-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SeXJA0zZtMPVGypUsfuIgKHEnP4WvNjN4Ol/VgaNQALa+Q8ERe+eXzvelm4iz7Jz FS5j3EeUq86MA373XEg4uw== 0000950117-04-001906.txt : 20040517 0000950117-04-001906.hdr.sgml : 20040517 20040517120839 ACCESSION NUMBER: 0000950117-04-001906 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTEC INTERNATIONAL INC CENTRAL INDEX KEY: 0000889992 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 113068704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-27368 FILM NUMBER: 04810660 BUSINESS ADDRESS: STREET 1: 3960 BROADWAY STREET 2: BLDG 28 CITY: NEW YORK STATE: NY ZIP: 10032 BUSINESS PHONE: 7183264698 10QSB 1 a37708.txt ORTEC INTERNATIONAL, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-QSB ----------- (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______________ to ____________ Commission file number 0-27368 ORTEC INTERNATIONAL, INC. (Exact name of small business issuer as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 11-3068704 (I.R.S. Employer Identification No.) 3960 Broadway New York, New York 10032 (Address of principal executive offices) (212) 740-6999 (Issuer's telephone number) ---------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the issuer's common stock is 5,420,665 (as of May 10, 2004) ================================================================================ ORTEC INTERNATIONAL, INC. INDEX TO QUARTERLY REPORT ON FORM 10-QSB FILED WITH THE SECURITIES AND EXCHANGE COMMISSION QUARTER ENDED March 31,2004 ITEMS IN FORM 10-QSB
Page ---- Facing page Part I - FINANCIAL INFORMATION Item 1. Condensed Financial Statements (Unaudited) 3 Item 2. Management's Discussion and Analysis of 18 Financial Condition and Results of Operation Item 3. Controls and Procedures 23 Part II - OTHER INFORMATION Item 1. Legal Proceedings 24 Item 2. Changes in Securities 24 Item 3. Default Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security None Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 26
2 Item 1. FINANCIAL STATEMENTS ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED BALANCE SHEETS
MARCH 31, 2004 DECEMBER 31, 2003 -------------- ----------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 421,445 $ 1,328,387 Prepaid and other current assets 344,520 33,756 ----------- ---------- Total current assets 765,965 1,362,143 Property and equipment (net of accumulated depreciation: 2004 - $3,829,960; 2003 - $3,749,251) 524,096 589,840 Patent application costs (net of accumulated amortization: 2004 - $372,782; 2003 - $352,998) 616,297 620,513 Deferred financing costs (net of accumulated amortization: 2004 - $15,371; 2003 - $13,883) 79,829 45,617 Deposits and other assets 155,241 114,158 ----------- ---------- Total assets $2,141,428 $2,732,271 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) Current liabilities: Accounts payable and accrued expenses $ 4,003,727 $ 4,451,848 Due to founder 399,683 398,574 Insurance premium financing payable 199,591 - Capital lease obligation, current (net of unamortized debt discount, 2004 - $18,500) 116,040 150,937 Loan payable - current 172,109 168,668 Advances payable (net of unamortized debt discount, 2004 - $85,600) 644,400 130,000 Promissory notes (net of unamortized debt discount, 2004 - $175,000 and 2003 - $271,000) 4,301,885 2,869,000 Obligation under revenue interest assignment 19,915,835 18,553,856 ----------- ----------- Total current liabilities 29,753,270 26,722,883 Promissory notes - noncurrent 121,870 - Loan payable - noncurrent 400,398 444,737 Capital lease obligation - noncurrent 59,747 41,058 --------- ---------- Total liabilities 30,335,285 27,208,678 COMMITMENTS AND CONTINGENCIES Shareholders' equity/(deficit): Common stock, $.001 par value; authorized, 200,000,000 shares; shares issued and outstanding: 2004: 5,422,665 and 5,420,665; 2003: 5,233,165 and 5,231,165, respectively 5,422 5,233 Preferred stock, $.001 par value, authorized 1,000,000 shares: Redeemable convertible - Series B, stated value $10,000 per share; authorized 1,200 shares; 50 shares issued; liquidation preference $500,000 270,859 270,859 Series C, stated value $6,000 per share; authorized 2,000 shares; 948 shares issued; liquidation preference $5,690,000 3,667,041 3,667,041 Convertible - Series D, stated value $10,000 per share; authorized 2,000 shares; 483 shares issued; liquidation preference $4,828,850 2,628,602 2,628,602 Additional paid-in capital 72,764,404 72,437,243 Deficit accumulated during the development stage (107,352,540) (103,307,740) Treasury stock, 2,000 shares, at cost (177,645) (177,645) ------------- ------------- Total stockholders' equity (deficit) (28,193,857) (24,476,407) ------------- ------------- Total liabilities and stockholders' equity (deficit) $ 2,141,428 $ 2,732,271 ============= ============= See accompanying notes to condensed unaudited financial statements.
