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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 OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] 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 10032
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 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
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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. [ X ]
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The number of shares outstanding of the Registrant's common stock is 9,691,608
(as of 4/11/02). The aggregate market value of the voting stock held by
nonaffiliates of the Registrant was approximately $35,878,542 as of April 11,
2002, based upon a closing price on such date of $4.27 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, 2001
ITEMS IN FORM 10-K
Facing Page Page
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Part I
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Item 1. Business ...................................................................................1
Item 2. Properties..................................................................................16
Item 3. Legal Proceedings ..........................................................................17
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 ..................18
Item 6. Selected Financial Data ....................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......20
Item 7a. Quantitative and Qualitative Disclosures About Market Risk ..............................None
Item 8. Financial Statements and Supplementary Data.................................................27
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 .........................................28
Item 11. Executive Compensation .....................................................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management .............................34
Item 13. Certain Relationships and Related Transactions..............................................36
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................38
Signatures ...................................................................................................39
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 that we call "OrCel",
which is used to stimulate the repair and regeneration of human skin. OrCel 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 OrCel is applied to the wound
site, it produces a mix of growth factors that stimulates wound closure.
We have achieved a number of milestones toward our goal of the
commercial sale of OrCel including:
o In August 2001 the FDA granted our application for commercial
sale of OrCel for the treatment of donor site wounds. The results
of the pivotal clinical trial for the use of OrCel to treat donor
site wounds, which we submitted to the FDA, showed that there was
a clinically and statistically shorter time to 100% wound closure
when OrCel 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 In December 2001 we commenced commercial sale of OrCel for the
treatment of donor site wounds. These sales have been made to
hospitals and other medical treatment facilities. For the 14-week
period ended March 9, 2002, we generated gross sales of
approximately $105,000. Such sales have been made before we have
commenced any marketing efforts to sell OrCel.
o In December 2001 our OrCel was approved by the Centers for
Medicaid and Medicare Services for inclusion on the Outpatient
Prospective Payment Systems Pass Through List. The inclusion on
this list allows hospitals to recover their cost for OrCel from
Medicare when utilizing OrCel for treatment of a Medicare patient
as a hospital outpatient.
o In December 2001 we entered into an agreement with PDI to market
OrCel to hospitals and other medical treatment facilities. We
have not yet started
utilizing PDI's marketing staff to generate sales. If on the
basis of the results of our clinical trials for the use of OrCel
for the treatment of venous and diabetic ulcers, the FDA
authorizes us to make commercial sales of OrCel for the treatment
of those medical conditions, we expect to enter into other
marketing arrangements to market OrCel to the larger medical
community for use of OrCel for those two larger patient markets.
Such marketing programs might consist of joint ventures with
pharmaceutical companies or pharmaceutical sales organizations.
At this time we can give no assurance that we will enter into
such other marketing arrangements.
o We have received encouraging results from the pilot clinical
trial of the non frozen version of OrCel for the treatment of
venous ulcers. These results show that OrCel is significantly
more effective in treating venous ulcer wounds than the standard
of care used in the clinical trial. Two months after initiating
treatments, the OrCel treated group achieved 100% healing in 47%
of the patients treated vs. 26% of the patients in the standard
of care group. Six months after treatment the OrCel treated group
achieved 100% healing in 71% of the patients treated, compared to
37% of the patients in the standard of care treated group. The
results in that trial for the OrCel treated group compared
favorably with the reported results of the clinical trials that
were conducted by our competitors using their products for
healing venous ulcers.
o We have received encouraging results from the pilot clinical
trial of the non frozen version of OrCel for the treatment of
venous ulcers. These results show that OrCel is significantly
more effective in treating venous ulcer wounds than the standard
of care used in the clinical trial. Two months after initiating
treatments, the OrCel treated group achieved 100% healing in 47%
of the patients treated vs. 26% of the patients in the standard
of care group. Six months after treatment the OrCel treated group
achieved 100% healing in 71% of the patients treated, compared to
37% of the patients in the standard of care treated group. The
results in that trial for the OrCel treated group compared
favorably with the reported results of the clinical trials that
were conducted by our competitors using their products for
healing venous ulcers.
o In October 2001 a preliminary review of the first 13 patients
completing treatment of venous ulcers using OrCel in its frozen
(cryopreserved) state showed that 9 of the patients (69%)
achieved 100% wound closure within three months and that the
other 4 patients achieved 90% or higher wound closure in that
same three month period.
o We have also received encouraging results from the pilot clinical
trial of OrCel for the treatment of diabetic foot ulcers. These
results show that OrCel is significantly more effective in
treating diabetic foot ulcer wounds than the standard of care
used in that clinical trial. Twelve weeks after treatment of
diabetic ulcers of 6 sq. cm. or less (the largest diabetic ulcers
population group) the OrCel treated group achieved 100% healing
in 47% (7 of 15 patients) of the patients treated, compared to
23% (3 of 13 patients) of the patients in the standard of care
treated group, for a greater than 100% improvement over standard
of care. The daily rate of healing for the OrCel treated group
was twice as fast as the rate for the standard of care treated
group (2.2% /day vs. 1.1% /day). For the entire forty patient
group, 35% (7 of 20 patients) of OrCel
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treated patients achieved 100% healing compared to 20% (4 of 20
patients) in the standard of care treated group, for a 75%
improvement over standard of care. This forty patient group
included only difficult to heal ulcers in the study since the
protocol required a pre-screening period in which all the
patients whose ulcers responded readily to standard of care
treatment were excluded from the trial. The results in that trial
for the OrCel treated group compared favorably with the reported
results of the clinical trials that were conducted by our
competitors for use of their products for treatment of diabetic
ulcers. Based on the results in the pilot trial, in February 2002
the FDA authorized us to commence a pivotal trial for use of
OrCel in the treatment of diabetic ulcers.
o We have developed the technology for the cryopreservation of
OrCel 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 trials for the treatment of venous and
diabetic ulcers.
o On February 21, 2001, the FDA granted our application for
commercial sale of OrCel 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.
