patients own dermal and epidermal cells
to proliferate and migrate into the wound site, as well as to allow the return
of blood vessels to the wound site. The Composite Cultured Skin dressing is
absorbed by the body in approximately 7-14 days and is replaced by the patient's
own skin.
Benefits
There are currently three primary and distinct approaches to the repair
and regeneration of skin: the acellular (no cell) approach, the cell-based
unilayered approach, and the cell based bi-layered approach. The acellular
approach uses a non-living material, particularly cadaver skin, collagen,
silicone, or an ointment to treat the wound. The cell-based approaches employ
living cells in order to closely replicate human skin cells and stimulate wound
repair and tissue regeneration. The unilayered approach, although a cell-based
approach, utilizes either living epidermal or dermal cells, but not both. The
approach we believe to be the most advanced is the bi-layered, dermal and
epidermal, approach. The only bi-layered product other than our Composite
Cultured Skin that is available for sale is Apligraf, a product developed by
Organogenesis, Inc.
We believe our Composite Cultured Skin induces faster wound healing and
reduces pain and complications generally associated with open wounds. We also
believe that autograft donor sites treated with our Composite Cultured Skin
tend to be ready for recropping earlier than sites treated with the current
standard of care.
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We believe that our Composite Cultured Skin is easier to use than the
existing available bi-layered technology because the composition and packaging
of our product allows the surgeon or other physician to easily remove our
Composite Cultured Skin from its packaging and simply drape it over the wound.
Our product can generally be applied to a wound in less than one minute.
We further believe our product constitutes a cost effective alternative to
conventional standards of wound care. The conventional treatment for acute
wounds such as venous and diabetic ulcers, burns and autograft donor sites can
be expensive and require multiple doctor visits and potentially lengthy
hospitalization. Because of the more rapid healing process we expect from
treating these wounds with our Composite Cultured Skin, the length of hospital
stays and the number of follow up visits to doctors may be reduced
substantially. In addition, our ability to cryopreserve our product allows for a
longer shelf life for storage of our product, which we believe will make it more
appealing to the end user - the physician or hospital. See "Disclosure Regarding
Forward Looking Statements."
Regulatory Process and Clinical Trials
Regulatory Framework. We are subject to extensive government regulation.
Products for human treatment are subject to rigorous pre-clinical and clinical
testing procedures as a condition for approval by the FDA and by similar
authorities in foreign countries for commercial sale.
The FDA regulates the manufacture, distribution and promotion of medical
devices in the United States, pursuant to the Federal Food, Drug and Cosmetic
Act and regulations promulgated thereunder. Our Composite Cultured Skin is
subject to these regulations and is currently classified as a medical device. We
must obtain pre-market approval by the FDA prior to commercial sale of our
Composite Cultured Skin. Pre-market approval requires proof of safety and
efficacy through human clinical trials. Pre-market approval is a lengthy and
expensive process. Although we have secured pre market approval from the FDA for
commercial sales of our product for use on patients with recessive dystrophic
epidermolysis bullosa undergoing reconstructive hand surgery and to treat donor
site wounds created during that surgery, we can give no assurance that we will
obtain pre-market approval for our Composite Cultured Skin for the treatment of
medical conditions with large patient populations.
To obtain pre-market approval, we must submit an application to the FDA,
supported by extensive data, including human clinical trial data, and
documentation to prove the safety and efficacy of the device. Applicable
regulations provide that the FDA has 180 days to review an application for
pre-market approval during which time an advisory committee usually evaluates
the application and makes recommendations to the FDA. While the FDA has
responded to applications for pre-market approval within that time period,
reviews usually
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occur over a significantly protracted period of twelve to twenty-four months.
Many devices are never cleared for marketing.
If human clinical trials of a proposed device are required and the device
presents a possible or unknown risk, the manufacturer or distributor of the
device has to file an application for an investigative device exemption with the
FDA prior to commencing such trials. The application for an investigative device
exemption must be supported by data, including the results of animal and other
testing. If the application for an investigative device exemption is approved,
human clinical trials may begin. The human clinical trials for medical devices
may consist of two stages: the first is a feasibility study/pilot trial, in
which a small group of patients is tested in order to collect preliminary safety
and effectiveness data; the second, a pivotal trial, requires testing of a
larger patient population to determine a fuller understanding of safety and to
confirm efficacy of the device for the targeted medical conditions.
We have developed rigorous internal standards for testing and compiling
data necessary for FDA filings. We conduct feasibility studies for all the
medical conditions we propose to treat with our Composite Cultured Skin prior to
filing applications with the FDA for pivotal trials. We assume that this process
has allowed us to submit more precise protocols to the FDA, clearly defining the
clinical objectives we wish to support in the pivotal trial phase. We engage in
an ongoing dialogue with the FDA in an effort to manage the approval process
both effectively and efficiently. At the present time we
- have received FDA approval for commercial sales of our product for
use on patients with recessive dystrophic epidermolysis bullosa
undergoing hand reconstructive surgery and to treat donor site
wounds created during that surgery.
- have completed the pivotal trial for use of our product in
treating all donor site wounds and have filed an application with
the FDA for pre-market approval for commercial sale of our product
for treatment of all donor site wounds.
- are conducting a pivotal clinical trial for use of our product in
its cryopreserved form for the treatment of venous ulcers.
- are conducting a pilot clinical trial for the use of our product
for the treatment of diabetic ulcers.
Description of the Production Process
Composite Cultured Skin cells are derived from infant foreskins obtained
during routine circumcisions. The immature, neonatal cells are highly
reproductive and provide enhanced
9
proliferation and rapid remodeling of the human skin. We separate the epidermis
from the dermis and treat each of these layers to release individual
keratinocyte (epidermal) and fibroblast (dermal) cells, which are the primary
cellular components of human skin. We grow the fibroblast and keratinocyte cells
in culture in large quantities, then freeze and store them as a cell bank, ready
for use. Prior to the use of each cell line, we conduct extensive testing and
screening in accordance with current FDA guidelines to ensure that the cells are
free of presence of bacterial contaminants, viruses, pathogens, tumorigenicity
or other transmittable diseases. We then apply the dermal fibroblast cells to a
proprietary, cross-linked bovine collagen sponge to form the dermal layer matrix
and we grow the epidermal keratinocyte cells on a separate non-porous layer of
collagen. We then incubate and supply this composite matrix with the proper
nutrients to allow the cells to multiply and for the fibroblasts to permeate
inside and anchor to the porous collagen sponge. The top layers of keratinocyte
cells and bottom layers of fibroblast cells in the collagen matrix, together,
constitute our proprietary Composite Cultured Skin, which we can then deliver to
customers in a "fresh" or cryopreserved state.
Original Research.
Our technology was developed by Dr. Mark Eisenberg, a physician in Sydney,
Australia. Dr. Eisenberg is an officer and director and one of the founders of
Ortec. He has been involved in biochemical and clinical research at the
University of New South Wales in Australia for over twenty five years, focusing
primarily on treating the symptoms of epidermolysis bullosa. In 1987, through
his work on epidermolysis bullosa, Dr. Eisenberg first succeeded in growing
epidermal layers of human skin, which he successfully applied as an allograft on
an epidermolysis bullosa patient. An allograft is a transplant other than with
the patient's own skin. Dr. Eisenberg continued his research which eventually
led to the development of our Composite Cultured Skin - a tissue-engineered
dressing which consists of both the dermal and epidermal layers. The current
research for our proprietary technology is performed at our laboratory in New
York City and in our laboratory in Sydney, Australia.
European Market
In June 1999 we entered into an agreement with Grupo Ferrer International,
SA. of Barcelona, Spain, giving Grupo Ferrer the exclusive right for a period of
ten years to market our Composite Cultured Skin in Spain. The agreement requires
Grupo Ferrer to pay for all clinical, regulatory and marketing expenses
necessary to gain regulatory approval for the commercial sale of our Composite
Cultured Skin in Spain. Grupo Ferrer is one of the largest pharmaceutical
companies in Spain. We believe that regulatory approval for the sale of our
Composite Cultured Skin for the treatment of venous and diabetic ulcers may be
secured more quickly in Spain than in the United States, even though Grupo
Ferrer will use the results of our clinical trials in the United States as the
basis for seeking regulatory approval in Spain. Of the different medical
conditions creating skin wounds which we believe our Composite Cultured Skin can
treat, venous and diabetic ulcers have the largest patient populations. We also
believe
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that securing regulatory approval in Spain may facilitate our ability to
register and ultimately sell our Composite Cultured Skin in the large markets of
other European Common Market countries.
Regulatory Strategies, Product Development and Sales
We employ a team of regulatory and clinical professionals, both full time
employees and consultants, with extensive knowledge in strategic regulatory and
clinical trial planning to support our product development efforts through every
stage of the development and FDA approval process. We also employ persons with
extensive knowledge and experience in the marketing and sale of new FDA approved
products for treatment of many medical conditions, including experience in
securing approval of third party payors (insurance companies, Medicare,
Medicaid) for use of new medical products.
Production and Supply
We believe that production capacity at our facility in the Audubon
Biomedical Science and Technology Park in New York City should be sufficient to
meet demands for our Composite Cultured Skin for the initial volume required by
the FDA's approval for its use in epidermolysis bullosa surgery and, if approved
by the FDA, for donor site wounds. For sale of our Composite Cultured Skin for
other medical conditions, based on our sales projections, we will need larger
production facilities. Such facilities will have to be FDA validated and
approved. Any manufacturing, whether by us or by a third party manufacturer, for
any future commercial scale production of our Composite Cultured Skin will have
to be in compliance with the good manufacturing processes and quality system
regulations mandated by the FDA. Our production facility in the Audubon
Biomedical Science and Technology Park was inspected and approved by the FDA in
September 2000 for the manufacturing of our Composite Cultured Skin for
commercial sale.
Competition
We are aware of several companies that are actively engaged in the
research and development of products for the repair and regeneration of skin. As
we noted previously, there are currently three primary and distinct approaches
to the repair and regeneration of skin: the acellular (no cell) approach,
including the use of cadaver based products; the cell-based unilayered
(epidermal or dermal cell) approach, and the cell based bi-layered (epidermal
and dermal cell) approach. The approach we believe to be the most advanced and
effective is the bi-layered approach.
There is also a procedure which cultures the patient's own epidermal cells
to create an epidermis like layer. That procedure takes a number of weeks to
create that epidermal layer. Genzyme Biosurgery is currently selling such a
product for treatment of severely burned patients only, pursuant to an FDA
humanitarian device exemption.
11
The Company considers its primary competitors to be Organogenesis, Inc.
and Advanced Tissue Sciences, Inc. The FDA approved Organogenesis' Apligraf,
which employs the bi-layered approach, for treatment of venous ulcers in May
1998 and for the treatment of diabetic ulcers in June 2000, and Organogenesis is
selling Apligraf through a joint venture with Novartis Pharmaceuticals
Corporation. Advanced Tissue, through a joint venture agreement with Smith &
Nephew PLC, markets Transcyte, a unilayer, non-absorbable biosynthetic matrix,
seeded with dermal fibroblast cells, which acts as a temporary wound covering
for severe burns and as a covering for partial thickness burns. Advanced
Tissue's Dermagraft product for the treatment of diabetic foot ulcers was
rejected by the FDA in June 1998 and additional trials were mandated by the FDA
to prove efficacy. In August 2000 advanced tissue submitted the results of their
additional trials to the FDA
We believe that the following are the greater benefits derived by patients
when they use our Composite Cultured Skin.
o Our Composite Cultured Skin can be cryopreserved so that it
can be stored by the hospital or clinic instead of awaiting
shipment.
o Our Composite Cultured Skin uses a porous collagen matrix and
undifferentiated epidermal and dermal fibroblast cells,
resulting in a vigorous growth factor production which appears
to enable a quicker healing process.
o Our Composite Cultured Skin is "user friendly". The physician
opens a cassette, peels off the protective mesh and
immediately lays the Composite Cultured Skin on the wound. The
process should take as little as one minute.
We believe that many of our competitors may have greater financial and
other resources than we do and most of them have conducted and continue to
conduct human clinical trials, some of which are at more advanced stages than
our human clinical trials.
Although we are not aware of any biologically active skin repair product
that has received pre-market approval from the FDA except as discussed above,
there may be other companies having greater financial resources than we do who
may develop other skin regeneration or wound healing technologies that may be
more effective than our Composite Cultured Skin, or that may make our Composite
Cultured Skin obsolete.
Patents and Proprietary Rights
We have two U.S. patents for the technology for our Composite Cultured
Skin, both of which expire in 2011. We have also been granted corresponding
patents in Europe (for most of the countries in Europe) and in Australia and New
Zealand, Ireland, Israel, Japan, Thailand,
12
and South Africa. We are prosecuting patent claims in Canada, The Russian
Federation, Brazil and China.