3 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Cumulative from Three Months Ended March 31, March 12, 1991 --------------------------- (inception) to 2004 2003 March 31, 2004 ----- ----- -------------- Product revenue $ - $ - $ 265,665 -------------- ----------- ------------- Expenses Product and laboratory costs 775,769 381,709 24,927,893 Rent 120,968 272,999 3,611,480 Consulting 11,895 (32,282) 5,701,501 Personnel 959,405 970,570 34,287,840 General and administrative 430,650 576,544 17,801,707 Interest and other expense 1,624,142 1,068,551 14,660,044 Interest and other income (25,279) (14,669) (2,297,264) Lease termination costs - 1,130,243 1,119,166 Loss on extinguishment of debt and series A preferred shares - - 1,004,027 ----------- ---------- ----------- 3,897,550 4,353,665 100,816,394 ----------- ----------- ------------- Net loss (3,897,550) (4,353,665) (100,550,729) Preferred stock dividends 147,250 923,077 2,532,811 Accretion of discount - 3,059,000 4,269,000 ----------- ------------ ------------ Net loss applicable to common shareholders $(4,044,800) $(8,335,742) $(107,352,540) =========== =========== ============= Net loss per share Basic and diluted $ (.75) $ (3.35) $ (117.69) =========== =========== ============= Weighted average shares outstanding Basic and diluted 5,377,327 2,487,136 912,173 ============ =========== =============
See accompanying notes to condensed unaudited financial statements. 4 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)
Common Stock Preferred Stock ------------ --------------- Shares Amount Series B Series C Series D ------ ------ -------- -------- -------- March 12, 1991 (inception) to December 31, 1991 Issuance of stock Founders 155,382 $ 155 First private placement ($3.00 cash per share) 21,744 22 The Director ($11.50 and $53.00 cash per share) 14,902 15 Second private placement ($94.25 cash per share) 5,302 5 Share issuance expense Net loss ------------------------------------------------------------ Balance at December 31, 1991 197,330 197 Issuance of stock Second private placement ($94.25 cash per share) 4,932 5 Stock purchase agreement with the Director ($94.25 cash per share) 3,182 3 Share issuance expense Net loss ------------------------------------------------------------ Balance at December 31, 1991 205,444 205 Issuance of stock Third private placement ($100.00 cash per share) 13,215 13 Stock purchase agreement with Home Insurance Company ($90.00 cash per share) 11,112 11 Stock purchase agreement with the Director ($94.25 cash per share) 2,122 2 Shares issued in exchange for commission ($100.00 value per share) 60 1 Share issuance expenses Net loss ------------------------------------------------------------ Balance at December 31, 1993 (carried forward) 231,953 $ 232 Deficit accumulated Additional during the Total paid-in development Treasury shareholders' capital stage stock equity/(deficit) ------- ----- ----- ---------------- March 12, 1991 (inception) to December 31, 1991 Issuance of stock Founders $ 715 $ 870 First private placement ($3.00 cash per share) 64,978 65,000 The Director ($11.50 and $53.00 cash per share) 249,985 250,000 Second private placement ($94.25 cash per share) 499,995 500,000 Share issuance expense (21,118) (21,118) Net loss $ (281,644) (281,644) ------------------------------------------------------- Balance at December 31, 1991 794,555 (281,644) 513,108 Issuance of stock Second private placement ($94.25 cash per share) 465,468 465,473 Stock purchase agreement with the Director ($94.25 cash per share) 299,995 299,998 Share issuance expense (35,477) (35,477) Net loss (785,941) (785,941) ------------------------------------------------------- Balance at December 31, 1991 1,524,541 (1,067,585) 457,161 Issuance of stock Third private placement ($100.00 cash per share) 1,321,487 1,321,500 Stock purchase agreement with Home Insurance Company ($90.00 cash per share) 999,988 999,999 Stock purchase agreement with the Director ($94.25 cash per share) 199,998 200,000 Shares issued in exchange for commission ($100.00 value per share) 5,999 6,000 Share issuance expenses (230,207) (230,207) Net loss (1,445,624) (1,445,624) ------------------------------------------------------- Balance at December 31, 1993 (carried forward) $3,821,806 $(2,513,209) $ 1,308,829
5 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)