The epidermolysis bullosa patient population that OrCel will
address is small.
o Our manufacturing facilities, which are at the same location as
our offices in New York City, have been approved by the FDA for
the manufacture of OrCel for commercial sale. However, we will
need larger facilities to manufacture sufficient units of OrCel
for anticipated sales for treatment of donor site wounds, after
our marketing efforts to secure such sales are under way, and for
treatment of venous and diabetic ulcers, if and when FDA approval
is secured for sales for treatment of those medical conditions.
In December 2001 we entered into a ten-year lease with the New
Jersey Economic Development Authority for lease of approximately
58,000 square feet of manufacturing and office space located in
North Brunswick, New Jersey. The leased premises (Tech Center)
will be completed and will be available to us in two phases. The
initial space, consisting of approximately 26,000 square feet, is
in an existing
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building and will be renovated to our specifications ("Phase
#1"). The additional space, consisting of 32,000 square feet,
will be a newly constructed building to be built to our
specifications ("Phase 2"). The new building will adjoin the
existing building. The landlord will be responsible for the
completion of the renovations and construction of the buildings
and is contributing up to $1,300,000 for the renovations in the
existing building and $3,200,000 for the construction of the new
building. Any additional renovation or construction costs will be
borne by us. We have not yet estimated the cost of such
renovations and new construction.
Our FDA trials have resulted in approval of commercial sales of OrCel
for treatment of donor site wounds and for patients with recessive epidermolysis
bullosa undergoing hand reconstruction. Two other FDA trials we are currently
conducting are for the use of OrCel in treating venous leg ulcers and diabetic
foot ulcers. The target population for these four conditions is approximately
one million people in aggregate, and a sales potential in excess of $1 billion.
Each market is described briefly below. See "Forward Looking Statements."
Venous Leg Ulcers. Approximately 700,000 Americans are plagued with
venous leg 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.
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
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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 OrCel to treat their ulcers.
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 OrCel 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.
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. OrCel 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 OrCel 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 OrCel for the
treatment of epidermolysis bullosa.
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Our immediate focus is to use OrCel to treat these four medical
conditions. However, we believe OrCel can also be used to treat additional acute
and chronic indications such as pressure ulcers (decubitus), cosmetic surgery
and indeterminate burns. We also 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 OrCel. We know of only
one other company, Organogenesis, Inc., that has developed a bi-layered product,
Apligraf, to treat the same wounds as OrCel. 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 OrCel will have certain competitive advantages over other comparable
bio-engineered products in that OrCel (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 only recently begun selling
OrCel, realizing net revenues of $105,000 in the 14 week period ending March 9,
2002. Such modest sales were achieved without any marketing effort on our part.
Except for such limited sales our activities to date have been limited to human
clinical trials of OrCel and research and development. From the creation of our
company in March 1991 through December 31, 2001, we have spent approximately
$18.0 million for human clinical trials and research and development, not
including employee salaries. From inception in March 1991 through December 31,
2001, we have sustained a net loss of $59.2 million and expect to continue to
incur substantial operating losses until at least 2003.
On August 29, 2001, we entered into a Revenue Interests Assignment
agreement with Paul Capital Royalty Acquisition Fund, L.P. Under such agreement
we received $6,000,000 during 2001 and received an additional $4,000,000 in
January 2002. Upon completion of additional milestones, we may be eligible to
receive another $5,000,000 from Paul Capital, if requested by us, and may
incrementally receive an additional $10,000,000, but only upon mutual agreement
by both Paul Capital and us.
In consideration for the first $10,000,000 received by us, Paul Capital
will receive a minimum 3.33% of the end user sales of our products in the United
States, Canada, and Mexico. Such percentage may be further adjusted upward or
downward, based on the volume
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of net receipts from end users of our products in those three countries. We
anticipate that the effective cost of the amounts we received from Paul Capital
will range from 20% to 35% per annum over the term of the agreement which
terminates in December 2011. Beginning on January 1, 2003, Paul Capital will be
entitled to receive each year the first proceeds we receive from end user sales
of our products in those three countries. Such annual amounts Paul Capital will
be able to draw in advance will range from $1.5 million in 2003 to $7.5 million
in 2005 and thereafter. The agreement provides for quarterly and annual
accountings between Paul Capital and us for those advance payments.
In the event of a change in control of Ortec or upon the occurrence of
certain other events as defined in the agreement, 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 our United States
and Canadian patents and trademarks relating to our technology for our OrCel
product to secure payments we are required to make to Paul Capital.
The agreement terminates on December 31, 2011, unless terminated
earlier by either party, as permitted by the terms of the agreement.
We have also recently received a $1,300,000 line of credit for
equipment lease financing.