In December 2000 and January 2001, we filed four additional patent
applications with the United States Patent Office directed to further aspects of
our Composite Cultured Skin technology. The patent applications focus on our
cryopreservation, cell and manufacturing processes, and a cardiovascular
application of our technology.
One of our competitors filed an opposition with the European Patent Office
challenging the validity of our European patent. The opposition in Europe may
not be resolved for more than a year. The expiration date of our European patent
is dependent upon the resolution of such opposition. The result in Europe will
not affect the validity of our patent in the United States. However, our patents
might be successfully challenged in court proceedings, invalidated or rendered
unenforceable. Our success will depend, in part, on our ability to maintain
patent protection for our technology, both in the United States and other
countries. Our patents may be infringed, invalidated or circumvented by others.
Others may also develop technologies or processes that are the same or
substantially as effective as ours, thereby by-passing the benefits of our
patent protection. Therefore, our United States and foreign patents may not
provide us with any commercial benefits. Nor can we give any assurance that our
currently pending patent applications will be granted.
Several of our competitors, including Organogenesis, Inc., Advanced Tissue
Sciences, Inc., Genzyme Biosurgery Repair Inc., Integra Life Sciences and
LifeCell Corporation, have been granted patents relating to their particular
artificial skin technologies. See "Competition".
Employees
We presently employ 71 people on a full-time basis, including five
executive officers. Including our executive officers, we employ 69 persons in
New York City and 2 people at our laboratory in Sydney, Australia. We also have
part time employees, 3 in New York and 2, including Dr. Eisenberg, in Australia.
We anticipate hiring additional employees in the areas of quality assurance,
manufacturing, marketing and research and development as our needs arise and
based on our finances.
Item 2. PROPERTIES
We occupy an aggregate of 17,000 sq. ft. of space in Columbia University's
Audubon Biomedical Science and Technology Park in New York City, pursuant to
four separate lease agreements, for laboratory and office space. We use our
laboratories for assay development, wound healing research, biomaterial
development, bioprocess development, histology, quality assurance testing and
for two clean rooms where we produce our product. As of December
13
31, 2000 we were paying an aggregate of $43,829 rent per month for use of all
our space at the Audubon facility.
We also lease approximately 5,000 square feet of space at 147-155 Queen
Street, Beaconsfield, Sydney, Australia, on a month to month basis, where we
operate a research laboratory to conduct our research and development activities
in Australia. We pay rent in Australian dollars, which at the current rate of
exchange amounts to approximately US$25,402 per year. We rent this space from
Dr. Mark Eisenberg's father's estate on terms that we believe are not less
favorable to us than for rental of similar space in Sydney, Australia, from
non-related third parties.
ITEM 3. LEGAL PROCEEDINGS
We are disputing a claim of approximately $250,000 made against us by a
consulting firm we had retained to assist us in gathering and analyzing the data
from our pivotal clinical trial for the use of our Composite Cultured Skin for
the treatment of donor site wounds and in preparing our submission of such data
to the FDA for pre-market approval for the commercial sale of our CCS for
treatment of donor site wounds. We believe that such consulting firm did not
render such service competently and we had to retain and pay a different firm to
perform such services and assist us in that recent submission to the FDA.
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is listed on the NASDAQ SmallCap Market under the symbol
"ORTC". The following table sets forth the high and low sales prices of our
common stock as reported by NASDAQ for each full quarterly period from January
1, 1999 through December 31, 2000.
14
2000 High Low
First Quarter 17.00 7.00
Second Quarter 11.13 6.00
Third Quarter 11.00 7.00
Fourth Quarter 11.15 5.50
1999 High Low
First Quarter 14.00 8.13
Second Quarter 10.25 7.00
Third Quarter 12.75 7.13
Fourth Quarter 10.00 5.13
Security Holders
To the best of our knowledge at March 1, 2001, there were 131 record
holders of our common stock. We believe that as of such date there were an
additional 1,646 beneficial owners of our common stock, whose shares are held in
"street name."
Dividends
We have not paid, and have no current plans to pay, dividends on our
common stock.
Recent Sales of Unregistered Securities
During the fourth quarter of 2000 we granted to 53 employees and 3
consultants options under our Employee Stock Option Plan to purchase an
aggregate of 315,306 shares of our common stock, at exercise prices ranging from
$5.75 to $10.00 per share. The grant of such options was exempt from the
registration requirements of the Act pursuant to the provisions of Section 4(2)
of the Act because such option grants did not involve any public offering and
because such option grants did not constitute sales of securities.
15
Item 6. Selected Financial Data
The following selected financial data are derived from the Company's financial
statements and should be read in conjunction with, and are qualified in their
entirety by, the financial statements and related notes and the Management's
Discussion and Analysis included elsewhere in this Annual Report:
Statement of operations data
Years Ended December 31,
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
Revenues - interest income $ 171,057 $ 291,602 $ 572,549 $ 368,711 $ 586,623
------------ ------------ ------------ ------------ ------------
Expenses
Research and development 964,864 1,178,836 1,933,877 3,106,908 4,191,317
Rent 85,076 166,498 252,397 473,010 535,443
Consulting 261,633 474,908 908,495 834,180 838,383
Personnel 730,357 1,901,409 4,060,629 3,742,632 4,763,662
General and administrative 727,192 1,320,488 1,725,201 2,152,968 2,297,769
Interest and other expense 51,703 75,126 104,,605 99,522 89,712
------------ ------------ ------------ ------------ ------------
2,820,825 5,117,265 8,985,204 10,409,220 12,716.286
------------ ------------ ------------ ------------ ------------
Net loss $ (2,649,768) $ (4,825,663) $ (8,412,655) $(10,040,509) $(12,129,663)
============ ============ ============ ============ ============
Net loss per share of common stock
Basic and diluted $ (.64) $ (1.01) $ (1.43) $ (1.51) $ (1.37)
============ ============ ============ ============ ============
Weighted average common stock outstanding
Basic and diluted 4,110,507 4,782,239 5,878,971 6,634,874 8,847,295
============ ============ ============ ============ ============
Balance sheet data
As of December 31,
Working capital $ (6,848,650) $ 12,982,711 $ 9,368,901 $ 11,009,660 $ 7,966,410
Total assets 8,791,925 14,998,414 12,391,039 15,011,645 11,719,760
Long-term debt, excluding current maturities 460,774 722,704 1,152,180 1,044,857 912,489
Stockholders' equity 7,716,998 13,716,618 10,390,759 12,370,720 9,392,325
Cumulative
From
March 12,
Statement of operations data 1991
(inception) to
Years Ended December 31, December 31,
2000
------------
Revenues - interest income $ 2,057,700
------------
Expenses
Research and development 13,765,354
Rent 1,590,297
Consulting 3,813,362
Personnel 16,343,730
General and administrative 9,330,798
Interest and other expense 483,436
------------
45,326,977
------------
Net loss $(43,269,277)
============
Net loss per share of common stock
Basic and diluted $ (10.41)
============
Weighted average common stock outstanding
Basic and diluted 4,157,780
============
16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes thereto. This discussion may be deemed to include forward
looking statements.
General
Since Ortec's inception we have been principally engaged in the research
and development of our skin regeneration product for use in the treatment of
chronic and acute wounds, such as venous and diabetic skin ulcers, indeterminate
depth burns and autograft donor site wounds. We have not had any revenues from
operations since Ortec's inception in 1991 because we cannot make any sales of
our product until we receive approval from the FDA to do so. We have incurred a
cumulative net loss of approximately $43.3 million as of December 31, 2000. We
expect to continue to incur substantial losses until at least 2003 due to
continued spending on research and development programs, the funding of clinical
trials and regulatory activities and the costs of manufacturing, marketing,
sales, distribution and administrative activities.
Our revenues consist only of interest income. To date, we have received no
revenue from the sale of our Composite Cultured Skin. While we may make
commercial sales of our product for use in surgeries on patients with recessive
dystrophic epidermolysis bullosa, which has a small patient population, we are
not permitted to engage in commercial sales of our product for treatment of skin
wounds with larger patient populations, until such time, if ever, as we receive
requisite FDA and/or other foreign regulatory approvals for such sales. As a
result, we do not expect to record significant product sales until such
approvals are received.
We anticipate that future revenues and results of operations may continue
to fluctuate significantly depending on, among other factors, the timing and
outcome of applications for regulatory approvals, our ability to successfully
manufacture, market and distribute our product and/or the establishment of
collaborative arrangements for the manufacturing, marketing and distribution of
our product. We anticipate that our operating activities will result in
substantial net losses until at least 2003.
We are currently conducting or have completed clinical trials of our
Composite Cultured Skin in the treatment of autograft donor site wounds, venous
and diabetic ulcers and chronic ulcers resulting from epidermolysis bullosa.
17
Results of Operations
Year Ended December 31, 2000 to Year Ended December 31, 1999
Revenues. Interest income increased by approximately $218,000 from
approximately $369,000 in 1999 to approximately $587,000 in 2000 because of
larger cash and cash equivalent balances in 2000 that resulted from sale of
common stock.
Research and Development. Our research and development expenses for the
year ended December 31, 2000 increased to $4.2 million from $3.1 million for the
year ended December 31, 1999, which amounts do not include consulting expenses,
a significant portion of which we paid for research and development. Such
consulting expenses for research and development amounted to approximately
$838,000 in 2000 and approximately $834,000 in 1999. 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 our Composite Culture Skin.
General and Administrative. Our general and administrative expenses for
the year ended December 31, 2000 amounted to $2.3 million and $2.2 million for
the year ended December 31, 1999.
Personnel. Our personnel expenses for the year ended December 31, 2000
increased to $4.8 million from $3.7 million for the year ended December 31,
1999. This increase resulted from the larger number of persons we employed
because of our increased research for product development, to conduct our
clinical trials, to prepare for manufacturing scale up and for marketing of our
CCS, and for additional personnel required in administrative positions because
of such increased staff.
Rent. Our expenses for rent for the year ended December 31, 2000 increased
to $535,000 from $473,000 for the year ended December 31, 1999. The increase in
rent expense in 2000 as compared to 1999 is the result of the increase in the
amount of space we occupied at Columbia University's Audubon Biomedical Science
and Technology Park in New York City for additional laboratories we built for
research and development, and to accommodate the additional personnel we
employed in 2000.
Year Ended December 31, 1999 to Year Ended December 31, 1998
Revenues. Interest income decreased approximately $204,000 from
approximately $573,000 in 1998 to approximately $369,000 in 1999 because of
lower average cash and marketable securities balances in 1999 that resulted from
the sale of common stock.
Research and Development. Our research and development expenses for the
year ended December 31, 1999 increased to approximately $3.1 million from
approximately $1.9 million
18
for the year ended December 31, 1998, which amounts do not include consulting
expenses, a significant portion of which we paid for research and development.
Such consulting expenses for research and development amounted to approximately
$834,000 in 1999 as compared to approximately $908,000 in 1998. The increase in
research and development expenses related primarily to the costs associated with
the increase in clinical trial activity, cryopreservation research and for
enhancement and other applications of our Composite Cultured Skin.
General and Administrative. Our general and administrative expenses for
the year ended December 31, 1999 increased to approximately $2.2 million from
approximately $1.7 million for the year ended December 31, 1998. The increase in
general and administrative expenses for the year ended December 31, 1999 as
compared to the same period in 1998 was the result of (i) the increase in costs
associated with professional services received from financial consultants,
attorneys and accountants and (ii) the increased overhead costs resulting from
the increase in personnel.
Personnel. Our personnel expenses for the year ended December 31, 1999
decreased to approximately $3.7 million from approximately $4.1 million for the
year ended December 31, 1998. Cash compensation paid by us to our personnel
actually increased $1.6 million from $2.1 million in 1998 to $3.7 million in
1999, but non-cash compensation in the form of stock options decreased from $1.9
million in 1998 to $64,715 in 1999. The increased cash compensation in 1999
compared to 1998 resulted from the larger number of persons we employed because
of our increased research and development, including the conducting and
preparation for clinical trials, and for which additional personnel were
required in administrative positions.
Rent. Our expenses for rent for the year ended December 31, 1999 increased
to $473,000 from $252,000 for the year ended December 31, 1998. The increase in
rent expense in 1999 as compared to 1998 was the result of new office and
laboratory space we rented at Columbia University's Audubon Biomedical Science
and Technology Park in New York City for a full year in 1999 and for only part
of the year in 1998.
Liquidity and Capital Resources
Since inception (March 12, 1991) through December 31, 2000, we have
accumulated a deficit of approximately $43.3 million and we expect to continue
to incur substantial operating losses for the next two years. We have financed
our operations primarily through private placements of our common stock, our
initial public offering and the exercise of our publicly traded Class A warrants
at the end of 1997. From inception to December 31, 2000 we have received
proceeds from the sale of equity securities, net of share issuance expenses, of
approximately $49.9 million.