Common Stock Preferred Stock ------------ --------------- Shares Amount Series B Series C Series D ------ ------ -------- -------- -------- (brought forward) 231,953 $ 232 Issuance of stock Fourth private placement ($100.00 cash per share) 3,946 4 Stock purchase agreement with Home Insurance Company ($100.00 cash per share) 5,000 5 Share issuance expense Net loss ------------------------------------------------------------- Balance at December 31, 1994 240,899 241 Rent forgiveness Net loss ------------------------------------------------------------- Balance at December 31, 1995 240,899 241 Initial public offering 120,000 120 Exercise of warrants 3,389 3 Fifth private placement ($64.90 cash per share) 95,911 96 Share issuance expenses Stock options issued for services Net loss ------------------------------------------------------------- Balance at December 31, 1996 460,199 460 Exercise of warrants 115,878 116 Share issuance expenses Stock options and warrants issued for services Net loss ------------------------------------------------------------- Balance at December 31, 1997 (carried forward) 576,077 $ 576 Deficit accumulated Additional during the Total paid-in development Treasury shareholders' capital stage stock equity/(deficit) ------- ----- ----- ---------------- (brought forward) $ 3,821,806 $ (2,513,209) $ 1,308,829 Issuance of stock Fourth private placement ($100.00 cash per share) 397,708 397,712 Stock purchase agreement with Home Insurance Company ($100.00 cash per share) 499,995 500,000 Share issuance expense (8,697) (8,697) Net loss (1,675,087) (1,675,087) -------------------------------------------------------- Balance at December 31, 1994 4,710,812 (4,188,296) 522,757 Rent forgiveness 40,740 40,740 Net loss (1,022,723) (1,022,723) -------------------------------------------------------- Balance at December 31, 1995 4,751,552 (5,211,019) (459,226) Initial public offering 5,999,880 6,000,000 Exercise of warrants 33,882 33,885 Fifth private placement ($64.90 cash per share) 6,220,701 6,220,797 Share issuance expenses (1,580,690) (1,580,690) Stock options issued for services 152,000 152,000 Net loss (2,649,768) (2,649,768 -------------------------------------------------------- Balance at December 31, 1996 15,577,325 (7,860,787) 7,716,998 Exercise of warrants 10,822,675 10,822,791 Share issuance expenses (657,508) (657,508) Stock options and warrants issued for services 660,000 660,000 Net loss (4,825,663) (4,825,663) -------------------------------------------------------- Balance at December 31, 1997 (carried forward) $26,402,492 $(12,686,450) $13,716,618
6 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)
Common Stock Preferred Stock ------------ --------------- Shares Amount Series B Series C Series D ------ ------ -------- -------- -------- (brought forward) 576,077 $ 576 Exercise of warrants 22,149 22 Stock options and warrants issued for services Sixth private placement 20,000 20 Warrants issued in Sixth private placement Share issuance expenses Purchase of 660 shares of treasury (at cost) Net loss ------------------------------------------------------------- Balance at December 31, 1998 618,226 618 Exercise of warrants 1,410 1 Stock options and warrants issued for services Seventh private placement ($87.50 cash per share) 38,916 39 Warrants issued in Seventh private placement Eighth private placement ($55.00 cash per share) 163,637 164 Share issuance expenses Purchase of 910 shares of treasury (at cost) Net loss ------------------------------------------------------------- Balance at December 31, 1999 822,189 822 Exercise of options and warrants 17,554 17 Stock options and warrants issued for services Ninth private placement ($150.00 cash per share) 6,667 7 Warrants issued in Ninth private placement Tenth private placement ($67.50 cash per share) 124,757 125 Share issuance expenses Purchase of 430 shares of treasury stock (at cost) Net loss ------------------------------------------------------------- Balance at December 31, 2000 (carried forward) 971,167 $ 971 Deficit accumulated Additional during the Total paid-in development Treasury shareholders' capital stage stock equity/(deficit) ------- ----- ----- ---------------- (brought forward) $26,402,492 $(12,686,450) $ 13,716.618 Exercise of warrants 1,281,935 1,281,957 Stock options and warrants issued for services 1,920,111 1,920,111 Sixth private placement 1,788,678 1,788,698 Warrants issued in Sixth private placement 211,302 211,302 Share issuance expenses (48,000) (48,000) Purchase of 660 shares of treasury (at cost) $ (67,272) (67,272) Net loss (8,412,655) (8,412,655) ------------------------------------------------------------ Balance at December 31, 1998 31,556,518 (21,099,105) (67,272) 10,390,759 Exercise of warrants 14,102 14,103 Stock options and warrants issued for services 64,715 64,715 Seventh private placement ($87.50 