At our current rate of spending, our cash and cash equivalents on hand
at December 31, 2001 (approximately $ .9 million) and the additional $4 million
which was due from Paul Capital at December 31, 2001, and was received in
January 2002, will enable us to continue our operations through April 30, 2002,
assuming that we will not incur unexpected costs. 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 OrCel. Our failure to receive
additional financing will have a material adverse effect on our operations.
Also, in order to produce OrCel for treatment of medical conditions with large
patient populations, we will 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 OrCel for treatment of
medical conditions with large patient populations and successfully market OrCel,
we believe that we will have the opportunity to reach cash break even in 2003.
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. While we
can give no assurance that any equity financing will be secured, Wainwright is
assisting us in raising equity financing of $12,000,000, which we believe will
enable us to continue our operations for the next 12 months.
If received, we will use the above proceeds primarily to complete our
clinical trials for use of OrCel in the treatment of venous stasis and diabetic
ulcers and to submit the results of those trials to the FDA for approval to
market OrCel for treatment of those medical conditions. We expect that the
anticipated financing will allow us to do this. Based upon our current schedule
for completion of the clinical trials and submission to the FDA, we believe that
we can obtain FDA approval for the use of our product in treating both venous
stasis and diabetic ulcers patients in 2003.
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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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OrCel
Our OrCel 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,
OrCel stimulates the body's healthy cells to rapidly regenerate and remodel the
human skin.
OrCel 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 OrCel
is mitigated because in approximately two weeks the entire OrCel dressing is
absorbed by the body and the cells from our product are no longer present.
We believe that OrCel'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
OrCel 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 OrCel 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 OrCel that is
available for sale is Apligraf, a product developed by Organogenesis, Inc.
We believe OrCel induces faster wound healing and reduces pain and
complications generally associated with open wounds. We also believe that
autograft donor sites treated with OrCel tend to be ready for recropping earlier
than sites treated with the current standard of care.
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We believe that OrCel 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 OrCel 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 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 OrCel, 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 " 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. OrCel 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 OrCel. 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 OrCel for the treatment
of donor site wounds and 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 sale of OrCel for the treatment of medical
conditions with larger 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
10
responded to applications for pre-market approval within that time period, as it
did in approving OrCel for treatment of donor site wounds, reviews usually 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 conducted feasibility studies for all the
medical conditions we propose to treat with OrCel 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 approvals for commercial sales of OrCel for
treatment of donor site wounds and for use on patients with
recessive dystrophic epidermolysis bullosa undergoing hand
reconstructive surgery and to treat donor site wounds created
during that surgery, and
- are conducting two pivotal clinical trials for use of OrCel in
its cryopreserved form for the treatment of venous ulcers and
diabetic ulcers.
Description of the Production Process
OrCel cells are derived from infant foreskins obtained during routine
circumcisions. The immature, neonatal cells are highly reproductive and provide
enhanced proliferation and
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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 OrCel, 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 OrCel - 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.
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.
12
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 OrCel for treatment of donor site wounds and in hand
reconstruction surgery for patients with recessive dystrophic epidermolysis
bullosa. We will need larger production facilities to achieve significant sales
of OrCel for treatment of larger patient populations, such as patients with
venous and diabetic ulcers.
In December 2001 we entered into a ten-year lease with the New Jersey
Economic Development Agency to lease approximately 58,000 square feet of
manufacturing and office space, located in North Brunswick, New Jersey. The
terms of that lease transaction is described in Part I, Item 1 -
"Business-Overview" in this annual report and in Item 2 - "Properties."
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 OrCel will also 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
OrCel for commercial sale. We expect to move into our new facilities in North
Brunswick, New Jersey in 2003.
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.
13
We consider our 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 and received approval for commercial sale of their
product in October 2001.
We believe that the following are the greater benefits derived by users
of OrCel.
o OrCel can be cryopreserved so that it can be stored by the
hospital or clinic instead of awaiting shipment.
o OrCel uses a porous collagen matrix and undifferentiated
epidermal and dermal cells, resulting in a vigorous growth factor
production which appears to enable a quicker healing process.
o OrCel 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 OrCel, or that may make OrCel obsolete.
14
Patents and Proprietary Rights
We have two U.S. patents for the technology for OrCel, 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 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 OrCel 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
was rejected in February 2002 and our patent was held novel and inventive. The
expiration date of our European patent is March 24, 2011.
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 95 people on a full-time basis, including five
executive officers. Including our executive officers, we employ 92 persons in
New York City and 3 people at our laboratory in Sydney, Australia. We also have
part time employees, 4 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.
15
Item 2. PROPERTIES
We occupy an aggregate of 17,287 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 OrCel. As of December 31, 2001 we were
paying an aggregate of $47,615 rent per month for use of all our space at the
Audubon facility.
In December 2001 we entered into a ten-year lease with the New Jersey
Economic Development Agency to lease approximately 58,000 square feet of
manufacturing and office space located in North Brunswick, New Jersey. The
leased premises (Tech Center) will be completed and will be available to us in
two phases. The initial space, consisting of approximately 26,000 square feet,
is in an existing building, which will be renovated to our specifications
("Phase #1") and the additional space, consisting of 32,000 square feet, will be
a newly constructed building built to our specifications ("Phase #2"). The new
building ("Phase #2") will adjoin the existing building ("Phase #1"). The
landlord will be responsible for the completion of the renovations and
construction of the buildings and is contributing up to $1,300,000 for the
renovations in the existing building and $3,200,000 for the construction of the
new building. Any additional renovation or construction costs will be borne by
us. We have not estimated the cost of such renovations and new construction.
