Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
----------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2003
[_] 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
3960 Broadway 10032
New York, New York (Zip Code)
(Address of principal
executive offices)
(212) 740-6999
Issuer's telephone number, including area code
----------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
----------
Indicate by check mark whether the issuer is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
----------
The number of shares outstanding of the issuer's common stock is 26,547,770 (as
of May 9, 2003)
================================================================================
ORTEC INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED March 31, 2003
ITEMS IN FORM 10-Q
Page
----
Facing page
Part I
Item 1. Financial Statements (Unaudited). 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk. None
Item 4. Controls and Procedures 24
Part II
Item 1. Legal Proceedings and Claims. 25
Item 2. Changes in Securities and Use of Proceeds. 25
Item 3. Default Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of
Security Holders. 26
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. 27
Signatures 28
2
Item 1. FINANCIAL STATEMENTS
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002 *
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 697,303 $ 826,227
Accounts receivable 14,324 15,324
Other current assets 28,447 41,904
----------- -----------
Total current assets 740,074 883,455
Property and equipment, at cost:
Laboratory equipment 1,671,700 1,671,075
Office furniture and equipment 1,350,985 1,350,985
Leasehold improvements 1,354,481 1,567,513
----------- -----------
4,377,166 4,589,573
Accumulated depreciation and amortization (3,347,565) (3,207,977)
----------- -----------
Property and equipment - net 1,029,601 1,381,596
----------- -----------
Other assets:
Patent application costs, net of accumulated
amortization of $296,459 at March 31, 2003 and
$279,037 at December 31, 2002 687,210 682,885
Deferred financing costs, net of accumulated
amortization of $9,420 at March 31, 2003 and
$7,933 at December 31, 2002 76,720 78,207
Security deposit - New Jersey location 16,000 639,000
Other deposits and other assets 26,082 33,223
----------- -----------
Total other assets 806,012 1,433,315
----------- -----------
$ 2,575,687 $ 3,698,366
=========== ===========
* Derived from audited financial statements.
See notes to condensed unaudited financial statements.
3
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002 *
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 3,740,617 $ 3,773,063
Accrued compensation 343,614 274,253
Accrued professional fees 417,518 365,945
Capital lease obligation - current 146,607 142,620
Loan payable - current 158,752 155,578
Advances payable 130,000 --
Lease termination liability 348,077 --
Other obligations 15,002,141 13,959,541
------------ ------------
Total current liabilities 20,287,326 18,671,000
Long-term liabilities:
Loan payable - noncurrent 572,507 613,405
Capital lease obligation - noncurrent 176,912 215,093
------------ ------------
Total Liabilities 21,036,745 19,499,498
------------ ------------
Commitments and contingencies
Shareholders' equity/(deficit):
Common stock, $.001 par value; authorized,
200,000,000 shares; 26,567,770 shares issued, 26,547,770 shares
outstanding, at March 31, 2003 and 23,204,693 shares issued, 23,184,693
shares outstanding, at December 31, 2002 26,568 23,205
Redeemable convertible preferred stock - Series B, stated
value $10,000 per share; authorized 1,000,000 shares; 1,138 shares issued
and outstanding, at March 31, 2003; 938 shares issued and outstanding, at
December 31, 2002; liquidation preference $11,382,742 at March 31, 2003
and $9,382,742 at December 31, 2002 6,153,032 5,037,087
Additional paid-in capital 65,731,338 61,174,830
Deficit accumulated during the development stage (90,194,351) (81,858,609)
Treasury stock, at cost (20,000 shares at March 31, 2003
and December 31, 2002 (177,645) (177,645)
------------ ------------
(18,461,058) (15,801,132)
------------ ------------
$ 2,575,687 $ 3,698,366
============ ============
* Derived from audited financial statements.
See notes to condensed unaudited financial statements.
4
ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative
from
March 12, 1991
Three Months Ended March 31, (inception) to
2003 2002 March 31, 2003
----------- ------------ --------------
Product revenue $ -- $ 116,415 $ 265,665
----------- ------------ ------------
Expenses
Research and development 356,265 1,153,837 21,552,172
Rent 244,965 174,737 3,107,616
Consulting (32,282) 169,872 5,685,059
Personnel 970,570 2,073,443 30,360,889
General and administrative 630,022 910,576 15,414,603
Interest and other expense 1,068,551 784,181 9,369,161
Interest income (14,669) (6,093) (2,271,765)
Lease termination costs 1,130,243 -- 1,130,243
Loss on extinguishment of debt and series
A preferred shares -- -- 1,004,027
----------- ------------ ------------
4,353,665 5,260,553 85,352,005
----------- ------------ ------------
Net loss (4,353,665) (5,144,138) (85,086,340)
Preferred stock dividends 923,077 -- 2,049,011
Accretion of discount 3,059,000 -- 3,059,000
----------- ------------ ------------
Net loss applicable to common shareholders $(8,335,742) $ (5,144,138) $(90,194,351)
=========== ============ ============
Net loss per share
Basic and diluted $ (.34) $ (.53) $ (15.90)
=========== ============ ============
Weighted average shares outstanding
Basic and diluted 24,871,360 9,691,608 5,671,714
=========== ============ ============
See notes to condensed unaudited financial statements.
5
Ortec International, Inc.
(a development stage enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)
Common stock Preferred stock Additional
------------------ --------------- paid-in
Shares Amount Shares Amount capital
--------- ------ ------ ------ ----------
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
--------- ------ ----------
Balance at December 31, 1991 1,973,300 1,973 792,779
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
--------- ------ ----------
Balance at December 31, 1992 2,054,440 2,054 1,522,692
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
--------- ------ ----------
Balance at December 31, 1993 (carried forward) 2,319,521 2,319 3,819,719
Deficit
accumulated
during the Total
development Treasury shareholders'
stage stock equity/(deficit)
----------- -------- ----------------
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) (281,644)
----------- -----------
Balance at December 31, 1991 (281,644) 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) 299,99
Share issuance expenses (35,477)
Net loss (785,941) (785,941)
----------- -----------
Balance at December 31, 1992 (1,067,585) 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) (1,445,624)
----------- -----------
Balance at December 31, 1993 (carried forward) (2,513,209) 1,308,829
6
Ortec International, Inc.
(a development stage enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT) (continued)
Common stock Preferred stock Additional
------------------ --------------- paid-in
Shares Amount Shares Amount capital
--------- ------ ------ ------ -----------
(brought forward) 2,319,521 $2,319 $ 3,819,719
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
--------- ------ -----------
Balance at December 31, 1994 2,408,972 2,409 4,708,644
Rent forgiveness 40,740
Net loss
--------- ------ -----------
Balance at December 31, 1995 2,408,972 2,409 4,749,384
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
--------- ------ -----------
Balance at December 31, 1996 (carried forward) 4,601,963 4,602 15,573,183
Deficit
accumulated
during the Total
development Treasury shareholders'
stage stock equity/(deficit)
----------- -------- ----------------
(brought forward) $(2,513,209) $ 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) (1,675,087)
----------- -----------
Balance at December 31, 1994 (4,188,296) 522,757
Rent forgiveness 40,740
Net loss (1,022,723) (1,022,723)
----------- -----------
Balance at December 31, 1995 (5,211,019) (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) (2,649,768)
----------- -----------
Balance at December 31, 1996 (carried forward) (7,860,787) 7,716,998
7
Ortec International, Inc.