19
In 2000 we used net cash for operating activities of approximately $11.6
million. Cash used in operating activities resulted primarily from our net loss
of $12.1 million offset by non-cash depreciation and amortization.
In 2000 we realized cash provided by our financing activities of
approximately $9.0 million. We received approximately $9.1 million in 2000 from
sale of our common stock net of share issuance costs which was offset by
payments of $127,000 on capital leases and $35,000 for purchases of treasury
stock
We invested a total of approximately $641,000 consisting of $552,000 for
property, plant and equipment and $90,000 for patents. Since inception, we have
spent approximately $3.9 million for property, plant and equipment, excluding
capital lease agreements, and approximately $732,000 for patents. The capital
lease agreements consist primarily of laboratory equipment.
Our capital funding requirements will depend on numerous factors,
including the progress and magnitude of our research and development programs
and our clinical trials, the time involved in obtaining regulatory approvals for
the use of our Composite Cultured Skin for the treatment of skin wounds with
large patient populations, the cost involved in filing and maintaining patent
claims, technological advances, competitor and market conditions, our ability to
establish and maintain collaborative arrangements, the cost of manufacturing
scale-up and the cost and effectiveness of commercialization activities and
arrangements.
We have raised funds in the past through the public and private sale of
securities, and may raise funds in the future through public or private
financings, collaborative arrangements or from other sources. The success of
such efforts will depend in large part upon continuing developments in our
clinical trials. We continue to explore and, as appropriate, enter into
discussions with other companies regarding the potential for equity investment,
collaborative arrangements, license agreements or development or other funding
programs in exchange for marketing, distribution or other rights to our
Composite Cultured Skin. However, such discussions with other companies may not
result in any investments, collaborative arrangements, agreements or funding,
and the necessary additional financing through debt or equity financing may not
be available to us on acceptable terms, if at all. Furthermore, any arrangements
resulting from these discussions may not reduce our funding requirements. If we
cannot secure additional funding when needed, we will be required to scale back
our research and development programs, clinical trials and administrative
activities and our business and financial results and condition would be
materially adversely affected. At our current rate of spending, our cash and
cash equivalents on hand at December 31, 2000 (approximately $9.3 million) will
enable us to continue our operations through the end of 2001.
20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements referred to in the
accompanying Index, setting forth the financial statements of the Company,
together with the report of Grant Thornton LLP, dated February 21, 2001.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors and Executive Officers
Our directors and executive officers are as follows:
Name Age Position
- ---- --- --------
Steven Katz, Ph.D. 56 Chairman of the Board of Directors and
Chief Executive Officer
Dr. Mark Eisenberg 63 Senior Vice President, Research and
Development, and Director
Ron Lipstein 45 Vice Chairman of the Board of Directors,
Secretary, Treasurer and Chief Financial
Officer
Alain M. Klapholz 44 Vice President, Operations, and Director
Costa Papastephanou 55 President
William Schaeffer 53 Chief Operating Officer
Joseph Stechler 49 Director
Steven Lilien, Ph.D. 53 Director
Steven Katz, one of our founders, has been a director since our inception
in 1991 and was elected Chairman of our Board of Directors in September 1994. He
has been employed by us since 1991. Dr. Katz has also been a professor of
Economics and Finance at Bernard M. Baruch College in New York City since 1972.
He has a Ph.D. in Finance and Statistics as well as an MBA and an MS in
Operations Research, both from New York University.
Dr. Mark Eisenberg, one of our founders, has been a director and Senior
Vice President since 1991. Dr. Eisenberg has also been a consultant to us since
1991. See "Eisenberg Consulting Agreement". He has been a physician in private
practice in Sydney, Australia since 1967. He is a member and co-founder of the
dystrophic epidermolysis bullosa clinic at the
21
Prince of Wales Hospital for children in Sydney, Australia. He has done
extensive research on epidermolysis bullosa disease.
Ron Lipstein, one of our founders, has been our Secretary, Treasurer,
Chief Financial Officer and a director since 1991. In January 2001 Mr. Lipstein
was elected Vice Chairman of our Board of Directors. He has been employed by us
since 1991. Mr. Lipstein is a certified public accountant.
Alain M. Klapholz, one of our founders, has been our Vice President and a
director since 1991. He has been employed by us since 1991. Mr. Klapholz has an
MBA from New York University.
Costa Papastephanou was employed by us in February 2001 as our president.
Prior to joining us, he was employed by Bristol Myers-Squibb for 30 years, the
last 14 of which he was with Bristol Myers' Convatec, a multinational ostomy and
wound care management division. His last position at Convatec was as President
of the global chronic care division, where he was responsible for that
division's sales and marketing, clinical trials, research and development,
manufacturing, quality assurance and regulatory affairs.
William Schaeffer, has been our Chief Operating Officer since May 1998.
Prior to joining us, Mr. Schaeffer was employed by Johnson & Johnson for more
than 25 years. His last position was Vice President, Quality Assurance Worldwide
for Johnson & Johnson's Cordis, Inc., where he was also a member of its
Management Board. Mr. Schaeffer has also held senior management positions at
Johnson & Johnson's Ethicon, Inc., Johnson & Johnson Cardiovascular and Ortho
Diagnostics, Inc. His responsibilities have included process development,
manufacturing and quality assurance for a broad range of medical devices
developed, produced and distributed by Johnson & Johnson.
Joseph Stechler has been a director since 1992. He has been President and
CEO of Stechler & Company, an investment management firm, since 1986, and from
1990 to January 1997, he was the general partner of Old Ironsides Capital, L.P.,
an investment fund. Prior to 1986, he was a securities analyst with several
investment firms. Mr. Stechler has a JD degree from Columbia University and an
LLM degree in corporate law from New York University.
Steven Lilien has been a director of Ortec since February 1998. He has
been chairman of the accounting department of Bernard M. Baruch College in New
York City for the past fourteen years and is currently the Weinstein Professor
of Accounting there. He is a certified public accountant and has a Ph.D. in
accounting and finance and an MS, both from New York University.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Our non employee
directors were compensated for their services and attendance at meetings in 2000
through the grant of options pursuant to our
22
Employee Stock Option Plan and payment of $5,000 to Dr. Steven Lilien for his
services as chairman of our audit committee. Officers are elected annually by
the Board of Directors and serve at the discretion of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
In 2000 Messrs. Steven Katz, Ron Lipstein, Alain Klapholz and William D.
Schaeffer failed to file on a timely basis Form 4 as required by Section 16(a)
of the Securities and Exchange Act reporting stock options granted to each of
them on October 3, 2000, under the Company's Employee Stock Option Plan. Such
reports were filed by them in December 2000 instead of November 2000. Messrs.
Katz, Lipstein and Klapholz are all directors and executive officers, and Mr.
Schaeffer is an executive officer, of the Company.
Eisenberg Consulting Agreement
Pursuant to a consulting agreement dated June 7, 1991, as amended on
September 1, 1992, with Dr. Eisenberg, we have retained the services of Dr.
Eisenberg as a consultant until June 6, 2005. Under such consulting agreement,
Dr. Eisenberg is required to devote 20 hours per week to Ortec. We pay Dr.
Eisenberg an annual fee at the rate of $73,000. Dr. Eisenberg's fee is subject
to annual increases based on certain formulas. Dr. Eisenberg has agreed not to
compete with us until one year after termination of his consulting agreement.
Item 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth the compensation paid by us for our fiscal
years ended December 31, 2000, 1999 and 1998 to our Chief Executive Officer and
to each of our executive officers whose compensation exceeded $100,000 on an
annual basis (collectively, the "Named Officers").
23
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------- ------------
Securities
Name and Other Annual Underlying
Principal Position Year Salary($) Bonus($) Compensation($) Options/SARs
- ------------------ ---- -------- -------- --------------- ------------
Steven Katz .................. 2000 209,807 94,605 9,000* 129,278
Chief Executive 1999 200,000 35,000 9,000* 50,000
Officer and Chairman 1998 200,000 9,000* 230,750
Ron Lipstein ................ 2000 179,712 78,105 9,000* 118,128
Vice Chairman, 1999 165,000 50,000 9,000* 35,000
Secretary, 1998 165,000 9,000* 220,000
Treasurer and CFO
Alain Klapholz .............. 2000 159,808 30,000 23,300
Vice President 1999 150,000 15,000 10,000
and Director 1998 150,000 70,000
William Schaeffer .......... 2000 167,308 17,000
Chief Operating Officer 1999 157,871 30,000 20,000
- ----------
* In lieu of health insurance.
Board Compensation
Mr. Joseph Stechler and Dr. Steven Lilien are our only non employee
directors. For his services in 2000 as a director and as chairman of our audit
committee, in February 2001 we paid Dr. Lilien $5,000 and granted him 7 year
options to purchase 7,500 shares of our common stock. For his services in 2000
as a director and as a member of our audit committee, in February 2001 we
granted Mr. Stechler 7 year options to purchase 7,500 shares of our Common
Stock. Such options were granted under our Employee Stock Option Plan and are
exercisable at $8.75 per share each.
24
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2000 by us to the Named
Officers:
Potential Realizable
Value at
Assumed Annual
Rates of Stock Price
Appreciation for
Individual Grants Option Term
----------------- -----------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year (1) ($/Share) Date 5% ($) 10% ($)
---- ------- --------------- --------- ---- ------ -------
Steven Katz 3,900 0.89 6.75 4/16/07 10,717 24,975
18,300 4.20 6.50 5/29/07 48,425 112,850
2,100 0.48 7.00 8/2/07 5,984 13,946
16,200 3.71 9.94 10/3/07 65,538 152,732
62,378 14.30 10.00 10/30/07 253,941 591,791
26,400 6.05 5.75 12/20/07 61,798 144,015
Ron Lipstein 3,250 0.75 6.75 4/16/07 8,931 20,812
15,250 3.50 6.50 05/29/07 40,354 94,042
1,750 0.40 7.00 8/2/07 4,987 11,622
13,500 3.09 9.94 10/3/07 54,615 127,276
62,378 14.30 10.00 10/30/07 253,941 591,791
22,000 5.04 5.75 12/20/07 51,498 120,013
Alain Klapholz 1,300 0.30 6.75 4/16/07 3,572 8,325
6,100 1.40 6.50 5/29/07 16,142 37,617
700 0.16 7.00 8/2/07 1,995 4,649
5,400 1.24 9.94 10/3/07 21,853 50,923
8,800 2.02 5.75 10/30/07 20,599 48,005
William D. Schaeffer (2) 1,800 0.41 6.75 4/16/07 4,946 11,527
9,150 2.10 6.50 5/29/07 24,212 56,425
1,050 0.24 7.00 8/2/07 2,992 6,973
5,000 1.15 9.94 10/3/07 20,228 47,139
- ----------------------
(1) Options to purchase a total of 436,206 shares of common stock were granted
to our employees, including the Named Officers, during the fiscal year
ended December 31, 2000.
(2) The options granted to Mr. Schaeffer vest as follows: 25% one year after
the date of grant, an additional 25% two years after, an additional 25%
three years after and the remaining 25% four years after the date of
grant.
25
Aggregated Options Exercised in Last Fiscal Year and Fiscal Year End Option
Value
The following table sets forth certain information regarding options
(which include warrants) exercisable during 2000 and the value of the options
held as of December 31, 2000 by the Named Officers. None of the Named Officers
exercised any options in 2000 nor did Messrs. Katz, Lipstein or Klapholz hold
any options which were not exercisable at December 31, 2000. At December 31,
2000, Mr. Schaeffer held 41,062 options which were not yet exercisable.
Value of Unexercised
Number of Unexercised Options at In-the-Money Options
Name Fiscal Year End at Fiscal Year End (1)
- ---- --------------- ----------------------
Steven Katz 475,028 $0
Ron Lipstein 473,128* 0
Alain Klapholz 152,300 0
William D. Schaeffer 19,688 0
William D. Schaeffer 41,062 (not exercisable) 0
- ----------
* Includes warrants to purchase 15,000 shares held by Mr. Lipstein's minor
children.
(1) The closing price of our common stock on December 31, 2000, as listed on
the Nasdaq SmallCap Market, was less than the exercise price of all the
options
Compensation Committee Interlock and Insider Participation
None of Ortec's executive officers serves as a member of the compensation
committee or on the board of directors of another entity, one of whose executive
officers serves on Ortec's Board of Directors.
The Compensation Committee of our Board of Directors determines
compensation policies applicable to our five executive officers. Messrs. Steven
Katz, Mark Eisenberg and Steven Lilien are the members of the Compensation
Committee. Mr. Katz is an executive officer of Ortec. Although Dr. Mark
Eisenberg is not an executive officer of Ortec, he is employed by Ortec on a
part time basis devoting his time to research in our facility in Australia. The
compensation paid to Dr. Eisenberg is determined by an agreement between Dr.
