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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 forw