(a development stage enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT) (continued)
Common stock Preferred stock Additional
------------------ --------------- paid-in
Shares Amount Shares Amount capital
--------- ------ ------ ------ -----------
(brought forward) 4,601,963 $4,602 $15,573,183
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
--------- ------ -----------
Balance at December 31, 1997 5,760,734 5,761 26,397,307
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
--------- ------ -----------
Balance at December 31, 1998 6,182,220 6,182 31,550,954
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
--------- ------ -----------
Balance at December 31, 1999 (carried forward) 8,221,843 8,222 43,644,902
Deficit
accumulated
during the Total
development Treasury shareholders'
stage stock equity/(deficit)
------------ --------- ----------------
(brought forward) $ (7,860,787) $ 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) (4,825,663)
------------ ------------
Balance at December 31, 1997 (12,686,450) 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) (8,412,655)
------------ --------- ------------
Balance at December 31, 1998 (21,099,105) (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) (10,040,509)
------------ --------- ------------
Balance at December 31, 1999 (carried forward) (31,139,614) (142,790) 12,370,720
8
Ortec International, Inc.
(a development stage enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT) (continued)
Common stock Preferred stock Additional
------------------ --------------- paid-in
Shares Amount Shares Amount capital
--------- ------ ------ ------ -----------
(brought forward) 8,221,843 $8,222 $43,644,902
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
--------- ------ -----------
Balance at December 31, 2000 9,711,608 9,712 52,829,535
Stock options issued for services 188,080
Net loss
--------- ------ -----------
Balance at December 31, 2001 9,711,608 9,712 53,017,615
Deficit
accumulated
during the Total
development Treasury shareholders'
stage stock equity/(deficit)
------------ --------- ----------------
(brought forward) $(31,139,614) $(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) (12,129,663)
----------- --------- ------------
Balance at December 31, 2000 (43,269,277) (177,645) 9,392,325
Stock options issued for services 188,080
Net loss (15,885,377) (15,885,377)
----------- --------- ------------
Balance at December 31, 2001 (59,154,654) (177,645) (6,304,972)
The accompanying notes are an integral part of this statement.
9
Ortec International, Inc.
(a development stage enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT) (continued)
Common stock Preferred stock Additional
-------------------- -------------------- paid-in
Shares Amount Shares Amount capital
---------- ------- ------ ----------- -----------
(brought forward) 9,711,608 $ 9,712 $53,017,615
Exercise of options and warrants 357,227 357
Stock options and warrants issued for services 113,060
Warrants issued with convertible debentures 440,523
Warrants issued with convertible redeemable
preferred stock 559,289
Convertible debenture conversion benefit 1,042,663
Redeemable convertible preferred stock
conversion benefit 1,097,886
Issuance of preferred stock 938 $ 9,382,742
Warrants issued with preferred stock 9,382,742 9,383 (3,479,043) 3,476,998
Share issuance costs - preferred stock (866,612) 304,615
Preferred stock dividends 3,753,116 3,753 1,122,181
Net loss
---------- ------- ----- ----------- -----------
Balance at December 31, 2002 23,204,693 23,205 938 5,037,087 61,174,830
Exercise of options and warrants 2,440,000 2,440 (1,905)
Issuance of preferred stock 200 2,000,000
Warrants issued with preferred stock (490,567) 490,567
Redeemable convertible preferred stock
conversion benefit 3,059,000
Share issuance costs - preferred stock (393,488) 86,692
Preferred stock dividends 923,077 923 922,154
Net loss
---------- ------- ----- ----------- -----------
Balance at March 31, 2003 26,567,770 $26,568 1,138 $ 6,153,032 65,731,338
========== ======= ===== =========== ===========
Deficit
accumulated
during the Total
development Treasury shareholders'
stage stock equity/(deficit)
------------ --------- ----------------
(brought forward) $(59,154,654) $(177,645) $ (6,304,972)
Exercise of options and warrants 357
Stock options and warrants issued for services 113,060
Warrants issued with convertible debentures 440,523
Warrants issued with convertible redeemable
preferred stock 559,289
Convertible debenture conversion benefit 1,042,663
Redeemable convertible preferred stock
conversion benefit 1,097,886
Issuance of preferred stock 9,382,742
Warrants issued with preferred stock 7,338
Share issuance costs - preferred stock (561,997)
Preferred stock dividends (1,125,934)
Net loss (21,578,021) (21,578,021)
------------ --------- ------------
Balance at December 31, 2002 (81,858,609) (177,645) (15,801,132)
Exercise of options and warrants 535
Issuance of preferred stock 2,000,000
Warrants issued with preferred stock
Redeemable convertible preferred stock
conversion benefit (3,059,000)
Share issuance costs - preferred stock (306,796)
Preferred stock dividends (923,077)
Net loss (4,353,665) (4,353,665)
------------ --------- ------------
Balance at March 31, 2003 (90,194,351) (177,645) (18,461,058)
============ ========= ============
10
Ortec International, Inc.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
(Unaudited)
Cumulative from
March 12, 1991
Three Months Ended March 31, (inception) to
2003 2002 March 31, 2003
----------- ----------- ---------------
Cash flows from operating activities
Net loss $(4,353,665) $(5,144,138) $(85,086,340)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 157,010 175,559 3,990,030
Amortization of deferred financing costs 1,487 324,712
Unrealized loss on marketable securities 11,404
Realized loss on marketable securities 5,250
Loss on sale of property and equipment 8,364
Lease termination costs 1,130,243 1,130,243
Non-cash stock compensation 755,257 3,154,231
Non-cash imputed interest 1,042,633 8,355,059
Loss on extinguishment of debt and series A
preferred stock 1,004,027
Purchases of marketable securities (19,075,122)
Sales of marketable securities 19,130,920
Changes in operating assets and liabilities
Accounts receivable 1,000 (51,740) (14,324)
Other current assets and other assets 20,598 (29,417) 39,729
Accounts payable and accrued liabilities 142,354 386,110 4,583,942
------------ ----------- ------------
Net cash used in operating activities (1,858,340) (3,908,369) (62,437,875)
------------ ----------- ------------
Cash flows from investing activities
Purchases of property and equipment, excluding
capital leases (625) (128,259) (4,454,522)
Proceeds from sale of property and equipment 56,901
Payments for patent applications (21,747) (97,741) (981,889)
Organization costs (10,238)
Deposits 31,629 (731,273)
Purchases of marketable securities (594,986)
Sale of marketable securities 522,532
------------ ----------- ------------
Net cash provided by (used in) investing
activities (22,372) (194,371) (6,193,475)
------------ ----------- ------------
11
Ortec International, Inc.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Cumulative from
March 12, 1991
Three Months Ended March 31, (inception) to
2003 2002 March 31, 2003
---------- ---------- ---------------
Cash flows from financing activities
Proceeds from issuance of notes payable $ 515,500
Proceeds from issuance of common stock 53,550,522
Proceeds from exercise of warrants $ 535 8,229
Share issuance expenses and other financing costs (306,796) (4,818,472)
Purchase of treasury stock (177,645)
Proceeds from issuance of loans payable 1,446,229
Proceeds from other obligations $4,000,000 10,000,000
Proceeds from issuance of convertible debentures 5,908,000
Proceeds from issuance of redeemable preferred
stock - series A 1,200,000
Proceeds from issuance of preferred stock - series B 2,000,000 3,070,000
Advances received 130,000 130,000
Repayment of capital lease obligations (34,194) (21,432) (233,126)
Repayment of loan payable (37,724) (34,797) (743,902)
Repayment of other obligations (33) (11,182)
Repayment of notes payable (515,500)
---------- ---------- -----------
Net cash provided by financing activities 1,751,788 3,943,771 69,328,653
---------- ---------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (128,924) (158,969) 697,303
Cash and cash equivalents at beginning of period 826,227 854,025 --
---------- ---------- -----------
Cash and cash equivalents at end of period $ 697,303 $ 695,056 $ 697,303
========== ========== ===========
12
Ortec International, Inc.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Cumulative from
March 12, 1991
Three Months Ended March 31, (inception) to
2003 2002 March 31, 2003
-------- -------- ---------------
Supplemental disclosures of cash flow information:
Noncash financing activities
Capital lease obligations $ -- $268,644 $ 568,344
Deferred offering costs included in
accrued professional fees -- -- 314,697
Financing costs - other long-term obligations
included in accrued expenses -- -- 59,500
Forgiveness of rent payable -- -- 40,740
Share issuance expenses - warrants -- -- 255,000
Dividends on series B preferred stock paid in
common shares 923,077 -- 2,049,011
Accretion of discount on preferred stock 3,059,000 -- 3,059,000
Share issuance expenses for series B preferred
stock incurred through issuance of warrants 86,692 -- 391,307
Cash paid for interest 25,000 26,876 569,858
Cash paid for income taxes -- -- 199,576
See notes to condensed unaudited financial statements.