Eisenberg and Ortec entered into on June 7, 1991 and amended on September 1,
1992.
26
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of February 28, 2001 by (i) each person (or
group of affiliated persons) who we know owns beneficially more than 5% of the
outstanding shares of our common stock, (ii) each of our executive officers and
directors, and (iii) all of our executive officers and directors as a group.
Except as indicated in the footnotes to this table, the persons named in this
table have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.
Amount and Percentage of
Name and Address Nature of Outstanding
of Beneficial Owner Beneficial Ownership Shares Owned**
- ------------------- -------------------- --------------
Steven Katz* 693,690(1) 6.8%
Mark Eisenberg* 596,000 6.1%
Ron Lipstein* 761,599(2) 7.5%
Alain Klapholz* 456,406(3) 4.6%
Costa Papastephanou* 0
William D. Schaeffer* 21,688(4) ***
Joseph Stechler 817,666(5) 8.4%
15 Engle Street
Englewood, NJ 07631
Steven Lilien 20,900(6) ***
19 Larchmont Street
Ardsley, NY 10502
George Soros 1,153,900(7) 11.9%
888 Seventh Avenue,
33rd Floor
New York, NY 10106
Franklin Resources, Inc. 666,666(8)(9) 6.9%
77 Mariners Island Boulevard
San Mateo, CA 94404
Pequot Capital Management, Inc. 2,150,807(8)(9) 22.0%
5000 Nyala Farm Road
Westport, CT 06880
All officers and directors as 3,367,949(1-6) 30.6%
a group (eight persons)
- ----------
* The address of these persons is at the Company's offices, 3960 Broadway,
New York, NY 10032.
27
** The number of shares of common stock beneficially owned by each person or
entity is determined under rules promulgated by the Securities and
Exchange Commission. Under such rules, beneficial ownership includes any
shares as to which the person or entity has sole or shared voting power or
investment power. Included among the shares owned by such person are any
shares which such person or entity has the right to acquire within 60 days
after February 28, 2001. Unless otherwise indicated, each person or entity
referred to above has sole voting and investment power with respect to the
shares listed. The inclusion herein of any shares deemed beneficially
owned does not constitute an admission of beneficial ownership of such
shares.
*** Less than 1%, based upon information available to us.
(1) Does not include shares owned by Dr. Katz's children, their spouses and
his grandchildren. Dr. Katz disclaims any beneficial interest in such
shares. Includes 525,028 shares issuable to Dr. Katz upon his exercise of
outstanding options and warrants.
(2) Includes 33,600 shares owned by Mr. Lipstein's minor children. Mr.
Lipstein disclaims any beneficial interest in such 33,600 shares. Also
includes 503,128 shares issuable to Mr. Lipstein and 15,000 to his minor
children upon his and their exercise of outstanding options and warrants.
(3) Includes 31,500 shares owned by Mr. Klapholz' minor children. Mr. Klapholz
disclaims any beneficial interest in such 31,500 shares. Also includes
162,300 shares issuable to Mr. Klapholz upon his exercise of outstanding
options.
(4) Includes 19,688 shares issuable to Mr. Schaeffer upon his exercise of
outstanding options.
(5) Includes shares owned by Stechler & Company and 30,000 shares owned by a
charitable foundation of which Mr. Stechler and another member of his
family are the trustees. Also includes 75,500 shares issuable to Mr.
Stechler upon his exercise of outstanding options or warrants.
(6) Includes 20,500 shares underlying options granted under the Company's
Stock Option Plan.
(7) As reported by Mr. Soros on a Form 4 filed by him with the Securities and
Exchange Commission which recites that this number includes 722,238 shares
held for the account of Quasar International Partners C.V. ("Quasar") and
431,572 shares held for the account of Lupa Family Partners ("Lupa").
Soros Fund Management LLC serves as principal investment manager of Quasar
(a Netherlands Antilles limited partnership) and, as such, and Mr. George
Soros as Chairman of Soros Fund Management LLC, may be deemed to have
investment discretion over and the power to direct the voting and
disposition of the shares held for the account of Quasar. Lupa is a New
York
28
limited partnership. In his capacity as a general partner of Lupa, Mr.
Soros may be deemed to have voting and dispositive power with respect to
shares held for the account of Lupa.
(8) As reported on Forms 13G filed by such persons with the Securities and
Exchange Commission.
(9) Shares held by investment funds. These have sole or shared investment
and/or voting power for these shares.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Consulting Agreement
See "Eisenberg Consulting Agreement" for a description of our consulting
agreement with Dr. Mark Eisenberg.
Change of Control Agreements
Our Board of Directors has authorized agreements with our four executive
officers in the event of a "change of control" of Ortec. In the agreements with
Messrs. Katz, Lipstein and Klapholz "change of control" of Ortec will be defined
as a change in the ownership or effective control of Ortec or in the ownership
of a substantial portion of Ortec's assets, but in any event if Messrs. Katz,
Lipstein and Klapholz and Dr. Mark Eisenberg no longer constitute a majority of
our Board of Directors. The payments to be made to such three executive officers
in the event of a change of control range from 2 to 2.99 times the compensation
paid by us to such executive in the twelve-month period prior to the change of
control. The change of control agreements with Messrs. Katz, Lipstein and
Klapholz will provide that in the event that such change of control occurs, the
expiration dates of all options and warrants which have been granted to such
executive officers and which expire less than three years after such change of
control, will be extended so that such options and warrants expire three years
after such change of control, and that at Messrs. Katz, Lipstein or Klapholz'
election, we will lend such executive officer upon his exercise of any of his
warrants or options, interest free and repayable after three years, the funds
needed by such executive officer to pay the exercise price.
We believe that such payments to most, if not all, of these three
executive officers will, if they are made, constitute "golden parachute"
payments under the Internal Revenue Code and to the extent the change of control
payments made to an individual executive officer exceeds the average annual
compensation paid by us to such executive officer in the five year period prior
to such change of control (a) such excess will not be able to be deducted by us
in calculating our income for income tax purposes and (b) a special excise tax
equal to 20% of such excess will have to be paid by the executive officer
receiving such excess payments. The
29
change of control agreements will provide that we will pay such excise tax
payable by such executive officer.
The change of control agreement with Mr. Schaeffer will provide that all
his options will vest immediately upon a change of control of Ortec. The
agreement with Mr. Schaeffer will define "change of control" as a merger or
consolidation of Ortec with another company or the sale by us of all or
substantially all of our assets.
FORWARD LOOKING STATEMENTS
This Annual Report includes statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including statements regarding our expectations, hopes, beliefs, intentions or
strategies regarding the future, that are based on the beliefs of our
management, as well as assumptions made by and information currently available
to us. When used in this document, the words "anticipate," "believe,"
"estimate," and "expect" and similar expressions, as they relate to us are
intended to identify such forward-looking statements. Such statements reflect
the current views of our management with respect to future events and are
subject to certain risks, uncertainties and assumptions, including those
described in this annual report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. We do not intend to update these
forward-looking statements.
AVAILABILITY OF FORM 10-K
We will provide a copy of our annual report on Form 10-K for the year
ended December 31, 2000, filed with the Securities and Exchange Commission,
including our financial statements and the financial statement schedules, to any
of our stockholders and to any person holding our warrants or options to
purchase shares of our common stock, upon written request and without charge.
Such written request should be directed to Mr. Ron Lipstein, Secretary, at Ortec
International, Inc., 3960 Broadway, New York, NY 10032.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
(i) Financial Statements:
See Index to Financial Statements.
(ii) Financial Statement Schedules
All financial statement schedules have been omitted since either (i)
the schedule or condition requiring a schedule is not applicable or (ii) the
information required by such schedule is contained in the Financial Statements
and Notes thereto or in Management's Discussion and Analysis of Financial
Condition and Results of Operation.
(b) Reports on Form 8-K.
We filed one report on Form 8-K in the fourth quarter of 2000.
(c) Exhibits.
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)
4.1 Form of Certificate evidencing shares of Common Stock (1)
10.1 Agreement for Consulting Services dated as of June 7, 1991 by and
between the Company and Dr. Mark Eisenberg (1)
23 Consent of Grant Thornton LLP (2)
- ----------
(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.
(2) Filed herewith.
31
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.
By: /s/ Steven Katz
-------------------
Steven Katz, Ph.D.
Chairman and Chief
Executive Officer
Dated: March 26, 2001
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Steven Katz Chairman, Chief Executive March 26, 2001
- ------------------------ Officer and Director
Steven Katz, Ph.D. (Principal Executive Officer)
Senior Vice President,
- ------------------------ Research and Development and
Dr. Mark Eisenberg Director
/s/ Ron Lipstein Vice Chairman, Chief Financial March 26, 2001
- ------------------------ Officer, Secretary,
Ron Lipstein Treasurer and Director
(Principal Financial and
Accounting Officer)
/s/ Alain M. Klapholz Vice President, Operations March 27, 2001
- ------------------------ and Director
Alain M. Klapholz
Director
- ------------------------
Joseph Stechler
/s/ Steven Lilien Director March 27, 2001
- ------------------------
Steven Lilien
32
Ortec International, Inc.
(a development stage enterprise)
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets as of December 31, 2000 and 1999 F-3
Statements of Operations for the years ended December 31, 2000, 1999 and
1998, and for the cumulative period from March 12, 1991 (inception) to
December 31, 2000 F-5
Statement of Shareholders' Equity for the cumulative
period from March 12, 1991 (inception) to
December 31, 2000 F-6
Statements of Cash Flows for the years ended December 31, 2000, 1999 and
1998, and for the cumulative period from March 12, 1991 (inception) to
December 31, 2000 F-10
Notes to Financial Statements F-12 - F-36
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Ortec International, Inc.
We have audited the accompanying balance sheets of Ortec International, Inc. (a
development stage enterprise) (the "Company") as of December 31, 2000 and 1999,
and the related statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000, and for the
period from March 12, 1991 (inception) to December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ortec International, Inc. at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, and for the
period from March 12, 1991 (inception) to December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
GRANT THORNTON LLP
New York, New York
February 21, 2001
F-2
Ortec International, Inc.
(a development stage enterprise)
BALANCE SHEETS
December 31,
ASSETS 2000 1999
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 9,292,478 $ 12,604,027
Other current assets 88,878 1,701
------------ ------------
Total current assets 9,381,356 12,605,728
PROPERTY AND EQUIPMENT, AT COST
Laboratory equipment 1,768,872 1,345,367
Office furniture and equipment 857,031 778,364
Leasehold improvements 1,333,144 1,283,686
------------ ------------
3,959,047 3,407,417
Less accumulated depreciation and amortization (2,223,064) (1,566,002)
------------ ------------
1,735,983 1,841,415
OTHER ASSETS
Patent application costs, net of accumulated
amortization of $159,460 in 2000 and
$107,594 in 1999 572,089 533,592
Deposits and other assets 30,332 30,910
------------ ------------
$ 11,719,760 $ 15,011,645
============ ============
F-3
Ortec International, Inc.
(a development stage enterprise)
BALANCE SHEETS (continued)
December 31,
LIABILITIES AND
SHAREHOLDERS' EQUITY 2000 1999
------------ ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 872,760 $ 886,388
Accrued compensation 226,208 232,781
Accrued professional fees 176,528 341,716
Accrued interest 7,081 7,935
Capital lease obligation - current 5,151
Loan payable - current 132,369 122,097
------------ ------------
Total current liabilities 1,414,946 1,596,068
LONG-TERM LIABILITIES
Loan payable - noncurrent 912,489 1,044,857
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; authorized, 25,000,000 shares; 9,711,608
shares issued, 9,691,608 shares outstanding, at December 31, 2000 and
8,221,843 shares issued, 8,206,143 shares
outstanding at December 31, 1999 9,712 8,222
Additional paid-in capital 52,829,535 43,644,902
Deficit accumulated during the development
stage (43,269,277) (31,139,614)
Treasury stock, at cost (20,000 shares at December 31, 2000
and 15,700 shares at December 31, 1999) (177,645) (142,790)
------------ ------------
9,392,325 12,370,720
------------ ------------
$ 11,719,760 $ 15,011,645
============ ============
The accompanying notes are an integral part of these statements.
F-4
Ortec International, Inc.