We expect to move into these new facilities in 2003. The initial base
rent for Phase #1, starting 9 months after the lease Commencement Date, is
$14.00 per square foot for the next 15 months, increasing to $25.00 and $26.00
per square foot during the third and fourth years, respectively, and to a base
rent of $29.00 per square foot in the fifth year to the balance of the initial
term of the lease. The initial base rent for Phase #2, commencing upon
substantial completion of the construction of the building, is $23.00 per square
foot during the first year after completion, increasing annually at the rate of
$1.00 per square foot during the second and third years, to a base rent of
$26.00 per square foot in the fourth year to the balance of the initial term of
the lease. We will also be responsible for additional rent for operating
expenses.
16
Due to timing of our anticipated move to the Tech Center premises in
North Brunswick, we also leased, as of March 1, 2002, from the same landlord,
approximately 3,200 square feet in an adjoining building, for a 16 month term,
at an initial base rent of $30.00 per square foot during the first year,
increasing to $31.50 per square foot during the last four months of the term.
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$24,900 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
The summons and the complaint in the legal proceeding instituted by Dov
Shellef against us and six of our then directors and one of our executive
officers who was not a director, were served on us and those individual
defendants in December 2001. The complaint's allegations and the court in which
that legal proceeding was instituted, are described in our 10-Q report for the
quarter ended September 30, 2001.
17
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, 2000 through December 31, 2001.
2001 High Low
- ----
First Quarter 8.75 5.81
Second Quarter 6.98 5.75
Third Quarter 7.75 6.00
Fourth Quarter 6.94 4.45
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
Security Holders
To the best of our knowledge at March 11, 2002, there were 121 record
holders of our common stock. We believe that as of such date there were an
additional 1,889 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.
18
Recent Sales of Unregistered Securities
During the fourth quarter of 2001 we granted to 17 employees, directors
and consultants options under our Employee Stock Option Plan to purchase an
aggregate of 426,000 shares of our common stock, at exercise prices ranging from
$4.70 to $6.10 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.
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 included in Item 7 and
Management's Discussion and Analysis included elsewhere in this Annual Report:
Cumulative
from
March 12,
1991
Statement of operations data (inception) to
- ---------------------------- December 31,
Years Ended December 31, 1997 1998 1999 2000 2001 2001
---------- ---------- ------------ ----------- ----------- ------------
Product revenue $ - $ - $ - $ - $ 21,890 $ 21,890
---------- ---------- ------------ ----------- ----------- ------------
Expenses
Research and development 1,178,836 1,933,877 3,106,908 4,191,317 4,283,038 18,048,392
Rent 166,498 252,397 473,010 535,443 589,238 2,179,535
Consulting 474,908 908,495 834,180 838,383 1,413,153 5,226,515
Personnel 1,901,409 4,060,629 3,742,632 4,763,662 6,605,630 22,949,360
General and administrative 1,320,488 1,725,201 2,152,968 2,297,769 2,671,887 12,002,685
Interest and other expense 75,126 104,605 99,522 89,712 536,070 1,019,506
Interest income (291,602) (572,549) (368,711) (586,623) (191,749) (2,249,449)
---------- ---------- ------------ ----------- ----------- ------------
4,825,663 8,412,655 10,040,509 12,129,663 15,907,267 59,176,544
---------- ---------- ---------- ---------- ---------- -----------
Net loss $(4,825,663) $(8,412,655) $(10,040,509) $(12,129,663) $(15,885,377) $(59,154,654)
========== ========== =========== =========== =========== ===========
Net loss per share of common
stock
Basic and diluted $(1.01) $(1.43) $(1.51) $(1.37) $(1.64) $(12.67)
Weighted average common stock
outstanding
Basic and diluted 4,782,239 5,878,971 6,634,874 8,847,295 9,691,608 4,668,594
========= ========= ========= ========= ========= =========
Balance sheet data
- ------------------
Working capital (deficiency) $12,982,711 $ 9,368,901 $ 11,009,660 $ 7,966,410 $ (2,529,159)
Total assets 14,998,414 12,391,039 15,011,645 11,719,760 4,038,601
Long-term debt, excluding
current maturities 722,704 1,152,180 1,044,857 912,489 6,768,983
Shareholders' equity/(deficit) 13,716,618 10,390,759 12,370,720 9,392,325 (6,304,972)
19
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.
Forward Looking Information
This Report on Form 10-K contains certain forward looking statements
and information relating to Ortec, that are based on the beliefs of management,
as well as assumptions made by management, utilizing currently available
information. 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 Form 10-K Report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove to be
incorrect, actual results may vary materially and adversely from those described
herein as anticipated, believed, estimated or expected. We do not intend to
update these forward looking statements.
The following discussion should be read in conjunction with our
financial statements and notes thereto.
General
Since Ortec's 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
20
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 Ortec 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
Ortec is still a development stage enterprise, in December 2001 we began our
first commercial shipment of product, realizing sales revenues of approximately
$22,000.
From inception to date, we have incurred cumulative net losses of
approximately $59.2 million. 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
increased personnel costs of manufacturing, marketing and sales, distribution
and administrative activities.