13
ORTEC INTERNATIONAL, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003 and 2002
NOTE 1 - FINANCIAL STATEMENTS
The condensed balance sheet as of March 31, 2003, and the condensed statements
of operations and cash flows for the three month periods ended March 31, 2003
and 2002, and statements of shareholders' equity for the period from March 12,
1991 (inception) to March 31, 2003, have been prepared by the Company and are
unaudited. In the opinion of management, all adjustments (which include only
normal recurring accrual adjustments) necessary to present fairly the financial
position as of March 31, 2003, results of operations and cash flows for the
period from March 12, 1991 (inception) through March 31, 2003, have been made.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and notes thereto in the Company's December 31, 2002,
annual report on Form 10-K filed with the Securities and Exchange Commission.
The results of operations for the three month periods ended March 31, 2003, are
not necessarily indicative of the operating results for the full year.
NOTE 2 - FORMATION OF THE COMPANY AND BASIS OF PRESENTATION
Formation of the Company
Ortec International, Inc. ("Ortec" or the "Company") was incorporated in March
1991 as a Delaware corporation to secure and provide funds for the further
development of the technology developed by Dr. Mark Eisenberg of Sydney,
Australia, to replicate in the laboratory, a tissue engineered skin substitute
for use in skin regeneration procedures (the "Technology"). Pursuant to a
license agreement dated September 7, 1991, Dr. Eisenberg had granted Ortec a
license for a term of ten years, with automatic renewals by Ortec for two
additional ten year periods, to commercially use and exploit the Technology for
the development of products. In April, 1998, Dr. Eisenberg assigned his patent
for the Technology to Ortec.
Basis of Presentation
Ortec is a development stage enterprise, which had no operating revenue prior to
December 2001. During 2001, the Company received Food and Drug Administration
("FDA") approval for the use of its product, OrCel, for treatment of
Epidermolysis Bullosa and donor sites in burn patients. The Company then began
marketing and selling its product for use on patients with these indications.
Revenues to date have not been significant, as the Company has been focusing its
efforts and resources towards its clinical trial for use of OrCel for the
treatment of venous stasis ulcers.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss of
$5.3 million during the three months ended March 31, 2003, and, as of that date,
the Company's current liabilities exceeded its current assets by $19.5 million,
its total liabilities exceeded its total assets by $18.5 million and the Company
has an accumulated deficit in its development stage of $90.2 million. These
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
On March 27, 2002, the Company engaged H.C. Wainwright & Co., Inc.
("Wainwright") an investment banking firm, to act as its financial advisor in
connection with raising capital for the Company through debt and/or equity
financing. During 2002, Wainwright assisted the Company in raising financing of
approximately $8.2 million and has raised an additional $2.0 million on February
26, 2003. While the Company can give no assurance of the total amount of
financing that will be secured, Wainwright is continuing to assist the Company
in raising financing in 2003. The Company has received a commitment to close on
$4.0 million to $6.0 million of preferred equity financing in May 2003 from
investors, some of whom have previously participated in the $10.2 million raised
through March 31, 2003. This will enable the Company to complete its venous
clinical pivotal trial, file its PMA with the FDA and execute its plan to engage
the services of a third party manufacturer. Accomplishing these milestones could
also enable the Company to raise an additional $5.0 million in 2003, through
other potential collaborative arrangements with companies for sales, marketing
and distribution of its product and through other equity investments. The
Company requires substantial funding to continue its research and development
activities, clinical trials, manufacturing, marketing, sales, distribution, and
administrative activities. The Company believes that its cash and cash
equivalents on hand at March 31, 2003, (approximately $.7 million), the
additional $4.0 million to $6.0 million committed to in May 2003, as well as the
additional $5.0 million anticipated to be raised in 2003 will enable it to
continue its operations for the next 12 months.
Additionally, the Company continues to explore and, as appropriate, enter into
discussions with other companies regarding the potential for equity investment,
collaborative arrangements, license agreements or other funding programs with
the Company, in exchange for manufacturing, marketing, distribution or other
rights to our product. However, the Company can give no assurance that
discussions with other companies will result in any additional investments,
collaborative arrangements, agreements or other funding, or that the necessary
additional financing through debt or equity financing will be available to the
Company on acceptable terms, if at all. If additional funding is not available
when needed, the Company may not be able to continue operations.
These financial statements have been prepared assuming that the Company will
continue as a going concern. Successful future operations depend upon the
successful development and marketing of the Company's product. Historically the
Company has funded its operating losses by periodically raising additional
sources of capital. If additional funding is not available to the Company when
needed, the Company may not be able to continue operations. No adjustments have
been made to the accompanying financials as a result of this uncertainty.
NOTE 3 - NET LOSS PER SHARE
As of March 31, 2003, an aggregate of 16,118,429 outstanding warrants and
options were excluded from the weighted average share calculations, as the
effect was antidilutive. An aggregate of 11,382,742 shares of common stock, if
converted at $1.00 per share or 45,530,968 common shares, if converted at the
floor rate of $.25 per share, would be issuable upon the conversion of preferred
stock outstanding at March 31, 2003. These were also excluded from the
calculation of diluted net loss per share at March 31, 2003. As of March 31,
2002, an aggregate of 2,477,788 outstanding warrants and options were excluded
from the weighted average share calculations, as the effect would be
antidilutive. Basic loss per share, for the quarter ended March 31, 2003,
includes 376,923 warrants, exercisable at $.001 per share reflected as
outstanding from the date of grant and 440,000 options which were granted in
2002, were exercised in February 2003 and considered outstanding for the entire
quarter.
NOTE 4 - EMPLOYEES STOCK OPTIONS
As permitted by SFAS 148, the Company continues to account for its employee
stock options under the recognition and measurement principles of APB Opinion
No. 25, "Accounting for Stock Issued to Employees", and related Interpretations.
No stock-based employee compensation cost is reflected in net loss for the
quarter ended March 31, 2003, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net loss and loss
per share for the quarter ended March 31, 2003 and 2002, if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation".
Quarter ended Quarter ended
March 31, 2003 March 31, 2002
-------------- --------------
Net loss, as reported $(8,335,742) $(5,144,138)
----------- -----------
Deduct: Total stock-based employee compensation expense
determined under fair value based method (183,000) (192,000)
----------- -----------
Pro forma net loss $(8,518,742) (5,336,138)
----------- -----------
Loss per share:
Basic and Diluted - as reported $ (.34) $ (.53)
----------- -----------
Basic and Diluted - pro forma $ (.34) $ (.55)
----------- -----------
NOTE 5 - OTHER OBLIGATIONS
On August 29, 2001, the Company entered into a Royalty Revenue Interest
Assignment agreement with Paul Capital Royalty Acquisition Fund L.P. ("Paul
Capital"), which terminates on August 29, 2011. Under such agreement the Company
was eligible to receive $10,000,000 during 2001. The Company received $6,000,000
during 2001 and the remaining $4,000,000 in January 2002. In February 2003, Paul
Capital and the Company signed an amendment to the agreement, restating and
updating certain provisions of the original agreement, including removing
additional funding requirements by Paul Capital. On February 26, 2003, Paul
Capital invested an additional $500,000 in Series B preferred stock, in
concurrence with this amendment, which is included in the overall Series B
convertible preferred financing (Note 8).