(a development stage enterprise)
STATEMENTS OF OPERATIONS
Cumulative
from
March 12,
1991
Year ended December 31, (inception) to
------------------------------------------------------ December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
Revenue
Interest income $ 586,623 $ 368,711 $ 572,549 $ 2,057,700
------------ ------------ ------------ ------------
Expenses
Research and development 4,191,317 3,106,908 1,933,877 13,765,354
Rent 535,443 473,010 252,397 1,590,297
Consulting 838,383 834,180 908,495 3,813,362
Personnel 4,763,662 3,742,632 4,060,629 16,343,730
General and administrative 2,297,769 2,152,968 1,725,201 9,330,798
Interest and other expense 89,712 99,522 104,605 483,436
------------ ------------ ------------ ------------
12,716,286 10,409,220 8,985,204 45,326,977
------------ ------------ ------------ ------------
Net loss $(12,129,663) $(10,040,509) $ (8,412,655) $(43,269,277)
============ ============ ============ ============
Net loss per share
Basic and diluted $ (1.37) $ (1.51) $ (1.43) $ (10.41)
============ ============ ============ ============
Weighted average shares outstanding
Basic and diluted 8,847,295 6,634,874 5,878,971 4,157,780
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
F-5
Ortec International, Inc.
(a development stage enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY
Deficit
accumulated
Common stock Additional during the
------------------------- paid-in development
Shares Amount capital stage
----------- ----------- ----------- -----------
March 12, 1991 (inception) to December 31, 1991
Issuance of stock
Founders 1,553,820 $ 1,554 $ (684)
First private placement ($.30 cash per share) 217,440 217 64,783
The Director ($1.15 and $5.30 cash per share) 149,020 149 249,851
Second private placement ($9.425 cash per share) 53,020 53 499,947
Share issuance expenses (21,118)
Net loss $ (281,644)
----------- ----------- ----------- -----------
Balance at December 31, 1991 1,973,300 1,973 792,779 (281,644)
Issuance of stock
Second private placement ($9.425 cash per share) 49,320 49 465,424
Stock purchase agreement with the Director ($9.425
cash per share) 31,820 32 299,966
Share issuance expenses (35,477)
Net loss (785,941)
----------- ----------- ----------- -----------
Balance at December 31, 1992 2,054,440 2,054 1,522,692 (1,067,585)
Issuance of stock
Third private placement ($10.00 cash per share) 132,150 132 1,321,368
Stock purchase agreement with Home
Insurance Company ($9.00 cash per share) 111,111 111 999,888
Stock purchase agreement with the Director
($9.425 cash per share) 21,220 21 199,979
Shares issued in exchange for commission
($10.00 value per share) 600 1 5,999
Share issuance expenses (230,207)
Net loss (1,445,624)
----------- ----------- ----------- -----------
Balance at December 31, 1993 (carried forward) 2,319,521 2,319 3,819,719 (2,513,209)
Total
Treasury shareholders'
stock equity
----------- -----------
March 12, 1991 (inception) to December 31, 1991
Issuance of stock
Founders $ 870
First private placement ($.30 cash per share) 65,000
The Director ($1.15 and $5.30 cash per share) 250,000
Second private placement ($9.425 cash per share) 500,000
Share issuance expenses (21,118)
Net loss (281,644)
-----------
Balance at December 31, 1991 513,108
Issuance of stock
Second private placement ($9.425 cash per share) 465,473
Stock purchase agreement with the Director ($9.425
cash per share) 299,998
Share issuance expenses (35,477)
Net loss (785,941)
-----------
Balance at December 31, 1992 457,161
Issuance of stock
Third private placement ($10.00 cash per share) 1,321,500
Stock purchase agreement with Home
Insurance Company ($9.00 cash per share) 999,999
Stock purchase agreement with the Director
($9.425 cash per share) 200,000
Shares issued in exchange for commission
($10.00 value per share) 6,000
Share issuance expenses (230,207)
Net loss (1,445,624)
-----------
Balance at December 31, 1993 (carried forward) 1,308,829
F-6
Ortec International, Inc.
(a development stage enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY (continued)
Deficit
accumulated
Common stock Additional during the
------------------------- paid-in development
Shares Amount capital stage
----------- ----------- ----------- -----------
(brought forward) 2,319,521 $2,319 $ 3,819,719 $ (2,513,209)
Issuance of stock
Fourth private placement ($10.00 cash per share) 39,451 40 397,672
Stock purchase agreement with Home
Insurance Company ($10.00 cash per share) 50,000 50 499,950
Share issuance expenses (8,697)
Net loss (1,675,087)
----------- ----------- ----------- -----------
Balance at December 31, 1994 2,408,972 2,409 4,708,644 (4,188,296)
Rent forgiveness 40,740
Net loss (1,022,723)
----------- ----------- ----------- -----------
Balance at December 31, 1995 2,408,972 2,409 4,749,384 (5,211,019)
Initial public offering 1,200,000 1,200 5,998,800
Exercise of warrants 33,885 34 33,851
Fifth private placement ($6.49 cash per share) 959,106 959 6,219,838
Share issuance costs (1,580,690)
Stock options issued for services 152,000
Net loss (2,649,768)
----------- ----------- ----------- -----------
Balance at December 31, 1996 (carried forward) 4,601,963 4,602 15,573,183 (7,860,787)
Total
Treasury shareholders'
stock equity
----------- -----------
(brought forward) $ 1,308,829
Issuance of stock
Fourth private placement ($10.00 cash per share) 397,712
Stock purchase agreement with Home
Insurance Company ($10.00 cash per share) 500,000
Share issuance expenses (8,697)
Net loss (1,675,087)
-----------
Balance at December 31, 1994 522,757
Rent forgiveness 40,740
Net loss (1,022,723)
-----------
Balance at December 31, 1995 (459,226)
Initial public offering 6,000,000
Exercise of warrants 33,885
Fifth private placement ($6.49 cash per share) 6,220,797
Share issuance costs (1,580,690)
Stock options issued for services 152,000
Net loss (2,649,768)
-----------
Balance at December 31, 1996 (carried forward) 7,716,998
F-7
Ortec International, Inc.
(a development stage enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY (continued)
Deficit
accumulated
Common stock Additional during the
------------------------- paid-in development
Shares Amount capital stage
----------- ----------- ----------- -----------
(brought forward) 4,601,963 $ 4,602 $15,573,183 $ (7,860,787)
Exercise of warrants 1,158,771 1,159 10,821,632
Share issuance costs (657,508)
Stock options and warrants issued for services 660,000
Net loss (4,825,663)
----------- ----------- ----------- -----------
Balance at December 31, 1997 5,760,734 5,761 26,397,307 (12,686,450)
Exercise of warrants 221,486 221 1,281,736
Stock options and warrants issued for services 1,920,111
Sixth private placement 200,000 200 1,788,498
Warrants issued in Sixth private placement 211,302
Share issuance costs (48,000)
Purchase of 6,600 shares of treasury stock (at cost)
Net loss (8,412,655)
----------- ----------- ----------- -----------
Balance at December 31, 1998 6,182,220 6,182 31,550,954 (21,099,105)
Exercise of warrants 14,103 14 14,089
Stock options and warrants issued for services 64,715
Seventh private placement ($8.75 cash per share) 389,156 389 3,168,396
Warrants issued in Seventh private placement 468,291
Eighth private placement ($5.50 cash per share) 1,636,364 1,637 8,998,365
Share issuance costs (619,908)
Purchase of 9,100 shares of treasury stock (at cost)
Net loss (10,040,509)
----------- ----------- ----------- -----------
Balance at December 31, 1999 (carried forward) 8,221,843 8,222 43,644,902 (31,139,614)
Total
Treasury shareholders'
stock equity
----------- -----------
(brought forward) $ 7,716,998
Exercise of warrants 10,822,791
Share issuance costs (657,508)
Stock options and warrants issued for services 660,000
Net loss (4,825,663)
-------------
Balance at December 31, 1997 13,716,618
Exercise of warrants 1,281,957
Stock options and warrants issued for services 1,920,111
Sixth private placement 1,788,698
Warrants issued in Sixth private placement 211,302
Share issuance costs (48,000)
Purchase of 6,600 shares of treasury stock (at cost) $ (67,272) (67,272)
Net loss (8,412,655)
--------- -------------
Balance at December 31, 1998 (67,272) 10,390,759
Exercise of warrants 14,103
Stock options and warrants issued for services 64,715
Seventh private placement ($8.75 cash per share) 3,168,785
Warrants issued in Seventh private placement 468,291
Eighth private placement ($5.50 cash per share) 9,000,002
Share issuance costs (619,908)
Purchase of 9,100 shares of treasury stock (at cost) (75,518) (75,518)
Net loss (10,040,509)
--------- -------------
Balance at December 31, 1999 (carried forward) (142,790) 12,370,720
F-8
Ortec International, Inc.
(a development stage enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY (continued)
Deficit
accumulated
Common stock Additional during the
------------------------- paid-in development
Shares Amount capital stage
----------- ----------- ----------- -----------
(brought forward) 8,221,843 $ 8,222 $43,644,902 (31,139,614)
Exercise of options and warrants 175,532 175 327,107
Stock options and warrants issued for services 56,265
Ninth private placement ($15.00 cash per share) 66,667 67 999,938
Warrants issued in Ninth private placement 23,000
Tenth private placement ($6.75 cash per share) 1,247,566 1,248 8,419,823
Share issuance costs (641,500)
Purchase of 4,300 shares of treasury stock (at cost)
Net loss (12,129,663)
----------- ----------- ----------- -----------
Balance at December 31, 2000 9,711,608 $9,712 $52,829,535 (43,269,277)
=========== =========== =========== ===========
Total
Treasury shareholders'
stock equity
----------- -----------
(brought forward) $ (142,790) $12,370,720
Exercise of options and warrants 327,282
Stock options and warrants issued for services 56,265
Ninth private placement ($15.00 cash per share) 1,000,005
Warrants issued in Ninth private placement 23,000
Tenth private placement ($6.75 cash per share) 8,421,071
Share issuance costs (641,500)
Purchase of 4,300 shares of treasury stock (at cost) (34,855) (34,855)
Net loss (12,129,663)
----------- -----------
Balance at December 31, 2000 $ (177,645) $ 9,392,325
=========== ===========
The accompanying notes are an integral part of this statement.
F-9
Ortec International, Inc.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
Cumulative
from
March 12,
1991
Year ended December 31, (inception) to
------------------------------------------------ December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
Cash flows from operating activities
Net loss $(12,129,663) $(10,040,509) $ (8,412,655) $(43,269,277)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 708,928 597,528 438,778 2,392,761
Unrealized loss on marketable securities 11,404
Realized loss on marketable securities 5,250
Non-cash stock compensation and interest 56,265 64,715 1,920,111 2,853,091
Purchases of marketable securities (6,298) (17,540,589) (19,075,122)
Sales of marketable securities 771,956 18,358,964 19,130,920
(Increase) decrease in assets
Prepaid expenses 588 (588)
Other current assets (87,177) (625) 6,001 (88,876)
Increase (decrease) in liabilities
Accounts payable and accrued liabilities (186,243) 762,650 253,727 1,370,404
------------ ------------ ------------ ------------
Net cash used in operating activities (11,637,890) (7,849,995) (4,976,251) (36,669,445)
------------ ------------ ------------ ------------
Cash flows from investing activities
Purchases of property and equipment, excluding
capital leases (551,630) (705,277) (1,099,666) (3,871,981)
Payments for patent applications (90,363) (124,917) (79,056) (731,549)
Organization costs (10,238)
Deposits 578 787 22,517 (28,349)
Purchases of marketable securities (594,986)
Sale of marketable securities 522,532
------------ ------------ ------------ ------------
Net cash used in investing activities (641,415) (829,407) (1,156,205) (4,714,571)
------------ ------------ ------------ ------------
F-10
Ortec International, Inc.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS (continued)
Cumulative
from
March 12,
1991
Year ended December 31, (inception) to
------------------------------------------------ December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
Cash flows from financing activities
Proceeds from issuance of notes payable $ 515,500
Proceeds from issuance of common stock $ 9,748,358 $ 12,419,181 $ 5,700,393 53,527,522
Share issuance expenses (618,500) (387,908) (48,000) (3,582,105)
Purchase of treasury stock (34,855) (75,518) (67,272) (177,645)
Proceeds from issuance of loans payable 20,379 600,000 1,446,229
Repayment of capital lease obligations (5,151) (30,706) (41,853) (107,204)
Repayment of loan payable (122,096) (111,678) (93,390) (430,303)
Repayment of notes payable (515,500)
------------ ------------ ------------ ------------
Net cash provided by financing activities 8,967,756 11,833,750 6,049,878 50,676,494
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (3,311,549) 3,154,348 (82,578) 9,292,478
Cash and cash equivalents at beginning of period 12,604,027 9,449,679 9,532,257 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 9,292,478 $ 12,604,027 $ 9,449,679 $ 9,292,478
============ ============ ============ ============
Supplemental disclosures of cash flow information:
Noncash financing activities
Capital lease obligations $ -- $ -- $ -- $ 118,903
Deferred offering costs included in
accrued professional fees -- -- -- 314,697
Forgiveness of rent payable -- -- -- 40,740
Share issuance expenses - warrants 23,000 232,000 -- 255,000
Cash paid for interest 90,565 100,418 153,677 407,336
Cash paid for income taxes 41,286 53,671 38,442 155,048
The accompanying notes are an integral part of these statements.