We are currently conducting pivotal clinical trials of OrCel in the
treatment of venous stasis and diabetic foot 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. Diabetic ulcers are open sores that remain
after the destruction of surface tissue. Ortec expects to complete the venous
stasis clinical trials by the end of 2002, with submission of the FDA filing by
the first quarter of 2003. We expect to complete the diabetic ulcers pivotal
clinical trials early in 2003, with submission to the FDA anticipated by the end
of the second quarter 2003. We anticipate obtaining FDA approval in 2003 for the
use of our OrCel product in the treatment of both these medical conditions.
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 until at least 2003.
Critical Accounting Policies
Revenue Recognition. Revenues from sales are recognized upon shipment of product
to customers. In December 2001 Ortec made its first commercial sales of product
to customers.
21
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 received. Interest is imputed at 30% per annum, which is the
minimum return under the agreement. Interest may range from 20% to 35% per annum
depending on our sales and the ultimate term of the Agreement.
Results of Operations
Year Ended December 31, 2001, and December 31, 2000.
Revenues
Ortec made its first commercial shipments of OrCel to customers in
December 2001, earning revenues from operations of approximately $22,000.
Expenses
Expenses increased by approximately $3.4 million in 2001 from
approximately $12.7 million in 2000 to approximately $16.1 million in 2001.
Personnel. Personnel costs increased by approximately $1.8 million to $6.6
million in 2001, compared with $4.8 million in 2000. This increased expense
resulted from the additional personnel required to conduct and manage the
clinical trial programs, to manufacture the product required by our clinical
trial programs and other research and development activities, to prepare for
manufacturing scale-up and marketing and an increase in corporate and
administrative expenses. During 2001, we conducted two pilot clinical trials,
concluded a pivotal clinical trial and the relevant FDA submissions. Based on
these trials and submissions, Ortec was granted two FDA approvals in 2001.
Consulting. These fees increased by $.6 million from $.8 million in 2000 to $1.4
million in 2001, primarily due to costs incurred in conducting the clinical
trials and FDA submissions, noted above, the development of a new cryopreserved
product and in hiring a marketing consultant.
Research and Development. These expenses increased by approximately $.1 million
to $4.3 million in 2001, compared with $4.2 million in 2000. The increase in
research and development expenses was primarily due to the costs of conducting
the venous and diabetic ulcers clinical trials, as well as research work
performed in the areas of cryopreservation and production cost reduction.
22
General and Administrative. These expenses increased by $.4 million from $2.3
million in 2000 to $2.7 million in 2001, due to increased marketing and legal
expenses incurred, as Ortec prepares for commercial sales of its product and
continues its financing activities. During 2001, the Company worked on and
entered into several significant agreements, including the Paul Capital Revenue
Interest Assignment agreement, the GE Capital Asset Financing agreement and the
Technology Center of New Jersey Lease agreement. We also investigated and
evaluated several potential corporate investment partners.
Interest Expense. Ortec incurred increased interest expense of $.4 million in
2001, compared with the expense incurred in 2000. On August 29, 2001, Ortec
entered into a Royalty Revenue Interest Assignment agreement with Paul Capital
and as part of this agreement, was entitled to receive $10.0 million in 2001.
$6.0 million of this amount was received in 2001 and the remaining $4.0 million
was received in January 2002. Upon the achievement of certain milestones, Ortec
may be entitled to receive another $5.0 million and may incrementally receive an
additional $10.0 million, but only upon the mutual agreement of both the Company
and Paul Capital. Management anticipates that the effective cost of these funds
based on the anticipated revenue stream, over the term of this agreement, which
terminates in December 2011, will range between 20% to 35% per annum and as
such, approximately $455,000 in interest expense has been accrued in 2001. We
have provided for interest at 30% per annum which represents the minimum return
to Paul Capital assuming that we do not early terminate the agreement.
Interest Income. Interest income declined by approximately $395,000 from
$587,000 in 2000 to approximately $192,000 in 2001, primarily due to the smaller
average cash balances outstanding during 2001 compared with 2000.
Year Ended December 31, 2000, and December 31, 1999.
Revenues
There were no revenues from commercial sales in 2000 and 1999.
Expenses
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 was paid for research and development projects. Such consulting expenses
for research and development amounted to approximately $838,000 in 2000 and
$834,000 in 1999. The increase in research and development expenses relate
primarily to the costs associated with the increased clinical trial activity,
cryopreservation research and for enhancement and other applications of Orcel.
23
General and Administrative. This expense amounted to $2.3 million for the year
ended December 31, 2000 and $2.2 million for 1999.
Personnel. 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 employed because of
increased research and product development, to conduct our clinical trials, to
prepare for manufacturing scale-up in anticipation of marketing our product, and
for additional administrative personnel required as a result of such increased
staffing levels.
Rent. This expense increased to $535,000 in 2000 from $473,000 for the year
ended December 31, 1999. This resulted from the increased space occupied at
Columbia University's Audubon Biomedical Science and Technology Park in New York
City for additional research and development laboratories and to accommodate the
increased staffing in 2000.
Interest Income. 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 sales of
common stock.