In consideration for the $10,000,000 million, Paul Capital will receive a
minimum of 3.33% of end user sales of the Company's products in the United
States, Canada and Mexico. Such percentage may be further adjusted upward or
downward, based on the volume of net sales to end users of the Company's
products in those three countries. Beginning January 1, 2003, Paul Capital is
entitled to receive each year advances from the first proceeds to the Company
from end user sales of its products in North America. The agreement provides for
quarterly and annual accountings between Paul Capital and the Company for those
advance payments.
Such annual amounts that Paul Capital will be able to draw in advance range from
$600,000 in 2003 to $7,500,000 in 2005 and thereafter. The amounts received from
Paul Capital have been classified as debt. Pursuant to the default provisions
under the agreement, interest has been accrued at 30% per annum. At such time
when the default provisions are no longer applicable, interest will be accrued
based upon the expected level of future revenues, which may result in a lower
imputed interest rate, with potential material lower interest expense.
As defined in the agreement, in the event of a change in control of the Company
or upon the occurrence of certain other events, including insolvency, Paul
Capital has the option to put its revenue interest back to the Company for an
amount of cash flows which will generate a 30% interest rate of return to Paul
Capital. The Company also has the option to repurchase Paul Capital's interest
upon the occurrence of a change in control of the Company or a complete
divestiture by the Company of its interest in its products, for an amount of
cash flows, which will generate a 35% internal rate of return to Paul Capital.
At December 31, 2002 and at March 31, 2003, the Company's liabilities exceeded
the value of its assets and as such, the Company was technically in default of
the solvency requirement under the Paul Capital agreement. Paul Capital is aware
of this breach and in discussions with management regarding this issue, has
indicated to the Company that it presently does not intend to exercise its
option to require the Company to repurchase its revenue interest.
The Company granted Paul Capital a security interest in its United States and
Canadian patents and trademarks relating to its technology for its OrCel
product, to secure payments required to be made by the Company to Paul Capital
under this agreement.
NOTE 6 - LEGAL PROCEEDINGS, CLAIMS AND OTHER CONTINGENCIES
ClinTrials Networks, LLC (ClinTrials) has claimed that the Company has breached
its agreement with them, which provided for ClinTrials to arrange and manage a
portion of the FDA mandated clinical trial for use of our OrCel product for the
treatment of venous stasis ulcers, and for other services. In October 2002,
ClinTrials commenced an arbitration proceeding against the Company, claiming
that the Company owes ClinTrials $165,936 and that ClinTrials reserves the right
to claim additional amounts from the Company, based on continuing additional
monthly fees ClinTrials claims that it is entitled to receive under their
agreement with us. The Company has denied ClinTrials' claim and has advised
ClinTrials that it is not in breach of its contract. In March 2003, the Company
filed a counterclaim for overpayment of $75,000 under the terms of the contract,
and as such, the Company has not provided for any additional amounts due under
this contract. An arbitration hearing is scheduled for June 2003.
During the quarter ended September 30, 2002, PDI, Inc. commenced an action
against the Company in the Superior Court of New Jersey, Bergen County, claiming
that the Company owes $196,762, plus interest, to PDI for services that they
have performed. The Company has reached an agreement with PDI to pay $150,000
in settlement of the amount claimed. The Company has provided for the
settlement amount owed.
On August 5, 2002, the Company entered into an agreement with the New Jersey
Economic Development Administration (NJEDA) to lease approximately 26,000 square
feet of production and office space, modifying an original lease for
approximately 58,000 square feet. Monthly payments under such lease were
scheduled to begin on January 1, 2003. As of March 31, 2003, the Company had not
paid its February and March rent of approximately $71,000 due under such lease,
however as the Company was in discussion with NJEDA regarding termination or
deferral of this lease no default notice has been served under this lease. In
April 2003 the Company and NJEDA agreed to terminate this lease. Based on the
negotiations to date and the currently proposed terms of this termination
settlement, which is subject to agreement by both parties and formal approval by
NJEDA, Ortec has estimated a termination cost of approximately $.9 million,
which includes $.3 million in settlement costs and $.6 million to reimburse
NJEDA for construction and other costs incurred to date. These termination costs
will be settled by applying the $623,000 security deposit, plus accrued interest
thereon, with the balance due within 30 days of an agreement. In conjunction
with the proposed terms of the settlement, NJEDA will also be granted 100,000
warrants to purchase common stock at an exercise price of $1.00 per common
share which were valued at $3,000 at March 31, 2003. Also included in lease
termination costs on the statement of operations is the write-off of $.2
million of leasehold improvements.
Ortec has executed a letter of intent with a third party manufacturer for the
production of OrCel and is currently negotiating the terms of a final contract.
These negotiations encompass the lease of production space as well as production
personnel needed for the manufacture of OrCel product. Upon completion of these
negotiations, the Company will be able to produce the large quantities of OrCel
that will be required upon the anticipated receipt of FDA approval for the sale
of product for use in the treatment of patients with venous stasis ulcers.
NOTE 7 - STOCK OPTIONS AND WARRANTS
The following represents stock option and warrant activity during the three
months ended March 31, 2003:
Stock Options Warrants Total
------------- ---------- ----------
Balance at December 31, 2002 2,872,117 11,172,109 14,044,226
Granted 265,000 4,376,923 4,641,923
Exercised -- (2,440,000) (2,440,000)
Expired or cancelled (127,720) -- (127,720)
--------- ---------- ----------
Balance at March 31, 2003 3,009,397 13,109,032 16,118,429
========= ========== ==========
Additionally, as of March 31, 2003, there were 3,800,000 stock options
outstanding that were granted outside of the plan.
The Company utilized the Black-Scholes option-pricing model to quantify the
expense of options and warrants granted to non-employees and the pro forma
effect on net loss and net loss per share of the fair value of the options and
warrants granted to employees during the quarter ended March 31, 2003. The
Company issued 4,376,923 warrants to non-employees during this period, which
were all issued in conjunction with the preferred stock financing. The fair
market value of these warrants was recorded as equity financing costs. No
options were granted to non-employees during this period. During the quarter
ended March 31, 2003, 265,000 options were granted to employees.
The Company accounts for its employee stock options under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. No stock-based employee compensation
cost is reflected in net loss for the quarter ended March 31, 2003, as all
options granted under this plan had an exercise price equal to the market value
of the underlying common stock on the date of grant.
NOTE 8 - PREFERRED STOCK ISSUANCES
In February 2003, Ortec received additional gross proceeds of $2 million from
five of the investors, including Paul Capital (Note 5), who had purchased the
Company's Series B convertible preferred stock in November and December 2002,
and from one new investor. The Company issued to such six investors 200 shares
of Series B convertible preferred stock, 2,923,077 shares of common stock
(including 923,077 shares of common stock constituting the first year's
dividends on such 200 shares of Series B convertible preferred stock, which
dividends were paid in advance and 2,000,000 shares of common stock, which
were issued upon exercise of Series A warrants exercised at $.001 per share)
and warrants to purchase an additional 2,000,000 shares of common stock, of
which warrants to purchase 1,000,000 shares are exercisable at $1.50 per share
and warrants to purchase the other 1,000,000 shares are exercisable at $2.00
per share. In March 2003, in addition to cash compensation, Ortec also granted
to Wainwright for its services in arranging such February 2003 Series B
financing, and to one designee of Wainwright's, warrants to purchase an
aggregate of 376,923 shares of common stock, exercisable at $0.001 per share.