F-11
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE A - 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 transplant procedures (the "Technology"). Pursuant to a
license agreement dated June 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 for no consideration.
The Skin Group, Ltd. (the "Skin Group") also was formed as a Delaware
corporation, in March 1991, to raise funds for development of the
Technology. On July 27, 1992, the Skin Group was merged with and into
Ortec. Owners of Skin Group shares were given .83672 of an Ortec share for
each Skin Group share. The merger was accounted for as if it were a
pooling of interests and, accordingly, the accompanying financial
statements include the accounts of the Skin Group for all periods
presented.
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 Composite Cultured Skin.
Initial Public Offering
On January 19, 1996, the Company completed an initial public offering
("IPO") of 1,200,000 units. Each unit consisted of one share of the
Company's common stock, one Class A warrant to purchase one share of
common stock at $10, of which 1,083,780 were exercised and the balance was
not exercised and has expired as of December 31, 1998, and one Class B
warrant to purchase one share of common stock at $15, of which 11,400 were
exercised and the balance was not exercised and has expired as of December
31, 2000.
F-12
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE A (continued)
The IPO raised gross proceeds of approximately $6,000,000, of which
$800,000, $537,500 and approximately $315,000 were used to pay
underwriting commissions, notes payable and deferred offering costs,
respectively, thereby providing the Company with net proceeds of
approximately $4,347,500.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Research and Development Costs
The Company is in the business of research and development and
therefore, all research and development costs, including payments
related to products under development and research consulting
agreements and personnel costs, are expensed when incurred.
2. Depreciation and Amortization
Property and equipment are carried at cost, less any grants received
for construction. In 1996, the Company received a $400,000 grant
toward the construction of its new laboratory and office facilities
and it received an additional grant of $130,000 in 1998. (see Note
I).
Office furniture and equipment and laboratory equipment are
depreciated on the straight-line basis over the estimated lives of
the assets (5 years). Leasehold improvements are amortized over the
shorter of the term of the related lease or life of the asset.
3. Patent Application Costs
Patent application costs relate to the Company's U.S. patent
application and application fees in foreign jurisdictions and
consist of legal fees and other direct fees. The recoverability of
the patent application costs is dependent upon, among other matters,
obtaining FDA approval for use on the underlying technology as a
medical device.
F-13
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE B (continued)
4. Foreign Currency Translation
The Company conducts some of its research and development at its
laboratory in Sydney, Australia. However, because all Australian
expenditures are funded from the United States, the Company has
determined that the functional currency of its Australian office is
the U.S. dollar. Accordingly, current assets and current liabilities
are remeasured into the functional currency using current exchange
rates and non-current assets and liabilities are remeasured using
historical exchange rates. Expense accounts are remeasured using the
average rate in effect for the year. Gains and losses arising from
the remeasurement of foreign currency are included in the results of
operations for all periods presented.
5. Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
6. Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
7. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents. Cash
equivalents consist principally of money market funds. The fair
value of cash and cash equivalents approximates the recorded amount
because of the short-term maturity of such instruments. Cash and
cash equivalents includes approximately $25,000 and $9,900, at
December 31, 2000 and 1999, respectively of bank balances
denominated in Australian dollars.
F-14
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE B (continued)
8. Net Loss Per Share
Net loss per common share is based on the weighted-average number of
common shares outstanding during the periods.
Basic net loss per share is computed by dividing the net loss by the
weighted-average common shares outstanding for the period. Diluted
net loss per share reflects the weighted-average common shares
outstanding plus the potential dilutive effect of securities or
contracts which are convertible to common shares, such as options,
warrants, and convertible preferred stock.
Options and warrants to purchase shares of common stock were not
included in the computation of diluted net loss per share in each of
the years presented because to do so would have been antidilutive
for the periods presented. (See Notes G and H.)
The amount of options and warrants excluded are as follows:
Years ended December 31,
------------------------
2000 1999 1998
--------- --------- -------
Warrants 609,773 764,091 678,609
========= ========= =======
Stock options 1,524,106 1,122,500 944,500
========= ========= =======
9. Impairment of Long-Lived Assets
The Company reviews long-lived assets, which consist of fixed assets
and patent application costs, for possible impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company has determined that
no provision is necessary for the impairment of long-lived assets at
December 31, 2000.
10. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards
for derivative instruments and for hedging activities. SFAS No. 133,
as amended by SFAS No. 138, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company does not
anticipate that the adoption of the statement will have a material
impact on its financial statements.
F-15
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE C - CONCENTRATION OF CREDIT RISK
The Company maintains cash and cash equivalent balances at four financial
institutions located in New York City. The accounts are insured by the
Securities Investors Protection Corporation up to $500,000 and the FDIC up
to $100,000. Uninsured balances aggregate to approximately $8,681,000 and
$11,458,000 at December 31, 2000 and 1999, respectively. The Company has
not experienced any losses in such accounts and believes it is not exposed
to any significant credit risk.
NOTE D - PATENTS
Patent application costs are stated at cost less amortization computed by
the straight-line method principally over 14 years. The Company's U.S.
patent was issued in 1994 and expires in 2011.
There can be no assurance that any patent will provide commercial benefits
to the Company.
NOTE E - CAPITAL LEASE OBLIGATION
The Company had entered into several capital lease agreements with terms
of two to three years at effective interest rates ranging from 12.22% to
15.48%. The agreements ended during the year ended December 31, 2000.
As of December 31, 2000 and 1999, the Company has recorded $118,903 in
equipment purchased under capital leases and $118,903 and $113,856 in
accumulated amortization, respectively.
F-16
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE F - LOAN PAYABLE
During 1996, the Company obtained a loan from the landlord of its new
laboratory for the construction of, and equipment for, the leased
facility. During 1997, the Company modified the terms of the loan as a
result of increased build-out costs incurred in the construction of the
facility. An adjustment has been made in 1997 to record additional
interest and principal. The adjusted loan payments are due in monthly
installments of $10,103, including interest at an effective rate of 7.98%,
through July 2006.
During 1998, the Company obtained an additional loan from the landlord for
improvements to the leased facility. During 1999, the Company modified the
terms of the additional loan as a result of increased build-out costs
incurred. The adjusted loan payments are due in monthly installments of
$7,605, including interest at an effective rate of 8.6%, through March
2008.
Minimum payments to be made under the terms of the loans are as follows:
Year ending December 31,
2001 $ 212,503
2002 212,503
2003 212,503
2004 212,503
2005 212,503
2006 and thereafter 283,676
----------
1,346,191
Less amount representing interest 301,333
----------
Net present value of future loan payments $1,044,858
==========
Current portion $ 132,369
Noncurrent portion 912,489
----------
$1,044,858
==========
F-17
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE G - EQUITY TRANSACTIONS
Each share of the Company's common stock is entitled to one vote.
In January 1993, Ortec effected a stock split and granted twenty new
shares of common stock of $.001 par value for each outstanding share of
common stock. This stock split is retroactively reflected in the
accompanying financial statements and all references to shares are to the
new shares with per share amounts appropriately adjusted.
Pursuant to an agreement between Dr. Eisenberg and the other founders (the
"Other Founders"), a business relationship was formed by the founders for
the manufacture and sale of products derived from the Technology (the
"Business Agreement"). Under the terms of the Business Agreement, Dr.
Eisenberg, who was the owner of all the capital stock of Ortec (600,000
shares) agreed to license the Technology to Ortec and sell 70% of Ortec's
shares for a purchase price of $1,000,000 to the Skin Group. Dr. Eisenberg
was paid $85,000 in connection with this agreement as reimbursement for
his expenses ($35,000 during the period from inception (March 12, 1991) to
December 31, 1991 and $50,000 during the year ended December 31, 1992).
The "Other Founders" initially owned all of the stock of the Skin Group
(953,820 shares). In March 1991, the Skin Group issued, in a private
placement, 217,440 shares for $65,000. In June and October 1991, the Skin
Group issued 130,160 and 18,860 shares, to a director of the Company (the
"Director") for $150,000 and $100,000, respectively. Commencing in
November 1991, the Skin Group issued 79,480 shares under a second private
placement for $750,006 (including 26,460 shares during the year ended
December 31, 1992). On July 27, 1992, the Skin Group was merged with and
into Ortec.
Also under the second private placement 22,860 shares of Ortec were issued
for $215,467. In addition, the Director was granted warrants to purchase
7,360 shares of Ortec at $9.425 per share.
Pursuant to a stock purchase agreement entered into with the Director in
June 1992, 53,040 shares of Ortec were sold to the Director for a total
purchase price of $499,998. In addition, the Director was granted warrants
to purchase 79,570 shares at an exercise price of $9.425 per share, such
warrants were exercised on December 29, 1998. The purchase price was
payable in installments and shares and warrants were issued in
installments pro rata with the payment of the purchase price. During the
years ended December 31, 1993 and 1992, the Director paid $200,000 and
$299,998, respectively, and was issued 21,220 and 31,820 shares,
respectively.
F-18
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE G (continued)
Further, in connection with the Director's purchase of the 53,040 shares,
in 1993, the Other Founders granted to the Director options to purchase
from them an aggregate of 74,000 Ortec shares, at a price of $5 per share.
In 1993, the Director exercised such option in part, and purchased 49,000
shares from the Other Founders at the option price of $5 per share. The
remaining balance of such options expired April 15, 1994.
Pursuant to a third private placement that commenced in January 13, 1993,
and concluded on March 31, 1993, Ortec sold an aggregate of 109,650 shares
at $10 per share ($1,096,500). Subsequent to such offering, in 1993, the
Company sold an additional 22,500 shares at $10 per share ($225,000). In
connection with such purchases, all purchasers received certain
registration rights.
Pursuant to a Stock Purchase Agreement dated July 19, 1993, by and between
Ortec and the Home Insurance Company ("Home Insurance"), the Company sold
to Home Insurance 111,111 shares of common stock for an aggregate purchase
price of $999,999, or $9 per share. In connection with such purchase, Home
Insurance received certain registration rights.
In addition, in 1993, the Company issued 600 shares to an individual as
compensation for commissions in connection with the sale of the Company's
shares. Such commissions are included in share issuance expenses. The
stock issued was valued at $10 per share.
In August 1993, the Director entered into a stock option agreement with
Dr. Eisenberg and the Other Founders, pursuant to which he received the
right to purchase an aggregate of 100,000 shares owned by such persons in
various amounts and at various times, at a purchase price of $10 per
share. As of December 31, 1993, the Director had exercised options and
purchased 5,000 shares under such agreement at $10 per share. The
remaining balance of such options has expired.
Pursuant to a fourth private placement consummated in July 1994, Ortec
sold an aggregate of 39,451 shares at between $10 and $10.25 per share for
aggregate proceeds of $397,712.
Pursuant to a Stock Purchase Agreement dated July 22, 1994, between Ortec
and Home Insurance, the Company sold to Home Insurance 50,000 shares of
common stock for an aggregate purchase price of $500,000, or $10 per
share. In connection with such purchase, Home Insurance received certain
registration rights and warrants to purchase 10,000 shares of common stock
at $12 per share, which expired on July 21, 1997.
F-19
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE G (continued)
On January 19, 1996, the Company completed an initial public offering
("IPO") of 1,200,000 units for aggregate proceeds of $6,000,000. Each unit
consisted of one share of the Company's common stock, one Class A warrant
to purchase one share of common stock at $10 and one Class B warrant to
purchase one share of common stock at $15. As of December 31, 1998,
1,083,780 Class A warrants were exercised and the balance expired
unexercised. The Class B warrants were originally set to expire in January
1999. The Company extended the expiration date to March 31, 2000. The
Class B warrants are subject to redemption by the Company at $.01 per
warrant. The Company received gross proceeds of approximately $1,282,000
and $10,823,000 and net proceeds of approximately $1,262,000 and
$10,165,000 as a result of the exercise of warrants in 1998 and 1997,
respectively.
In November 1996, the Company completed a private placement of its
securities from which it received gross proceeds of $6,220,797 and net
proceeds of approximately $5,733,000 (after deducting approximately
$487,000 in placement fees and other expenses of such private placement).
The Company sold 959,106 shares of common stock in such private placement
at average prices of $6.49 per share. In addition, the Company granted
five-year warrants to placement agents to purchase such number of shares
equal to 10% of the number of shares of common stock sold by such
placement agents, exercisable at prices equal to 120% of the prices paid
for such shares. Pursuant to the purchasers' request, the Company
registered all 959,106 shares.