Liquidity and Capital Resources
Since inception (March 12, 1991) through December 31, 2001, Ortec has
accumulated a deficit of approximately $59.2 million and we expect to continue
to incur substantial operating losses until at least 2003. 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, 2001, we received cash proceeds from
the sale of equity securities, net of share issuance expenses, of approximately
$49.9 million, and in 2001, we received $6 million from the sale of a percentage
interest in our future revenues from the sale of our product in North America.
For the year ended December 31, 2001, we used net cash for operating
activities of approximately $13.0 million. Cash used in operating activities
resulted primarily from our net loss of $15.9 million, offset by non cash
depreciation and amortization of approximately $737,000, approximately $188,000
of non cash stock compensation and an increase in accounts payable and accrued
expenses of approximately $2.1 million.
24
In 2001 we invested approximately $620,000 in property, plant,
equipment and patent application costs and made deposits and advances of
$105,000 toward certain agreements. Additionally, we paid down $132,000 on our
loans payable during 2001. We did not receive any cash from the sale of our
common stock, but we did receive $6.0 million under our agreement with Paul
Capital Royalty Acquisition Fund, L.P.
In December 2001 we entered into a ten-year lease with New Jersey
Economic Development Authority to lease approximately 58,000 square feet of
manufacturing and office space located in North Brunswick, New Jersey. The
leased premises will be completed and will be available to us in two phases. The
initial space, consisting of approximately 26,000 square feet, is in an existing
building, which will be renovated to our specifications. The additional space,
adjoining the existing building and consisting of 32,000 square feet, will be
constructed to our specifications. The landlord is responsible for the
completion of the renovations and construction of the building and is
contributing up to $1,300,000 for the renovations and $3,200,000 for the
construction of the new building. Any additional renovation or construction
costs will be borne by us.
We expect to move to the new facility and to be fully operational at
that site in 2003. We believe that the move into the existing building will
provide us with the anticipated manufacturing capacity required through 2004,
sufficient to generate sales revenues in excess of $50.0 million. Accordingly,
we believe that initially no additional manufacturing build-out costs will be
necessary in the building to be constructed. That second move into the newly
constructed building will allow us to consolidate our manufacturing, marketing
and sales, research and administrative operations in one location, facilitate
future growth and afford us the ability to increase our manufacturing capacity
at such time as the manufacturing capacity in the existing building is fully
utilized.
On August 29, 2001, we entered into a Revenue Interests Assignment
Agreement with Paul Capital. During 2001, Ortec was eligible to receive $10.0
million under this agreement. We received $6.0 million in 2001 and the remaining
$4.0 million balance in January 2002. Upon completion of additional milestones,
we may be eligible to receive another $5.0 million. In addition, we may
incrementally receive another $10.0 million, but only upon mutual agreement by
both Ortec and Paul Capital.
In consideration for the first $10.0 million received by us, Paul
Capital will receive a minimum of 3 1/3% of end user revenues from the sale of
our products in the United States, Canada and Mexico, which percentage will be
proportionately increased by the additional amounts paid by Paul Capital to us
under the August 29, 2001 agreement. These percentage payments may be further
adjusted upward or downward, based on the volume of net sales to
25
end users of our products in those three countries. We anticipate that our
effective cost for the amounts we receive from Paul Capital will range between
20% to 35% per annum. Beginning on January 1, 2003, Paul Capital will be
entitled to receive each year the first proceeds to us from end user sales of
our products in those three countries. Such annual amounts Paul Capital will be
able to draw in advance will range from $1.5 million in 2003 to $7.5 million in
2005 and thereafter. The agreement provides for quarterly and annual accountings
between Paul Capital and us for those advance payments.
In the event of a change in control of Ortec or upon the occurrence of
certain other events as defined in the agreement, 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 our United States
and Canadian patents and trademarks relating to our technology for our product,
to secure payments we are required to make to Paul Capital.
The agreement terminates on December 31, 2011, unless terminated
earlier by either party, as permitted by the terms of the agreement.
In January 2002 we received a $1,300,000 line of credit from GE Capital
for equipment lease financing. These proceeds will be utilized in financing
manufacturing equipment purchases in 2002.
Our capital funding requirements will depend on numerous factors,
including the progress and magnitude of our research and development programs,
preclinical 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 require substantial funding to continue our research and development
activities, clinical trials, manufacturing scale up, marketing, sales,
distribution, and administrative activities. Our cash and cash equivalents on
hand at December 31, 2001, (approximately $.9 million), and the additional $4.0
million which was due from Paul Capital and was received in January 2002, will
enable us to continue our operations until April 30, 2002.
26
We have raised funds in the past through the public or private sale of
securities and through the agreement with Paul Capital. Even after the remaining
$4.0 million received from Paul Capital in January 2002, 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.
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. While we
can give no assurance that any equity financing will be secured, Wainwright is
assisting us in raising equity financing of $12,000,000, which we believe will
enable us to continue our operations for the next 12 months.
If received, we will use the above proceeds primarily to complete our
clinical trials for use of OrCel in the treatment of venous stasis and diabetic
ulcers and to submit the results of those trials to the FDA for approval to
market OrCel for treatment of those medical conditions. We expect that the
anticipated financing will allow us to do this. Based upon our current schedule
for completion of the clinical trials and submission to the FDA, we believe that
we can obtain FDA approval for the use of our product in treating both venous
stasis and diabetic ulcers patients in 2003.
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 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 22, 2002, except
for Note A as to which the date is April 15, 2002.