The Company assigned values to the preferred stock and the Series A, Series B-1
and Series B-2 warrants issued to the investors of $1,509,434, $347,170, $75,472
and $67,925, respectively, based upon the relative fair market value of the
Series B Preferred stock at the date of issuance and the estimated fair market
value of the warrants, using the Black-Scholes option pricing model. The Company
valued the options granted to Wainwright at $87,000, using the Black-Scholes
option pricing model. All of the above were reflected as share issuance costs
related to the preferred stock.
The Company incurred $307,000 of financing fees relating to the preferred stock,
which were paid in cash (of which $106,000 were reimbursements to Paul Capital
pursuant to the terms of the Amended and Restated Agreement signed on February
26, 2003).
Additionally, since the conversion price of the preferred stock may be adjusted
after February 1, 2003, the Company recognized an aggregate of $3,059,000 of
additional discounts on the preferred issuances in 2003 and 2002 when calculated
as of March 31, 2003 based upon the lowest available conversion price of $.25
per share. This conversion feature was charged to retained earnings as accretion
of discount as of March 31, 2003.
NOTE 9 - ADVANCES FROM THIRD PARTIES
During the quarter ended March 31, 2003, the Company received non-interest
bearing advances of $130,000 from certain investors.
NOTE 10 - SUBSEQUENT EVENTS
As noted in Note 2, the Company has received commitment to close on $4.0 million
to 6.0 million of preferred equity financing in May 2003 from investors, some of
whom have previously participated in the $10.2 million raised through March 31,
2003. This proposed financing consists of Series C convertible preferred shares
at stated value of $6,000 per share, convertible into common shares at an
initial conversion rate of $.20 per share. Dividends will be paid in cash or
common shares at the option of the Company, at the rate of 6% per annum,
increasing to 10% per annum beginning January 1, 2005. Beginning 180 days from
issue, the Series C convertible preferred stock shall automatically convert, if
the common stock of the Company trades at a price equal to or greater than $.60
per share for a period of 10 consecutive trading days. Additionally, each
investor will be issued 12,000 five-year warrants for each Series C convertible
preferred share purchased. The Series C warrants have an exercise price of $.36
per common share. Beginning twenty-four months after the Closing, the Company
may redeem the Series C warrants for $.01 per warrant if its common stock closes
above $1.08 per share for 10 consecutive trading days.
Concurrently with the closing of this Series C convertible preferred financing,
a majority in interest of the holders of the Company's Series B convertible
preferred stock would agree to convert their preferred shares into common
shares, at the fixed conversion rate of $.25 per share. Additionally, the
exercise price of the Company's outstanding B-1 and B-2 warrants would be
adjusted to $.40 per share and $.50 per share, respectively, for those holders
who convert their Series B convertible preferred shares into common shares. The
B-1 and B-2 warrants would be redeemable for $.01 per share if the Company's
common stock closes above $1.00 and $1.25, respectively, for 10 consecutive
trading days.
Upon completion of this Series C convertible preferred financing and Series B
conversion, the Company plans on implementing a one to ten reverse common stock
split, whereby each investor will be issued one new common stock or common stock
equivalent for every ten shares or common stock equivalents owned prior to the
reverse split. Upon completion of the one for ten reverse stock split and an
estimated $6.0 million in Series C convertible preferred financing, the Company
will have approximately 10 million common shares or equivalents outstanding, as
well as approximately 2,462,000 warrants and 761,000 options, which includes
693,000 warrants exercisable at $4.00 per share, 569,000 warrants exercisable at
$5.00 per share, 1,200,000 warrants exercisable at $3.60 per share, 550,000
options exercisable between $2.00 and $6.00 per share and 211,000 options and
warrants exercisable at prices of $10.00 per share and above.
Item 2. 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.
Forward Looking Information May Prove Inaccurate
This Quarterly Report on Form 10-Q contains certain forward looking statements
and information relating to Ortec that are based on the beliefs of management,
as well as assumptions made by and information currently available to us. When
used in this document, the words "anticipate," "believe," "estimate," and
"expect" and similar expressions, as they relate to Ortec, are intended to
identify forward looking statements. Such statements reflect our current views
with respect to future events and are subject to certain risks, uncertainties
and assumptions, including those described in this discussion and elsewhere in
this Quarterly Report on Form 10-Q. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. We do not intend to update these forward
looking statements.
General
Since our inception we have been principally engaged in the research and
development of our tissue engineered skin regeneration product, for use in the
treatment of chronic and acute wounds, such as venous and diabetic skin ulcers,
and autograft donor site wounds for burn victims. We call our product OrCel'TM'
and in June 2001 we filed a trademark application for such name with the United
States Patent and Trademark Office.
In February 2001 we received FDA approval to make commercial sales of OrCel for
use on patients with recessive dystrophic epidermolysis bullosa, followed by FDA
approval in September 2001 for use of the product in the treatment of donor site
wounds in burn patients. With these approvals, though we are still a development
stage enterprise, in December 2001 we began commercial sales of our product.
During 2002, we engaged a sales force organization to actively pursue sales of
our product, but due to a reduction in anticipated financing, we curtailed these
activities in the second half of 2002. As a result of this curtailment, there
have been no sales of our product in the current quarter.
From inception to date, we have incurred cumulative net losses of approximately
$90.2 million. We expect to continue to incur substantial losses through 2004,
due to continued spending on research and development programs, the funding of
clinical trials and regulatory activities and the increased personnel costs of
manufacturing, marketing and sales, distribution and administrative activities.
We are currently conducting a pivotal clinical trial using OrCel in the
treatment of venous stasis ulcers. Venous stasis ulcers are open lesions on the
legs, which result from the poor circulation of blood returning from the legs to
the heart. As of May 2, 2003, we have enrolled 106 patients to participate in
the pivotal clinical trial and we are anticipating a total enrollment of 120
patients to complete the trial. We expect to complete the venous stasis pivotal
clinical trials during the second quarter of 2003, with submission of the FDA
filing in September 2003. We anticipate obtaining FDA approval early in 2004 for
the use of our OrCel product in the treatment of venous stasis ulcers.
In June 2002, we received approval from the FDA to initiate a pivotal clinical
trial using OrCel in the treatment of diabetic foot ulcers. Diabetic ulcers are
open sores that remain after the destruction of surface tissue. We have deferred
the implementation of the diabetic foot ulcers pivotal clinical trial and expect
to resume this trial in the second half of 2003 dependent on obtaining
sufficient additional financing, with FDA approval anticipated by the end of
2004.
We are in negotiations with and we have received a letter of intent from a third
party manufacturer for the production of OrCel. If these negotiations are
successful, we will be able to produce the large quantities of OrCel that will
be required upon the anticipated receipt of FDA approval for the sale of our
product for use in the treatment of patients with venous stasis ulcers.
Concluding an agreement with the third party manufacturer will allow us to avoid
the costlier plan of constructing our owned manufacturing facility. We are also
concurrently in the process of evaluating various sales and marketing
collaborative arrangements.
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 additional regulatory approvals, our ability to
successfully manufacture, market and distribute OrCel 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 through 2004.
Critical Accounting Estimates
Revenue Recognition. Revenues from sales are recognized upon shipment of product
to customers.