During 1992 and 1993, the Company issued warrants to purchase 6,660 shares
at $9.425 per share, and during 1995 the Company issued warrants to
purchase 2,000 shares at $10 per share to members of the Scientific
Advisory Board of the Company. During 1996 and 1997, the Company issued
warrants to purchase 242,101 shares at $6 to $12 per share to the Director
and certain others. These warrants expire at various dates through
November 2001.
F-20
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE G (continued)
On January 20, 1996, the Company granted "lock-up warrants" entitling
shareholders to purchase an aggregate of 389,045 shares of the Company's
common stock at a price of $1.00 per share. All unexercised warrants
expired on January 18, 2000. At different times during 1996, seven persons
exercised such warrants and purchased 33,885 shares of common stock at the
$1.00 per share exercise price. The issuance of such lock-up warrants was
in consideration for such shareholders signing lock-up agreements agreeing
not to sell or transfer shares of the Company's common stock purchased at
prices of $9.00 or more per share until January 20, 1997. At different
times during the third quarter of 1997, eight persons exercised such
warrants and purchased an aggregate of 21,210 shares of common stock at
the $1.00 per share exercise price. During 1998, nine persons exercised
such warrants and purchased an aggregate of 96,077 shares of common stock
at the $1.00 per share exercise price. During 1999, five persons exercised
such warrants and purchased an aggregate of 14,103 shares of common stock
at the $1.00 per share exercise price. There were no underwriting
discounts or commissions given or paid in connection with any of the
foregoing warrant exercises.
During the third quarter of 1997, the Company granted to one person and
its seven designees four-year warrants to purchase an aggregate of 37,500
shares of common stock, at an exercise price of $12.00 per share. Such
warrants are not exercisable until July 18, 1998 and were granted in
consideration for consulting services rendered to the Company.
During the fourth quarter of 1997, the Company granted to one person and
its six designees four-year warrants to purchase an aggregate of 37,500
shares of common stock, at an exercise price of $12.00 per share. Such
warrants are not exercisable until July 18, 1998 and were granted in
consideration for consulting services rendered to the Company.
During 1998, warrants for 18,700 shares, mentioned in the two previous
paragraphs, were exercised utilizing the cashless exercise option of the
warrant agreement. The Company issued 6,204 shares under this exercise.
During the third quarter of 1997, the Company granted to one person a
one-year warrant to purchase an aggregate of 625 shares of common stock,
at an exercise price of $12.00 per share. Such warrants were granted in
consideration for consulting services rendered to the Company. The warrant
was exercised during 1998.
The Company recorded consulting expense of approximately $64,000 as a
result of these grants during the year ended December 31, 1998.
F-21
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE G (continued)
During the fourth quarter of 1997, the Company granted five-year warrants
to its three executive officers to purchase an aggregate of 240,000 shares
of common stock, at an exercise price of $12.00 per share. Such warrants
were granted in consideration for services rendered to the Company. The
exercise of such warrants is contingent upon the occurrence of certain
events, which were considered probable at December 31, 1997. As of
December 31, 1998, five of the six events have occurred so that 185,000 of
those warrants are now vested. As a result, the Company recorded
compensation expense of approximately $80,000 in December 1997 and
$1,185,000 for the year ended December 31, 1998. The balance of the
warrants became vested upon the exercise of warrants owned by a director
in December 1998 in accordance with the terms of certain compensation
provisions as approved by the Company's Board of Directors.
In consideration for services rendered by him as a director of the Company
in the five-year period from 1992 to 1996 for which he never received
compensation, the Company extended by one year to December 31, 1998 the
expiration date of warrants owned by a director to purchase an aggregate
of 86,930 shares, exercisable at $9.425 per share. As a result, the
Company recorded compensation expense of approximately $420,000, during
the fourth quarter of 1997. All of these warrants were exercised on
December 29, 1998.
During the fourth quarter of 1998, the Company granted five-year options
to its three executive officers to purchase an aggregate of 520,750 shares
of common stock, at exercise prices ranging from $12.13 to $12.44 per
share. The exercise of such options was contingent upon the occurrence of
certain events. All of these options became vested upon the exercise of
warrants owned by a director in December 1998 in accordance with the terms
of certain compensation provisions as approved by the Company's Board of
Directors. As a result, the Company recorded compensation expense of
approximately $495,000 in December 1998.
In December 1998, the Company completed a private placement of its
securities from which it received proceeds of $2,000,000. In addition, the
Company granted three-year warrants to the Purchaser to purchase 50,000
shares at $12 per share. The Company sold 200,000 shares of common stock
in such private placement. The Company assigned value to the common stock
and warrants issued of $1,788,698 and $211,302 based upon the relative
fair market value of the stock at the date of issuance and the estimated
fair value of the warrants using the Black-Scholes option pricing model.
F-22
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE G (continued)
In March 1999, the Company completed a private placement of 389,156 shares
of its common stock to twenty investors from which it received proceeds of
approximately $3,405,000. In addition, each investor also received a
three-year warrant to purchase 20% of the number of shares of the
Company's common stock such investor purchased in such private placement.
The prices at which such warrants are exerciseable are $12.50 per share
for one half, and $14.50 per share for the other half, of the number of
shares issuable upon exercise of such warrants. The Company assigned value
to the common stock and warrants issued to the investors of $3,168,785 and
$236,291 based upon the relative fair market value of the stock at the
date of issuance and the estimated fair market value of the warrants using
the Black-Scholes option pricing model. Oscar Gruss & Son, Incorporated
("Gruss") acted as placement agent in such private placement. For its
services as placement agent, the Company paid Gruss $272,406 and granted
Gruss a five-year warrant to purchase an aggregate of 38,915 shares of the
Company's common stock at an exercise price of $10.50 per share. The value
assigned to the Gruss warrants was $232,000. Other share issuance costs
amounted to $106,002.
In December 1999, the Company completed a private placement of 1,636,364
shares of its common stock to two institutional funds from which it
received proceeds of approximately $9,000,000. Share issuance costs
amounted to approximately $9,500.
In March 2000, the Company completed a private placement of 66,667 shares
of its common stock to one fund from which it received proceeds of
approximately $1,000,000. In addition, the Company paid a placement agent
who introduced the Company to the fund a fee of approximately $43,400 and
granted such placement agent a five year warrant to purchase 2,667 shares
of the Company's common stock at an exercise price of $15.00 per share.
The value assigned to the warrant was $23,000, which was reflected as
share issuance costs. Other share issuance costs amounted to $3,200.
In September 2000, the Company completed a private placement of 1,247,566
shares of its common stock to ten investors from which it received
approximately $8,421,000. In addition, the Company paid the placement
agent who introduced the Company to the investors a fee of approximately
$525,400. Other share issuance costs amounted to approximately $46,500.
F-23
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE G (continued)
The following table summarizes warrant activity during the period from
March 12, 1991 (inception) through December 31, 2000 (excluding the Class
A and B warrants which were issued during the IPO):
Price range Shares
----------- ------
March 12, 1991 (inception) to December 31, 1991
Granted $ 9.425 7,360
--------
Balance, December 31, 1991 9.425 7,360
Granted 9.425 55,080
--------
Balance, December 31, 1992 9.425 62,440
Granted 9.425 - 12.00 48,230
--------
Balance, December 31, 1993 9.425 - 12.00 110,670
Granted 12.00 10,000
--------
Balance, December 31, 1994 9.425 - 12.00 120,670
Granted 10.00 4,000
Expired 9.425 (2,680)
--------
Balance, December 31, 1995 9.425 - 12.00 121,990
Granted 1.00 - 10.00 511,606
Exercised 1.00 (33,885)
Expired 12.00 (2,450)
--------
Balance, December 31, 1996 1.00 - 12.00 597,261
Granted 12.00 - 14.25 330,625
Expired 12.00 (10,000)
--------
Balance, December 31, 1997 1.00 - 14.25 917,886
Granted 12.00 - 14.00 75,000
Exercised 1.00 - 12.00 (205,852)
Expired 12.00 (108,425)
--------
Balance, December 31, 1998 (carried forward) 1.00 - 14.25 678,609
F-24
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE G (continued)
Price range Shares
----------- ------
Balance, December 31, 1998 (brought forward) $ 1.00 - 14.25 678,609
Granted 12.50 - 14.50 116,745
Exercised 1.00 (14,103)
Expired 6.00 - 9.425 (17,160)
--------
Balance, December 31, 1999 1.00 - 14.25 764,091
Granted 15.00 2,667
Exercised 12.00 (2,000)
Expired 1.00 -10.00 (154,985)
--------
Balance, December 31, 2000 $ 7.70 - 15.00 609,773
The following table summarizes warrant data as of December 31, 2000:
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life price exercisable price
--------------- ----------- ---- ----- ----------- -----
$7.70 to $10.50 148,976 1.44 years $8.58 148,976 $8.58
$12.00 to $12.50 383,218 1.55 years $12.05 383,218 $12.05
$14.00 to $15.00 77,579 1.96 years $14.32 77,579 $14.32
F-25
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE H - STOCK OPTIONS AND WARRANTS
In April 1996, the Board of Directors and stockholders approved the
adoption of a stock option plan (the "Plan"). The Plan provides for the
grant of options to purchase up to 350,000 shares of the Company's common
stock. These options may be granted to employees, officers of the Company,
nonemployee directors of the Company and consultants to the Company. The
Plan provides for granting of options to purchase the Company's common
stock at not less than the fair value of such shares on the date of the
grant. The options generally vest ratably over a four year period and
expire after seven years.
In August 1998, the stockholders and Board of Directors ratified and
approved an amended and restated 1996 Stock Option Plan increasing the
maximum number of shares of the Company's common stock for which stock
options may be granted from 350,000 to 1,550,000 shares. In August 2000,
the stockholders and Board of Directors ratified and approved the second
amendment to the Company's Amended and Restated 1996 Stock Option Plan
increasing the number of shares of the Company's common stock for which
options have been or could be granted under the Plan from 1,550,000 to
3,000,000 shares. The following table summarizes the stock option activity
through December 31, 2000:
Weighted average
Number exercise price
------ --------------
Granted - adoption of stock option plan 156,000 $ 7.08
---------
Balance, December 31, 1996 156,000 7.08
Granted 123,000 11.94
Forfeited, expired (3,000) 6.63
---------
Balance, December 31, 1997 276,000 9.25
Granted 689,750 12.10
Exercised (6,750) 7.42
Forfeited, expired (14,500) 11.19
---------
Balance, December 31, 1998 944,500 11.17
399,000 10.87
Granted (221,000) 14.93
---------
Forfeited, expired
Balance, December 31, 1999 (carried forward) 1,122,500 10.33
F-26
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE H (continued)
Balance, December 31, 1999 (brought forward) 1,122,500 $10.33
Granted 449,956 7.96
Exercised (3,500) 7.00
Forfeited, expired (44,850) 8.27
Balance, December 31, 2000 1,524,106 $12.30
=========
The following data has been provided for exercisable options:
December 31,
------------
2000 1999 1998
----------- ----------- -----------
Number of options 1,237,706 947,950 793,700
Weighted average exercise price $12.02 $10.74 $11.19
Weighted remaining contractual life 3.95 years 4.18 years 4.7 years
The exercise price for all stock options awarded has been determined by
the Board of Directors of the Company.
The weighted average fair value at the date of grant for options granted
during the year ended December 31, 2000 was $4.37.
The following table summarizes option data as of December 31, 2000:
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life price exercisable price
--------------- ----------- ------------ ------- ----------- ---------
$5.75 to $7.50 547,800 5.6 years $6.42 340,100 $6.40
$8.00 to $10.44 362,806 5.1 years 9.57 289,606 9.55
$10.50 to $14.25 597,500 2.7 years 12.46 593,000 12.47
$14.25 to $21.38 16,000 2.4 years 20.75 15,000 19.66
--------- ---------
1,524,106 $12.30 1,237,706 $12.02
========= ====== ========= ======
F-27
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE H (continued)
In October 1995, the Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation," established financial
accounting and reporting standards for stock-based employee compensation
plans. The financial accounting standards of SFAS No. 123 permit companies
to either continue accounting for stock-based compensation under existing
rules or adopt SFAS No. 123 and reflect the fair value of stock options
and other forms of stock-based compensation in the results of operations
as additional expense. The disclosure requirements of SFAS No. 123 require
companies which elect not to record the fair value in the statement of
operations to provide pro forma disclosures of net income and earnings per
share in the notes to the financial statements as if the fair value of
stock-based compensation had been recorded.
The Company follows Accounting Principles Board Opinion No. 25 and its
related interpretations in accounting for its stock-based compensation
plans.
The Company recognized approximately $1,696,000 of compensation expense
for options and warrants issued to officers and directors of the Company
in 1998. Such options and warrants were accounted for as variable option
grants. Such options and warrants had vested prematurely in December 1998,
upon the exercise of warrants owned by a director of the Company, in
accordance with the terms of certain compensation provisions provided for
and approved by the Company's Board of Directors.