27
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. 57 Chairman of the Board of Directors and Chief
Executive Officer
Dr. Mark Eisenberg 64 Senior Vice President, Research and Development,
and Director
Ron Lipstein 46 Vice Chairman of the Board of Directors,
Secretary, Treasurer and Chief Financial Officer
Alain M. Klapholz 45 Vice President, Operations, and Director
Costa Papastephanou, Ph.D. 56 President
William Schaeffer 54 Chief Operating Officer
Steven Lilien, Ph.D. 54 Director
Allen I. Schiff, Ph.D. 56 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.
28
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 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. He 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. He holds a Ph.D. in
Biochemistry from University of Miami as well as a Master of Science in
Microbial Biochemistry from University of London.
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.
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.
29
Allen I. Schiff was elected a director of Ortec on June 11, 2001. He
has been Director of the Field Study Program at Fordham University Graduate
School of Business since 1992. That program performs consulting projects for
businesses and charitable institutions including a number of major well known
business and charitable entities. From 1985 through 1989 he was chairman of both
the undergraduate and the graduate accounting departments at Fordham University.
He has a Ph.D. in business administration and an MS in accounting, both from New
York University. He is a director and chairman of the audit committee of Data
Software and Systems, Inc., a publicly held company whose shares are listed on
NASDAQ and whose principal business is the development of compatible software
for use by utilities.
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 2001
through the grant of options pursuant to our Employee Stock Option Plan and
payment of $5,000 to Dr. Steven Lilien for his services as chairman of our audit
committee and $2,500 to Dr. Allen Schiff for his services in the last three
months of 2001 as a director and a member of our audit committee. Officers are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors.
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 $73,000. Dr. Eisenberg's fee is subject
to annual increases based on certain formulas. Dr. Eisenberg has agreed not to
compete with us until one year after termination of his consulting agreement.
Item 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth the compensation paid by us for our
fiscal years ended December 31, 2001, 2000 and 1999 to our Chief Executive
Officer and to each of our other executive officers (collectively, the "Named
Officers").
30
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------- ------------
Securities
Name and Other Annual Underlying
Principal Position Year Salary($) Bonus($) Compensation($) Options/SARs
------------------ ---- --------- -------- --------------- ------------
Steven Katz ........................... 2001 236,392 92,000 200,000
Chief Executive 2000 209,807 94,605 9,000* 129,278
Officer and Chairman 1999 200,000 35,000 9,000* 50,000
Ron Lipstein ......................... 2001 214,447 86,000 185,000
Vice Chairman, Secretary, 2000 179,712 78,105 9,000* 118,128
Treasurer and CFO 1999 165,000 50,000 9,000* 35,000
Costa Papastephanou................ 2001 181,625 60,000
President
Alain Klapholz ....................... 2001 170,604 20,000 60,000
Vice President 2000 159,808 30,000 23,300
and Director 1999 150,000 15,000 10,000
William Schaeffer ................... 2001 188,688 10,000
Chief Operating Officer 2000 167,308 17,000
1999 157,871 30,000 20,000
- ----------------------
* In lieu of health insurance.
Board Compensation
Drs. Steven Lilien and Allen I. Schiff are our only non-employee
directors. For Dr. Steven Lilien's services in 2001 as a director and as
chairman of our audit committee, in November 2001 we granted Dr. Lilien 7 year
options to purchase 15,000 shares of our common stock. For his services in 2001
as a director and as a member of our audit committee, in June and November 2001
we paid Dr. Schiff an aggregate of $2,500 and we granted Dr. Schiff 7 year
options to purchase an aggregate of 15,000 shares of our Common Stock. Such
options were granted under our Employee Stock Option Plan and different options
are exercisable at $4.75, $6.30 and $8.75 per share each.
31
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2001 by us to the Named
Officers:
Potential Realizable
Value at
Assumed Annual
Rates of Stock Price
Appreciation for
Individual Grants Option Term
----------------- -----------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year (1) ($/Share) Date 5% ($) 10% ($)
---- ------- --------------- --------- ---- ------ -------
Steven Katz 50,000 7.9 8.75 2/12/08 178,106 415,064
150,000 23.8 4.75 11/1/08 290,059 675,961
Ron Lipstein 45,000 7.1 8.75 2/12/08 160,296 373,557
140,000 22.2 4.75 11/1/08 270,722 630,877
Costa Papastephanou(2) 10,000 1.6 7.063 2/5/08 28,753 67,008
30,000 4.8 6.30 6/12/08 76,942 179,308
20,000 3.2 4.75 11/1/08 38,675 90,128
Alain Klapholz 10,000 1.6 8.75 2/12/08 35,621 83,013
50,000 7.9 4.75 11/1/08 96,686 225,320
William D. Schaeffer (2) 10,000 1.6 4.75 11/1/08 19,337 45,064
- ----------------------
(1) Options to purchase a total of 630,500 shares of common stock were
granted to our employees, including the Named Officers, during the fiscal
year ended December 31, 2001.
(2) The options granted to Messrs. Papastephanou and 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.