Research and Development Costs. As we are still engaged in clinical trials of
our product and remain a development stage enterprise, the cost of producing
product for clinical trials and for sale, is included in Research and
Development costs. All research and development costs, including consulting and
personnel costs, are expensed as incurred.
Other Obligations. We account for our Revenue Interest Assignment Agreement in a
manner similar to that of debt and provide for interest to reflect the estimated
cost of the funds anticipated under the terms of the agreement. Pursuant to the
default provisions under the agreement, interest is accrued at 30% per annum. At
such time when the default provisions are no longer applicable, interest will be
accrued based upon the expected level of future revenues, which may result in a
lower imputed interest rate, with potential material lower interest expense.
Results of Operations
Three Months Ended March 31, 2003, and March 31, 2002.
Revenues
We earned revenues of approximately $116,000 from commercial shipments of
products to customers in the quarter ended March 31 2002. As previously
discussed, our sales activities were curtailed in the second half of 2002,
resulting in no revenues generated in the quarter ended March 31, 2003.
Expenses
Expenses decreased by approximately $.9 million from approximately $5.3 million
in the 2002 quarter to approximately $4.4 million in the 2003 quarter.
Personnel. Personnel costs decreased by approximately $1.1 million to $1.0
million in the 2003 quarter, compared with $2.1 million in the 2002 quarter.
This reduction in expense in the 2003 quarter resulted from management's
decision in June 2002 to curtail manufacturing of product for sale and focus
completely on conducting the pivotal venous stasis clinical trial. The headcount
and personnel cost were higher in the 2002 quarter as we had increased staffing
to manage two clinical trials, manufacture the increased quantity of product
required by our clinical trial programs and for commercial sales, initiate our
sales and marketing program for our FDA approved product and for additional
administrative personnel required as a result of such increased staffing levels.
Consulting. These fees decreased by $.2 million in the quarter ended March 31,
2003, compared with the quarter ended March 31, 2002. During the current
quarter, the Company did not incur any consulting expenses, as we have been
focused on completing the venous stasis clinical trial, and as such have
utilized primarily existing personnel.
Research and Development. These expenses decreased by approximately $.8 million
to $.4 million in the 2003 quarter, compared with $1.2 million in the 2002
quarter. This decrease in research and development expenses was due to the fact
that during the 2003 quarter costs were incurred primarily for the venous ulcer
pivotal clinical trial, whereas in 2002 costs were incurred for concluding the
donor site pivotal clinical trial, as well as the venous and diabetic ulcers
pilot trials.
General and Administrative. These expenses decreased by $.3 million from $.9
million in the 2002 quarter to $.6 million in the 2003 quarter, due to reduced
marketing, recruitment and other expenses incurred in 2003 compared with 2002,
during which period we were preparing for commercial sales of our product.
Rent and Lease Termination Costs. Rent expense increased by $70,000 in the 2003
quarter, due to the cost incurred to lease the New Jersey premises, which were
not incurred in 2002. The Company and NJEDA have agreed to terminate this lease
and in accordance with the proposed terms of this settlement has recorded
termination expenses of $1.1 million at March 31, 2003. These cost included $.3
million in settlement costs, $.6 million to reimburse NJEDA for construction and
other costs incurred to date and the write-off of $.2 million of other leasehold
costs incurred directly by the Company.
Interest Expense. Interest expense increased by $.3 million in the quarter ended
March 31, 2003, compared with the expense incurred in the quarter ended March
31, 2002, due to the non-cash imputed interest accrued on the Paul Capital
agreement. Although interest was accrued at 30% per annum for both periods, at
March 31, 2003, interest was accrued on a higher level of debt outstanding. Due
to the default provisions under the agreement, interest has been accrued at 30%
per annum in 2003, which provision may be adjusted in the future if the default
provisions are not longer applicable and interest will then be accrued based on
the expected level of future revenues.
Liquidity and Capital Resources
Since inception (March 12, 1991) through March 31, 2003, we have accumulated a
deficit of approximately $90.2 million and we expect to continue to incur
substantial operating losses through 2004. We have financed our operations
primarily through private placements of our common stock, preferred stock and
convertible debentures, our initial public offering and the exercise of our
publicly traded Class A warrants at the end of 1997. From inception to March 31,
2003, we received cash proceeds from the sale of equity securities, net of share
issuance expenses, of approximately $48.7 million, we received net cash proceeds
from the issuance of debentures and preferred stock of $10.2 million, and we
have received a total of $10.0 million from the sale of a percentage interest in
our future revenues from the sale of our product in North America.
For the three months ended March 31, 2003, we used net cash for operating
activities of approximately $1.9 million. Cash used in operating activities
resulted primarily from our net loss of $4.4 million, offset by depreciation and
amortization of approximately $.2 million, approximately $1.0 million of
non-cash interest expense and approximately $1.1 million in costs for accrued
lease termination costs, relating to the NJEDA lease.
In the quarter ended March 31, 2003, we received gross proceeds of $2.0 million
from the issuance of preferred stock financing through H.C. Wainwright, advances
of $.1 million against future financings and incurred $.3 million in financing
costs. As a result of such preferred stock financing, common shares outstanding
increased by 3.4 million shares, due to the exercise of warrants and the
issuance of common stock for dividends payable on preferred stock.
On August 5, 2002, the Company entered into an agreement with the New Jersey
Economic Development Administration (NJEDA) to lease approximately 26,000 square
feet of production and office space, modifying an original lease for
approximately 58,000 square feet. Due to the lower level of financing received
in 2002 than had originally been planned, the Company and NJEDA have agreed to
terminate this lease and are currently in the process of negotiating the terms
of this termination settlement. Based on the negotiations to date, and in
accordance with the currently proposed terms of this settlement, which is
subject to agreement by both parties and formal approval by NJEDA, the Company
has expensed the $637,000 security deposit (including accrued interest of
$14,000), which had been paid to NJEDA and has provided for an additional
settlement liability of approximately $350,000, which will be paid to NJEDA
within 30 days of an agreement. In conjunction with the proposed terms of this
settlement, NJEDA will also be granted 100,000 warrants to purchase common
stock at an exercise price of $1.00 per common share. This settlement has
released Ortec from its monthly lease obligation of approximately $35,000 over
a three-year period, terminating on December 31, 2005, as well as its
estimated obligation of approximately $7.0 million to complete the
construction of these facilities.
Under the August 29, 2001 agreement, as amended, in consideration for the
investment of $10.0 million, Paul Capital received 3-1/3% of end user revenues
from the sale of our products in the United States, Canada and Mexico. These
percentage payments may be further adjusted upward or downward, based on the
volume of net sales to end users of our products in those three countries. As of
March 31, 2003, we have provided for the effective cost of the amounts received
from Paul Capital at 30% per annum, pursuant to default provisions of the
agreement and we have accrued interest accordingly. However, at such time when
the default provisions are no longer applicable, interest will be accrued based
upon the expected level of future revenues, which may result in a lower imputed
interest rate, with potential material lower interest expense. Under the August
29, 2001 agreement, as amended, beginning on January 1, 2003, Paul Capital is
entitled to receive each year advances from the first proceeds to us from end
user sales of our products. The agreement provides for quarterly and annual
accountings between Paul Capital and us for those advance payments, compared to
amounts owed based on actual sales. Such annual amounts Paul Capital will be
able to draw in advance will range from $.6 million in 2003, $1.0 million in
2004 to $7.5 million in 2005 and thereafter.
At March 31, 2003, our liabilities exceeded the value of our assets and as such,
we were technically in default of the solvency requirement under the Paul
Capital agreement. Paul Capital is aware of this breach and based on our
discussions regarding this issue, has indicated to us that it presently does not
intend to exercise its option to require us to repurchase its revenue interest.