cash per share) 3,168,746 3,168,785 Warrants issued in Seventh private placement 468,291 468,291 Eighth private placement ($55.00 cash per share) 8,999,838 9,000,002 Share issuance expenses (619,908) (619,908) Purchase of 910 shares of treasury (at cost) (75,518) (75,518) Net loss (10,040,509) (10,040,509) ------------------------------------------------------------ Balance at December 31, 1999 43,652,302 (31,139,614) (142,790) 12,370,720 Exercise of options and warrants 327,265 327,282 Stock options and warrants issued for services 56,265 56,265 Ninth private placement ($150.00 cash per share) 999,998 1,000,005 Warrants issued in Ninth private placement 23,000 23,000 Tenth private placement ($67.50 cash per share) 8,420,946 8,421,071 Share issuance expenses (641,500) (641,500) Purchase of 430 shares of treasury stock (at cost) (34,855) (34,855) Net loss (12,129,663) (12,129,663) ------------------------------------------------------------ Balance at December 31, 2000 (carried forward) $52,838,276 $(43,269,277) $(177,645) $ 9,392,325
7 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)
Common Stock Preferred Stock ------------ --------------- Shares Amount Series B Series C Series D ------ ------ -------- -------- -------- (brought forward) 971,167 $ 971 Stock options and warrants issued for services Net loss ------------------------------------------------------------- Balance at December 31, 2001 971,167 971 Exercise of options and warrants 35,723 36 Stock options and warrants issued for services Warrants issued with convertible debentures Warrants issued with convertible redeemable preferred stock Convertible debenture conversion benefit Redeemable convertible preferred stock conversion benefit Issuance of series B preferred stock (938 shares) ($10,000 cash per share) $ 9,382,742 Warrants issued and exercised with preferred stock 938,275 938 (3,479,043) Shares issuance costs - preferred stock (866,612) Preferred stock dividends 375,312 375 Net loss -------------------------------------------------------------- Balance at December 31, 2002 (carried forward) 2,320,477 $2,320 $5,037,087 Deficit accumulated Additional during the Total paid-in development Treasury shareholders' capital stage Stock equity/(deficit) ------- ----- ----- ---------------- Stock options and warrants issued for services $52,838,276 $(43,269,277) $(177,645) $ 9,392,325 Net loss 188,080 188,080 (15,885,377) (15,885,377) Balance at December 31, 2001 ---------------------------------------------------------- Exercise of options and warrants 53,026,356 (59,154,654) (177,645) (6,304,972) Stock options and warrants issued for services Warrants issued with convertible debentures 321 357 Warrants issued with convertible redeemable 113,060 113,060 preferred stock 440,523 440,523 Convertible debenture conversion benefit Redeemable convertible preferred stock 559,289 559,289 conversion benefit 1,042,663 1,042,663 Issuance of series B preferred stock (938 shares) ($10,000 cash per share) 1,097,886 1,097,886 Warrants issued and exercised with preferred stock Shares issuance costs - preferred stock 9,382,742 Preferred stock dividends 3,485,443 7,338 Net loss 304,615 (561,997) 1,125,559 (1,125,934) - (21,578,021) (21,578,021) Balance at December 31, 2002 (carried forward) ----------------------------------------------------------- $61,195,715 $(81,858,609) $(177,645) $(15,801,132)
8 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)
Common Stock Preferred Stock ------------ --------------- Shares Amount Series B Series C Series D ------ ------ -------- -------- -------- (brought forward) 2,320,477 $ 2,320 $ 5,037,087 Exercise of options and warrants 398,750 399 Issuance of preferred stock: series B (200 shares), series C (948 shares) 2,000,000 $ 5,690,000 Warrants issued with preferred stock (490,567) (1,225,632) Warrants issued for services Share issuance costs - preferred stock (393,488) (797,327) Conversion of series B preferred stock (605 shares) into common stock 2,421,556 2,422 (3,253,571) Conversion of series B preferred stock into series D Preferred stock (483 shares) (2,628,602) $2,628,602 Preferred stock deemed dividends and discounts Preferred stock dividends 92,308 92 Common stock dividend to be distributed on series C preferred stock Common stock to be issued in connection with promissory notes Adjustment for one for ten reverse stock 74 split Net loss ----------------------------------------------------------------- Balance at December 31, 2003 5,233,165 5,233 270,859 3,667,041 2,628,602 Common stock issued in connection with promissory notes 32,500 32 Common stock issued