32
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 2001 and the value of the options
held as of December 31, 2001 by the Named Officers. None of the Named Officers
exercised any options in 2001 nor did Messrs. Katz, Lipstein or Klapholz hold
any options which were not exercisable at December 31, 2001. At December 31,
2001, Mr. Papastephanou and Mr. Schaeffer respectively held 60,000 and 35,874
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 625,028 $158,820
Ron Lipstein 633,128* 148,100
Costa Papastephanou 60,000 (not exercisable) 21,000
Alain Klapholz 202,300 52,940
William D. Schaeffer 34,876 2,625
William D. Schaeffer 35,874 (not exercisable) 7,875
- -------------------
* 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, 2001, as listed
on the Nasdaq SmallCap Market, was less than the exercise price of options
held by these five Named Officers to purchase an aggregate of 1,164,006
shares.
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.
33
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, 2002 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* 747,915(1) 7.2
Mark Eisenberg* 596,000 6.1
Ron Lipstein* 876,024(2) 8.5
Alain Klapholz* 491,806(3) 5.0
Costa Papastephanou* 4,250(4) ***
William D. Schaeffer* 40,114(5) ***
Steven Lilien 35,900(6) ***
19 Larchmont Street
Ardsley, NY 10502
Allen I. Schiff 15,000(7) ***
Fordham University
Graduate School of Business
113 West 60th Street
New York, NY 10023
George Soros 1,153,906(8) 11.9%
888 Seventh Avenue, 33rd Floor
New York, NY 10106
Franklin Resources, Inc. 688,866(9)(10) 7.1%
One Franklin Parkway
San Mateo, CA 94403-1906
Pequot Capital Management, Inc. 2,069,064(9)(10) 21.3%
5000 Nyala Farm Road
Westport, CT 06880
All officers and directors as a group 2,807,009(1-7) 25.0%
(eight persons)
34
* The address of these persons is at the Company's offices 3960 Broadway,
New York, NY 10032.
** 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, 2002. 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 625,853 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 618,953 shares issuable to Mr. Lipstein and 15,000 to his minor
children upon his and their exercise of outstanding options and warrants.
(3) Includes 26,900 shares owned by Mr. Klapholz' minor children. Mr. Klapholz
disclaims any beneficial interest in such 26,900 shares. Also includes
202,300 shares issuable to Mr. Klapholz upon his exercise of outstanding
options.
(4) Includes 2,500 shares issuable to Mr. Papastephanou upon his exercise of
outstanding options.
(5) Includes 37,514 shares issuable to Mr. Schaeffer on his exercise of
outstanding options.
(6) Includes 35,500 shares issuable to Dr. Lilien on his exercise of
outstanding options.
(7) All 15,000 shares are issuable to Dr. Schiff on his exercise of
outstanding options.
(8) As reported by Mr. Soros on a Form 13GA 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
35
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 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.
(9) As reported on Forms 13G filed by such persons with the Securities and
Exchange Commission.
(10) 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 four of our
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
36
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 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, 2001, 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.
37
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 did not file any report on Form 8-K in the fourth quarter of 2001.
(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
38
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: April 12, 2002
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 April 12, 2002
- ------------------------- Officer and Director (Principal
Steven Katz, Ph.D. Executive Officer)
- ------------------------------- Senior Vice President, Research
Dr. Mark Eisenberg and Development and Director
/s/ Ron Lipstein Vice Chairman, Chief Financial April 12, 2002
- ------------------------- Officer, Secretary,
Ron Lipstein Treasurer and Director (Principal
Financial and Accounting Officer)
/s/ Alain M. Klapholz Vice President, Operations April 12, 2002
- ---------------------- and Director
Alain M. Klapholz
39
Signature Title Date
- --------- ----- ----
/s/ Steven Lilien Director April 12, 2002
- ------------------------
Steven Lilien
/s/ Allen I. Schiff Director April 12, 2002
- ------------------------
Allen I. Schiff
Exhibit Index.
Exhibit No. Description
- ---------- -----------
3.1 Agreement of Merger of the Skin Group, Ltd. and the Company dated July
9, 1992 (1)
3.2 Original Certificate of Incorporation (1)
3.3 By-Laws (1)
4.1 Form of Certificate evidencing shares of Common Stock (1)
10.1 Agreement for Consulting Services dated as of June 7, 1991 by and between
the Company and Dr. Mark Eisenberg (1)
23 Consent of Grant Thornton LLP (2)
- ---------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form
SB-2 (File No. 33-96090), or Amendment 1 thereto, and incorporated herein
by reference.
(2) Filed herewith.
40
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, 2001 and 2000 F-3
Statements of Operations for the years ended December 31, 2001, 2000 and
1999, and for the cumulative period from March 12, 1991 (inception) to
December 31, 2001 F-5
Statement of Shareholders' Equity/(Deficit) for the cumulative
period from March 12, 1991 (inception) to December 31, 2001 F-6
Statements of Cash Flows for the years ended December 31, 2001, 2000 and
1999, and for the cumulative period from March 12, 1991 (inception) to
December 31, 2001 F-10
Notes to Financial Statements F-12 - F-40
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, 2001 and 2000,
and the related statements of operations, shareholders' equity/(deficit) and
cash flows for each of the three years in the period ended December 31, 2001,
and for the period from March 12, 1991 (inception) to December 31, 2001. 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, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, and for the
period from March 12, 1991 (inception) to December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A, the Company
incurred a net loss of $15,885,337 during the year ended December 31, 2001, and,
as of that date, the Company's current liabilities exceeded its current assets
by $2,529,159 and its total liabilities exceeded its total assets by $6,304,972.
These factors, among others, as discussed in Note A to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
GRANT THORNTON LLP
New York, Ne