Additionally, in February 2003, Paul Capital amended its agreement with us,
restating and updating certain provisions of the original agreement. On February
26, 2003, Paul Capital invested an additional $500,000 in our Series B preferred
stock, in concurrence with this amendment.
As defined in the agreement, in the event of a change in control of Ortec or
upon the occurrence of certain other events, Paul Capital has the option to put
its revenue interest back to us for an amount as provided in the agreement.
Ortec also has the option to repurchase Paul Capital's interest upon the
occurrence of a change in control of Ortec or a complete divestiture by us of
our products, for an amount provided in the agreement.
We have granted Paul Capital a security interest in all our United States
patents and trademarks relating to our technology for our product, to secure
payments we are required to make to Paul Capital, based on sales generated under
the Royalty Revenue Interest Assignment agreement, as described above.
The original agreement and modifications to the agreement terminate on December
31, 2011, unless terminated earlier by either party, as permitted by the terms
of the agreement.
On March 27, 2002, we engaged H.C. Wainwright & Co., Inc. an investment banking
firm, to act as our financial advisor in connection with raising capital for the
Company through debt and/or equity financing. Wainwright has assisted us in
raising financing of approximately $8.2 million in 2002 and has continued its
financing efforts on our behalf in 2003, raising an additional $2.0 million in
Series B convertible preferred stock, as of March 31, 2003. As part of this
financing, the Company issued 2,000,000 Series A warrants at $.001 per share,
which were immediately converted into common shares, 1,000,000 Series B-1 and
1,000,000 Series B-2 warrants exercisable at $1.50 per share and $2.00 per
share, respectively. Dividends on our Series B preferred stock sold in such
financing were paid in common shares at the rate of 12% per annum, resulting in
the issue of 923,077 shares of common stock.
The Company anticipates closing on preferred equity financing of approximately
$5.5 to $6.0 million, with firm commitments of approximately $4.0 million, in
May 2003, from investors, some of whom have previously participated in the $10.2
million raised through March 31, 2003. This financing consists of Series C
convertible preferred stock at a stated value of $6,000 per share, convertible
into common shares at an initial conversion rate of $.20 per share. Dividends
will be paid in cash or common shares at the option of the Company, at the rate
of 6% per annum, increasing to 10% per annum beginning January 1, 2005.
Beginning 180 days from issue, the Series C convertible preferred stock shall
automatically convert, if the common stock of the Company trades at a price
equal to or greater than $.60 per share for a period of 10 consecutive trading
days. Additionally, each investor will be issued 12,000 five-year warrants for
each Series C convertible preferred share purchased. The Series C warrants have
an exercise price of $.36 per common share. Beginning twenty-four months after
the Closing, the Company may redeem the Series C warrants for $.01 per warrant
if its common stock closes above $1.08 per share for 10 consecutive trading
days.
Concurrently with the closing of this Series C convertible preferred financing,
a majority in interest of the holders of the Company's Series B Convertible
Preferred stock would agree to convert their preferred shares into common
shares, at the conversion rate of $.25 per share. Additionally, the exercise
price of the Company's outstanding B-1 and B-2 warrants would be adjusted to
$.40 per share and $.50 per share, respectively. The B-1 and B-2 Warrants are
redeemable for $.01 per share if the Company's common stock closes above $1.00
and $1.25, respectively, for 10 consecutive trading days. The Company expects
additional investments in 2003 as part of the Series C preferred equity
financing.
Our capital funding requirements will depend on numerous factors, including the
progress and magnitude of our research and development programs, pre-clinical
testing and clinical trials, the time involved in obtaining regulatory approvals
for commercial sale of our product to treat venous stasis and diabetic foot
ulcers, the cost involved in filing and maintaining patent claims, technological
advances, competitive and market conditions, our ability to establish and
maintain collaborative arrangements, our cost of manufacturing scale up and the
cost and effectiveness of commercialization activities and arrangements.
We have raised funds in the past through the public or private sale of equity
securities and debentures and through the agreement with Paul Capital. We will
need to raise additional funds in the future through public or private
financings, collaborative arrangements or from other sources. The success of
such efforts will depend in large part upon continuing developments in our
clinical trials and upon market conditions.
We require substantial funding to continue our research and development
activities, clinical trials, manufacturing, sales, distribution and
administrative activities. While the Company can give no assurance of the total
amount of financing that will be secured, Wainwright is continuing to assist the
Company in raising financing in 2003. The Company anticipates closing on
preferred equity financing of approximately $5.5 to $6.0 million, with firm
commitments of approximately $4.0 million, in May 2003, from investors, some of
whom have previously participated in the $10.2 million raised through March 31,
2003. This will enable the Company to complete its venous clinical pivotal
trial, file its application for pre-market approval with the FDA and execute its
plan to engage the services of a third party manufacturer. Accomplishing these
milestones would enable the Company to raise an additional $5.0 million in 2003,
through other potential collaborative arrangements with companies for sales,
marketing and distribution of its product and through other equity investments.
The Company believes that its cash and cash equivalents on hand at March 31,
2003, (approximately $.7 million), the additional $4.0 million to $6.0 million
committed to in May 2003, as well as the additional $5.0 million anticipated to
be raised in 2003, will enable it to continue its operations for the next 12
months. The Company can give no assurance that additional investment or other
funds can be secured.
We continue to explore and, as appropriate, enter into discussions with other
companies regarding the potential for equity investment, collaborative
arrangements, license agreements or other funding programs with us, in exchange
for manufacturing, marketing, distribution or other rights to our product.
However, we can give no assurance that discussions with other companies will
result in any additional investments, collaborative arrangements, agreements or
other funding, or that the necessary additional financing through debt or equity
financing will be available to us on acceptable terms, if at all. Further, we
can give no assurance that any arrangements resulting from these discussions
will successfully reduce our funding requirements. If additional funding is not
available to us when needed, we may not be able to continue operations.
Item 4. Controls and Procedures
1. Evaluation of disclosure controls and procedures.
The Company's chief executive officer and its chief financial officer,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of a
date within 90 days of the filing date of the quarterly report (the "Evaluation
Date") have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities, particularly during the
period in which this quarterly report was being prepared.
2. Changes in internal controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's disclosure controls
and procedures subsequent to the Evaluation Date, nor any significant
deficiencies or material weaknesses in such disclosure controls and procedures
requiring corrective actions. As a result, no corrective actions were taken.
PART II
Item 1. Legal Proceedings and Claims
In our quarter annual report on Form 10-QA for the three months ended
September 30, 2002, we reported that ClinTrials Networks, LLC (ClinTrials) had
commenced an arbitration proceeding against us claiming we owe ClinTrials
$165,936, and that PDI, Inc. (PDI) commenced an action against us claiming that
we owe PDI $205,000. In our annual report on Form 10-K for the year ended
December 31, 2002, we reported the current status of those two proceedings
against us.
The arbitration between us and ClinTrials is now scheduled to take place in
early June, 2003.
In its action, PDI, in the second quarter of 2003, filed a motion for
summary judgment against us for $196,762 plus interest. Such motion is scheduled
to be heard on May 23, 2003. We have reached an agreement to settle this claim
for $150,000, conditioned upon prompt payment by us. We expect to have the
funds available for such payment from financing now being arranged.