in connection with previously issued promissory notes 157,000 157 Common stock to be issued on advances payable upon conversion to promissory notes Common stock dividend to be distributed on Series B and C preferred stock Warrant to be issued in connection with lease Net loss ----------------------------------------------------------------- Balance at March 31, 2004 5,422,665 $5,422 $ 270,859 $ 3,667,041 $2,628,602 ================================================================= Deficit accumulated Additional during the Total paid-in development Treasury shareholders' capital stage Stock equity/(deficit) ------- ----- ----- ---------------- (brought forward) $61,195,715 $ (81,858,609) $(177,645) $(15,801,132) Exercise of options and warrants 12,567 12,966 Issuance of preferred stock: series B (200 shares), series C (948 shares) 7,690,000 Warrants issued with preferred stock 1,716,199 - Warrants issued for services 87,000 87,000 Share issuance costs - preferred stock 359,078 (831,737) Conversion of series B preferred stock (605 shares) into common stock 3,251,149 - Conversion of series B preferred stock into series D Preferred stock (483 shares) - Preferred stock deemed dividends and discounts 4,269,000 (4,269,000) - Preferred stock dividends 922,985 (923,077) - Common stock dividend to be distributed on series C preferred stock 336,550 (336,550) - Common stock to be issued in connection with promissory notes 287,000 287,000 Adjustment for one for ten reverse stock split Net loss (15,920,504) (15,920,504) --------------------------------------------------------- Balance at December 31, 2003 72,437,243 (103,307,740) (177,645) (24,476,407) Common stock issued in connection with promissory notes 58,768 59,000 Common stock issued in connection with previously issued promissory notes (157) - Common stock to be issued on advances payable upon conversion to promissory notes 102,600 102,600 Common stock dividend to be distributed on Series B and C preferred stock 147,250 (147,250) - Warrant to be issued in connection with lease 18,500 18,500 Net loss (3,897,550) (3,897,550) ---------------------------------------------------------- Balance at March 31, 2004 $72,764,404 $(107,352,540) $(177,645) $(28,193,857) ==========================================================
Common stock shares and amounts have been adjusted to reflect one for ten reverse stock split effective June 24, 2003. See accompanying notes to condensed unaudited financial statements. 9 ORTEC INTERNATIONAL INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Cumulative from Three Months Ended March 31, March 12, 1991 ---------------------------- (inception) to 2004 2003 March 31, 2004 ---- ---- --------------- Cash flows from operating activities Net loss $(3,897,550) $(4,353,665) $(100,550,729) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 303,300 158,497 5,111,206 Allowance for doubtful accounts - - 5,374 Unrealized loss on marketable securities - - 11,404 Realized loss on marketable securities - - 5,250 (Gain) Loss on sale of property and equipment (25,263) - (57,103) Cost to terminate lease on New Jersey facility - 1,130,243 836,032 Non-cash stock compensation - - 3,241,231 Non-cash imputed interest 1,361,979 1,042,633 13,268,985 Loss on extinguishment of debt and series A preferred stock - - 1,004,027 Purchase of marketable securities - - (19,075,122) Sales of marketable securities - - 19,130,920 Changes in operating assets and liabilities Accounts receivable - 1,000 (5,374) Prepaid and other current assets (32,247) 20,598 31,738 Accounts payable and accrued liabilities 354,754 142,354 5,233,503 ---------- ---------- ------------- Net cash used in operating activities (1,935,027) (1,858,340) (71,808,658) ---------- ---------- ------------- Cash flows from investing activities Purchases of property and equipment (8,127) (625) (4,473,847) Proceeds from sale of property and equipment 9,775 - 141,676 Payments for patent applications (15,568) (21,747) (987,299) Organization costs - - (10,238) Deposits (16,082) - (822,355) Purchases of marketable securities - - (594,986) Sale of marketable securities - - 522,532 ---------- ---------- ------------- Net cash used in investing activities (30,002) (22,372) (6,224,517) ---------- ---------- -------------
10 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