The Company utilized the Black-Scholes option-pricing model to quantify
the expense of options and warrants granted to nonemployees and the pro
forma effects on net loss and net loss per share of the fair value of the
options and warrants granted to employees during the years ended December
31,2000, 1999 and 1998. The following assumptions were made in estimating
fair value.
Year ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
Risk-free interest rate 4.5% 5% 5%
Expected option life 7 years 3 years 3 years
Expected volatility 65% 65% 65%
F-28
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE H (continued)
Had compensation cost been determined under SFAS No. 123 for the years
ended December 31, 2000, 1999 and 1998, net loss and loss per share would
have been increased as follows:
Year ended December 31,
-----------------------
2000 1999 1998
------------ ------------ ------------
Net loss
As reported $(12,129,663) $(10,040,509) $ (8,412,655)
Pro forma $(13,948,132) $(11,149,970) $(11,609,531)
Net loss per share
As reported $ (1.37) $ (1.51) $ (1.43)
Pro forma $ (1.58) $ (1.68) $ (1.97)
In addition, the Company recognized approximately $56,000, $65,000 and
$160,000 in consulting expenses in 2000, 1999 and 1998, respectively, for
options and warrants granted to independent consultants and investment
bankers for services rendered to the Company.
NOTE I - COMMITMENTS AND CONTINGENCIES
Agreement With Dr. Eisenberg
Pursuant to an amended agreement, the Company has engaged the services of
Dr. Eisenberg as a consultant through August 31, 2005. The consulting
agreement may be renewed for an additional two years unless terminated by
either party prior to such renewal period. Under the agreement, Dr.
Eisenberg is obligated to devote twenty hours per week to Company business
and is entitled to an annual compensation for such services with annual
increases, as defined. In addition, Dr. Eisenberg is paid $58 per hour for
services in excess of twenty hours per week. The agreement also provides
for a bonus in the event the Company files for the registration of any
patent. The bonus, which shall be determined by the Board of Directors of
the Company, shall not be less than $30,000 per patent registration, but
may not aggregate more than $60,000 during any twelve-month period. As of
December 31, 1999 and for the cumulative period since inception, no
bonuses have been earned by Dr. Eisenberg. For each of the years ended
December 31, 2000, 1999 and 1998, Dr. Eisenberg earned approximately
$73,000 for consulting services and approximately $688,000 for the period
from inception to December31, 2000, which is included in research and
development expense. Included in accrued professional fees at December 31,
2000 and 1999 are $21,411 and $37,494, respectively, representing unpaid
consulting fees to Dr. Eisenberg.
F-29
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE I (continued)
Supply Agreements
In October 1991, the Company entered into an agreement with Cornell
University Medical College ("Cornell"), a medical institution in New York
City, for Cornell to produce and supply the Company, on an exclusive basis
and using Dr. Eisenberg's technology, all of the cultured skin equivalent
necessary for the Company's use in human clinical tests in the United
States. Fees earned by Cornell amounted to approximately $1,145,000 for
the period from inception to December 31, 1996. The Cornell arrangement
was terminated as of December 31, 1996.
Research Agreement
In January 1997, the Company entered into an agreement with the New Jersey
Center for Biomaterials and Medical Devices (the "New Jersey Center"),
whereby the Company and the New Jersey Center will collaborate on research
focusing on the development of collagen-based biomaterials for soft tissue
repair, specifically targeting the development of a second generation
collagen matrix to be used for the production of the Company's Composite
Cultured Skin. The New Jersey Center is a cooperative research initiative
sponsored by the University of Medicine and Dentistry of New Jersey,
Rutgers University and the New Jersey Institute of Technology, and
receives financial support from the New Jersey Commission of Science and
Technology. The Company contributed $40,000 of the $100,000 cost of such
research in 1998, $45,000 in 1999 and the final $15,000 in 2000.
Occupancy Arrangements
The Company leases approximately 5,000 square feet of space in Sydney,
Australia, on a month-to-month basis, in which the Company operates a
research laboratory to conduct its research and development activities in
Australia and to produce the Composite Cultured Skin used in the
operations conducted in Australia. The Company pays rent in Australian
dollars, which at the current rate of exchange, amounts to approximately
US $26,000 per year. This space is rented from Dr. Mark Eisenberg's father
on terms that the Company believes are not less favorable to it than for
rental of similar space in Sydney, Australia, from nonrelated third
parties.
During the year ended December 31, 1995, Dr. Eisenberg's father waived the
rights to $40,740 of unpaid rent which was accounted for as additional
paid-in capital.
Total rent expense under the lease for the years ended December 31, 2000,
1999 and 1998, was approximately $30,000, $33,000 and $32,000,
respectively.
F-30
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE I (continued)
In March 1996, the Company entered into a five-year lease with Columbia
University for the Company's new laboratory and offices in Columbia's new
Audubon Biomedical Science and Technology Park in New York City.
Construction of the new laboratory and office facility was completed in
July 1996 and became fully operational in November 1996. In 1996, the
Company also granted Columbia a warrant expiring March 2001 to purchase
5,000 shares of common stock at an exercise price of $10 per share. In
addition, Columbia had agreed to provide the Company with a grant of
$400,000 and a ten-year self-amortizing loan with interest at the rate
charged by Columbia's bank for up to an additional $600,000, to build and
equip the Company's laboratory. During 1998, the Company received the
$600,000 loan and an additional grant of $130,000 and entered into two
leases with Columbia for additional space in the building. During 2000,
the Company extended the two leases for another year and entered into a
new lease for additional space in the building. The Company utilizes its
laboratory facilities to produce its Composite Cultured Skin for use in
the remaining FDA-approved human clinical trials and for further research
to develop the Company's proprietary technology for treatment of other
wounds.
The Company conducts a major portion of its operations at a leased
facility in New York, New York. The lease term for the original lease is
five years, expiring in June 2001 and one year for the additional three
leases. The minimum rental payments due over the term of the leases at
December 31, 2000 are as follows:
Year ending December 31,
2001 $304,108
========
Total rent expense under the lease for the years ended December 31, 2000,
1999 and 1998 was approximately $505,100, $454,700 and $241,800,
respectively.
Government Regulation
The Company is subject to extensive government regulation. Products for
human treatment are subject to rigorous preclinical and clinical testing
procedures as a condition for approval by the Food and Drug Administration
("FDA") and by similar authorities in foreign countries prior to
commercial sale. Presently, the Company is continuing to submit the
results of its human clinical trials to the FDA; however, it is not
possible for the Company to determine whether the results achieved from
the human clinical trials will be sufficient to obtain FDA approval.
F-31
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE J - RELATED PARTY TRANSACTIONS
Prior to December 31, 1998, the "Other Founders" were paid fees for
services rendered of approximately $980,000 in the aggregate, for the
period from inception to December 31, 1998. In addition, in 1996, $140,000
was paid to a director as cash compensation for services as placement
agent in connection with the November 1996 private placement. Also, the
director received 30,500 warrants (see Note G).
In December 1997, the Company extended the expiration date on warrants to
the director to purchase 86,930 shares, exercisable at $9.425 per share,
resulting in compensation expense of approximately $420,000 (see Note G).
The Company paid approximately $35,000 and $25,000 for the years ended
December 31, 1997 and 1996, respectively, as fees for accounting services,
to a stockholder (approximately $100,000 for the period from inception to
December 31, 1997). Also during the year ended December 31, 1996, the
Company repaid loans of approximately $247,000 from the net proceeds of
the "IPO" to officers.
Prior to June 1996, the Company's executive offices were located in office
space leased by a company owned by an officer, founder and director of the
Company on a rent-free basis.
Change of Control
In December 1998, the Company's Board of Directors authorized agreements
between the Company and its four executive officers which state that in
the event of a "change of control" certain "special compensation
arrangements" will occur. A "change of control" is defined as a change in
the ownership or effective control of the Company or in the ownership of a
substantial portion of the assets of the Company, but in any event if
certain members of the Company's Board of Directors no longer constitute a
majority of the Board of Directors. In the event that such change of
control occurs, the agreements will provide three of its officers
additional compensation, interest-free loans to exercise their stock
options and warrants, and extensions of the expiration dates of all of
their then outstanding options and warrants. In addition, for all four of
the officers, in the event of a change of control, all unvested options
and warrants will vest immediately upon such change of control.
F-32
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE K - INCOME TAXES
The Company has deferred start-up costs for income tax purposes and
intends to elect to amortize such costs over a period of 60 months, under
Section 195(b) of the Internal Revenue Code, when the Company commences
operations.
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $10,699,000 for Federal and New York State income tax
purposes expiring through 2020. Due to the merger of skin group with and
into Ortec in July 1992, the net operating losses and other built-in
deductions existing at that time were subject to annual limitations
pursuant to Internal Revenue Code Section 382. The Company's ability to
utilize net operating losses and other built-in deductions generated after
that date may be limited in the future due to additional issuances of the
Company's common stock or other changes in control, as defined in the
Internal Revenue Code and related regulations.
For financial statement purposes, a valuation allowance of approximately
$18,206,000 and $12,760,000 at December 31, 2000 and 1999, respectively,
has been recognized to offset entirely the deferred tax assets related to
the Company's operating loss carryforwards and other temporary differences
related to the deferral of start-up expenses for tax purposes, as the
realization of such deferred tax assets is uncertain.
Components of the Company's deferred tax asset are as follows:
December 31,
-----------------------------------
2000 1999
------------ ------------
Net operating loss carryforwards $ 4,922,000 $ 3,295,000
Deferral of start-up costs 13,284,000 9,465,000
------------ ------------
18,206,000 12,760,000
Valuation allowance (18,206,000) (12,760,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
F-33
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE K (continued)
The following reconciles the income taxes computed at the Federal
Statutory rate to the amounts recorded in the Company's statement of
operations:
Year ended December 31, Cumulative from
--------------------------------------------------- March 12, 1991 (inception)
2000 1999 1998 to December 31, 2000
------------ ------------ ------------ --------------------------
Income tax benefit at the
Statutory rate $ (4,124,000) $ (3,414,000) $ (2,860,000) $(14,712,000)
State and local income
taxes, net of Federal
benefit (961,000) (795,000) (666,000) (3,494,000)
Effect of valuation
allowance 5,085,000 4,209,000 3,526,000 18,206,000
------------ ------------ ------------ ------------
Total $ -- $ -- $ -- $ --
============ ============ ============ ============
The Company's net operating loss tax carryforwards expire as follows:
December 31, 2006 $ 76,000
December 31, 2007 233,000
December 31, 2008 511,000
December 31, 2009 597,000
December 31, 2010 440,000
December 31, 2011 677,000
December 31, 2012 839,000
December 31, 2018 1,189,000
December 31, 2019 2,602,000
December 31, 2020 3,535,000
-----------
$10,699,000
===========
F-34
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE L - OPERATIONS IN OTHER GEOGRAPHIC AREAS
Long-lived assets which consists of fixed assets and patents are as
follows as of December 31, 2000 and 1999
2000 1999
---------- ----------
United States $2,246,423 $2,325,036
Australia 61,649 49,971
---------- ----------
$2,308,072 $2,375,007
========== ==========
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"),
"Fair Value of Financial Instruments," requires disclosure of the
estimated fair value of an entity's financial instrument assets and
liabilities. For the Company, financial instruments consist principally of
cash and cash equivalents and loan payable.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value.
Cash and Cash Equivalents
The carrying value reasonably approximates fair value because of the short
maturity of those instruments.
Loan Payable
Based on borrowing rates currently available to the Company for bank loans
with similar terms and maturities, the carrying value of the Company's
loan payable approximates the fair value.
F-35
Ortec International, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000 and 1999
NOTE N - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial for the years ended December 31, 2000 and
1999, is as follows:
Quarter Ended
-------------
March 31, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Total revenue $ 164,467 $ 111,894 $ 139,328 $ 106,198
Net loss $(2,650,531) $(2,248,479) $(2,811,949) $(2,453,741)
Net loss per share
Basic and diluted $ (.32) $ (.36) $ (.33) $ (.37)
Quarter Ended
-------------
September 30, December 31,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Total revenue $ 103,810 $ 90,981 $ 179,018 $ 59,638
Net loss $(3,408,097) $(2,812,363) $(3,259,086) $(2,525,926)
Net loss per share
Basic and diluted $ (.38) $ (.43) $ (.34) $ (.35)
F-36
EXHIBIT INDEX
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)
4.1 Form of Certificate evidencing shares of Common Stock (1)
10.1 Agreement for Consulting Services dated as of June 7, 1991 by and
between the Company and Dr. Mark Eisenberg (1)
23 Consent of Grant Thornton LLP (2)
- ----------
(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.
(2) Filed herewith.