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities
In our annual report on Form 10-K for the year ended December 31, 2002, we
reported sale of our Series B convertible preferred stock in February 2003. In
February 2003 we received gross proceeds of $2 million from five of the
investors who had purchased our Series B convertible preferred stock in November
and December 2002, and from one new investor. We issued to such six investors
200 shares of our Series B convertible preferred stock, 2,923,077 shares of our
common stock (including 923,077 shares of our common stock constituting the
first year's dividends on such 200 shares of Series B convertible preferred
stock, which dividends were paid in advance) and warrants to purchase an
additional 2,000,000 shares of our common stock, of which warrants to purchase
1,000,000 shares are exercisable at $1.50 per share and warrants to purchase the
other 1,000,000 shares are exercisable at $2.00 per share. In March 2003, in
addition to cash compensation, we also granted to H.C. Wainwright for its
services in arranging such February 2003 Series B financing, and to one designee
of Wainwright's, warrants to purchase an aggregate of 376,923 shares of our
common stock, exercisable at $0.001 per share.
Each share of the Series B preferred stock is convertible into so many
shares of our common stock as determined by dividing the $10,000 liquidation
preference amount of one Series B preferred share by the conversion price. There
is a fixed conversion price and an alternative conversion price. The fixed
conversion price is $1.00 per share. The holders of the Series B preferred stock
may elect an alternative conversion price, equal to 90% of the average of the
five lowest volume weighted average prices for our common stock during the
twenty trading days immediately prior to conversion. At no time will the
alternative conversion price be less than $0.25 per share. The certificate of
designations of the relative rights and preferences of the Series B convertible
preferred stock provides for customary adjustments to the conversion price in
the event of stock splits, combinations, dividends, distributions,
reclassification and other corporate events. If we issue or sell any additional
shares of common stock at a price per share less than $0.50, or without
consideration, or options or warrants to purchase, or other securities
convertible into, shares of our common stock, in effect giving the holders of
those options, warrants or convertible securities the right to purchase our
common stock at a price per share less than $0.50, the fixed conversion price
will be reduced (except in certain specified events, some of which would also
increase the alternative conversion price to $1.00) to a price equal to the
consideration per share paid or payable for such additional shares of common
stock, and the number of shares of our common stock into which the Series B
preferred stock can be converted will be proportionately increased.
Each holder of Series B preferred stock is entitled to receive dividends at
the rate of 12% of the Series B preferred stock's stated $10,000 per share
liquidation preference, payable by us semi-annually and at our option in either
cash or shares of our common stock that have been registered pursuant to an
effective registration statement. The formula for determining the number of
shares of our common stock to be paid as a dividend on each Series B preferred
share is the number equal to the quotient of (i) the dividend payment divided by
(ii) the conversion price.
The relative rights and preferences of our Series B convertible preferred
stock are described in greater detail in our prospectus dated January 21, 2003,
which can be viewed on the SEC's internet site, http://www.sec.gov.
All of the purchasers of our Series B convertible preferred stock
represented to us that they were "accredited investors" as such term is defined
in the rules promulgated by the Securities and Exchange Commission. The sale of
such Series B convertible preferred stock, the
issuance of such common stock and the grant of such warrants, in our Series B
financings, were all exempt from the registration requirements of the Securities
Act of 1933 (the "Act") pursuant to Section 4(2) of the Act and Regulation D
promulgated under the Act because such sales did not involve any public
offering.
During the first quarter of 2003 we granted to 15 employees (including one
executive officer) options under our Employee Stock Option Plan, to purchase an
aggregate of 265,000 shares of our common stock, at exercise prices ranging from
$0.22 to $0.41 per share. The grant of such options was exempt from the
registration requirements of the Act pursuant to the provisions of Section 4(2)
thereof because such option grants did not involve any public offering and
because such option grants did not constitute sales of securities.
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of shareholders was held on February 11, 2003, at the
Russ Berrie Medical and Science Pavilion, 1150 St. Nicholas Avenue, New York,
New York. At the meeting our shareholders voted on five matters and all of such
matters were approved.
The first matter was the election of the members of our Board of Directors.
All six of our directors were re-elected and the tabulation of the votes (both
in person and by proxy) was as follows:
NOMINEES FOR
DIRECTORS FOR AGAINST ABSTENTIONS
- -------------- ---------- ------- -----------
Steven Katz 17,490,964 7,931 283,617
Mark Eisenberg 17,490,964 7,931 283,617
Ron Lipstein 17,494,977 3,918 283,617
Alain Klapholz 17,498,627 268 283,617
Steven Lilien 17,498,827 68 283,617
Allen Schiff 17,498,827 68 283,617
There was no other director whose term of office as a director continued
after the meeting.
The second matter upon which our shareholders voted was the proposal to
ratify the appointment by the Board of Directors of Grant Thornton LLP as
independent certified public accountants for Ortec for 2003. The tabulation of
the votes (both in person and by proxy) was as follows:
FOR AGAINST ABSTENTIONS
- ---------- ------- -----------
17,728,407 34,273 19,900
The third matter upon which our stockholders voted was on the proposal to
approve an amendment to the Company's certificate of incorporation increasing
from 35,000,000 to 200,000,000 the number of shares of common stock the Company
is authorized to issue.
The tabulation of votes (both in person and by proxy) on this proposal was
as follows:
FOR AGAINST ABSTENTIONS
- ---------- ------- -----------
17,423,169 338,091 21,300
The fourth matter upon which our stockholders voted was on the proposal to
authorize the Board of Directors, in its discretion, at any time prior to
December 31, 2003, to amend the Company's certificate of incorporation, as
amended and restated, to effect a reverse stock split of the Company's common
stock at a ratio within the range from one-for-two to one-for-ten without
further approval or authorization of the stockholders. The tabulation of the
votes (both in person and by proxy) on this proposal was as follows:
FOR AGAINST ABSTENTIONS
- ---------- ------- -----------
17,544,998 218,132 22,450
The fifth matter upon which our stockholders voted was on the proposal to
ratify and approve a third amendment to the Company's 1996 Stock Option Plan
(the "Stock Option Plan" or the
"Plan") increasing the number of shares of the Company's Common Stock for which
options can be granted under the Plan from 3,000,000 to 4,500,000 shares.
The tabulation of the votes (both in person and by proxy) on this proposal
was as follows:
FOR AGAINST ABSTENTIONS
- ---------- ------- -----------
12,349,778 585,206 26,600
There were 4,820,996 broker held non-voted shares represented at the
meeting with respect to this matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation (1)
3.2 Amendment to Restated Certification of Incorporation (2)
3.3 Amendment to Certificate of Incorporation adopted June 28, 2002, being a
Certificate of Designation of the Relative Rights and Preferences of the Series
A Convertible Preferred Stock (3)
3.4 Amendment to Certificate of Incorporation filed on August 26, 2002, being an
Amended Certificate of Designation of the Relative Rights and Preferences of the
Series B Convertible Preferred Stock (2)
3.5 By-Laws (4)
99.1 Certification of Principal Executive Officer (5)
99.2 Certification of Principal Financial Officer (5)
- ----------
(1) Filed as an Exhibit to our Form 10-Q filed for the quarter ended September
30, 2001, and incorporated herein by reference.
(2) Filed as an Exhibit to our Form 10-K for the year ended December 31, 2002
and incorporated herein by reference.
(3) Filed as an Exhibit to our Form 10-Q for the quarter ended June 30, 2002.
(4) Filed as an Exhibit to our Registration Statement on Form SB-2 (file no.
33-96090), or Amendment 1 thereto, and incorporated herein by reference.
(5) Filed herewith.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K in the first quarter of 2003.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
Registrant:
ORTEC INTERNATIONAL, INC.
Date: May 15, 2003 By: /s/ Steven Katz
------------------------------
Steven Katz, PhD
Chairman
(Principal Executive Officer)
Date: May 15, 2003 By: /s/ Ron Lipstein
------------------------------
Ron Lipstein
Vice Chairman/CEO and
Chief Financial Officer
(Principal Executive Officer)
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as ............................... 'TM'