Cumulative from Three Months Ended March 31, March 12, 1991 ---------------------------- (inception) to 2003 2004 March 31, 2004 ---- ---- -------------- Cash flows from financing activities Proceeds from issuance of notes payable $ 650,000 $ - $ 4,305,500 Proceeds from issuance of common stock - 53,550,522 Proceeds from exercise of warrants - 535 20,660 Share issuance expenses and other financing costs - (306,796) (5,343,413) Purchase of treasury stock - - (177,645) Proceeds from issuance of loan payable - - 1,446,229 Proceeds from obligations under Revenue Interest Assignment - - 10,000,000 Proceeds from issuance of convertible debentures - - 5,908,000 Proceeds from issuance of redeemable preferred stock - series A - - 1,200,000 Proceeds from issuance of preferred stock - series B - 2,000,000 3,070,000 Proceeds from issuance of preferred stock - series C - - 5,690,000 Advances received 600,000 130,000 730,000 Repayment of capital lease obligations (41,894) (34,194) (406,544) Repayment of loan payable (40,898) (37,724) (902,654) Repayment of obligations under Revenue Interest Assignment - (33) (11,414) Repayment of insurance premium financing payable (80,409) - (80,409) Repayment of notes payable (28,712) - (544,212) ---------- ---------- ----------- Net cash provided by financing activities 1,058,087 1,751,788 78,454,620 ---------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (906,942) (128,924) 421,445 Cash and cash equivalents at beginning of period 1,328,387 826,227 - ---------- ---------- ----------- Cash and cash equivalents at end of period $ 421,445 $ 697,303 $ 421,445 ========== ========== =========== Cash paid during the period for: Interest $ 21,593 $ 25,000 $ 670,474 ========== ========== =========== Income taxes $ 500 $ - $ 200,576 ========== =========== ===========
11 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
Cumulative from Three Months Ended March 31, March 12, 1991 ---------------------------- (inception) to 2004 2003 March 31, 2004 ---- ---- -------------- Supplemental disclosures of cash flow information: Noncash investing and financing activities Assets acquired under capital leases $ 45,669 $ - $ 568,344 Deferred offering costs included in accrued professional fees - - 314,697 Financing costs - other long-term obligations 59,500 Forgiveness of rent payable - - 40,740 Share issuance expenses - warrants - - 255,000 Dividends on series B preferred stock paid in common shares 5,000 923,077 2,054,011 Dividends on series C preferred stock paid in 142,250 - 142,250 common shares Accretion of discount on preferred stock - 3,059,000 4,269,000 Share issuance expenses for series B preferred stock incurred through issuance of warrants - 86,692 391,307 Share issuance expenses for series C preferred stock incurred through issuance of warrants - - 272,386 Share issuance of series D preferred stock in exchange for series B preferred stock - - 2,628,602 Equipment transferred in satisfaction of 25,000 - 100,000 deposit Discount on promissory notes 59,000 - 346,000 Discount on advances payable 102,600 - 102,600 Insurance premium financing of prepaid insurance 280,000 - 280,000 Accounts payable converted to promissory notes 837,468 - 837,468 Accrued deferred financing costs 35,700 - 35,700 Warrant issued in connection with lease 18,500 - 18,500
See accompanying notes to condensed unaudited financial statements. 12 ORTEC INTERNATIONAL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) March 31, 2004 and 2003 NOTE 1 - FINANCIAL STATEMENTS The condensed balance sheet as of March 31, 2004, and the condensed statements of operations and cash flows for the three-month periods ended March 31, 2004 and 2003, and statements of shareholders' equity for the period from March 12, 1991 (inception) to March 31, 2004, have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position as of March 31, 2004, results of operations and cash flows for the period from March 12, 1991 (inception) through March 31, 2004, have been made. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto in the Company's December 31, 2003 annual report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the three-month period ended March 31, 2004, are not necessarily indicative of the operating results for the full year or any other interim period. The condensed balance sheet as of December 31, 2003 has been derived from the Company's audited balance sheet as of that date. NOTE 2 - FORMATION OF THE COMPANY AND BASIS OF PRESENTATION Formation of the Company Ortec International, Inc. ("Ortec" or the "Company") was incorporated in March 1991 as a Delaware corporation to secure and provide funds for the further development of the technology developed by Dr. Mark Eisenberg of Sydney, Australia, to replicate in the laboratory, a tissue engineered skin substitute for use in skin regeneration procedures (the "Technology"). Pursuant to a license agreement dated September 7, 1991, Dr. Eisenberg had granted Ortec a license for a term of ten years, with automatic renewals by Ortec for two additional ten-year periods, to commercially use and exploit the Technology for the development of products. In April 1998, Dr. Eisenberg assigned his patent for the Technology to Ortec. Basis of Presentation Ortec is a development stage enterprise, which had no operating revenue prior to December 2001. During 2001, the Company received Food and Drug Administration ("FDA") approval for the use of its product, OrCel, for treatment of Epidermolysis Bullosa and donor sites in burn patients. The Company then began marketing and selling its product for use on patients with these indications. Revenues to date have not been significant, as the Company has been focusing its efforts and resources towards its clinical trial for use of OrCel for the treatment of venous stasis ulcers. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a net loss of $3.9 million during the three months ended March 31, 2004, and, as of that date, the Company's current liabilities exceeded its current assets by $29 million, its total liabilities exceeded its total assets by $28.2 million and the Company has a deficit accumulated in its development stage of $107.4 million. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. 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 the Company, in exchange for marketing, distribution or other rights to our products. However, we can give no assurances that our 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 will be available to the Company on acceptable terms, if at all. We require substantial funding to continue our research and development activities, clinical trials, manufacturing, sales, distribution and administrative activities. During the quarter ended March 31, 2004, we raised an additional $1,250,000 consisting of $650,000 in 8% promissory notes due June 30, 2004 and $600,000 in advances payable ($480,000 of these advances payable were converted to 8% promissory notes in April 2004). In April and May 2004 we received an additional $1,770,000, all of which were 8% promissory notes due June 30, 2004. We are currently in the process of completing a 13 registration statement which was initially filed on September 22, 2003 with the Security and Exchange Commission ("SEC") to register shares of our common stock and warrants. If and when our registration statement becomes effective, we hope to receive net proceeds, after payment of placement fees and other expenses we incur in connection with the offering to enable us to execute our production plan with our third party manufacturer and prepare for sales in 2004, pay a portion of our past due obligations, repay a portion of our short-term promissory note borrowings, initiate the pivotal clinical trial for the use of OrCel in its cryopreserved form for the treatment of diabetic foot ulcers, and provide for our general and corporate working capital requirements for 2004. We believe that our cash and cash equivalents on hand at March 31, 2004, (approximately $.4 million) together with the additional funds we raised and hope to raise from the registered offering will enable us to continue our operations for the next 12 months. Additionally, we are continuing our equity financing efforts with an investment banking firm and we are currently exploring other potential collaborative arrangements with companies for sales and marketing and distribution of our product. These financial statements have been prepared assuming that Ortec will continue as a going concern. Successful future operations depend upon the successful development and marketing of Ortec's OrCel product. Historically Ortec has funded its operating losses by periodically raising additional sources of capital. If additional funding is not available to Ortec when needed, Ortec may not be able to continue operations. No adjustments have been made to the accompanying financials as a result of this uncertainty. Reclassifications Certain reclassifications have been made to the 2003 amounts to conform to the 2004 presentation. Reverse Stock Split On June 24, 2003, the Company effected a reverse stock split of its common shares outstanding, whereby every stockholder received one new common share for every ten previously outstanding common shares. All share and per share data have been adjusted to give effect to the reverse stock split. NOTE 3 - NET LOSS PER SHARE As of March 31, 2004, an aggregate of 4,782,998 outstanding warrants and options and an aggregate of 4,976,539 shares of common stock issuable upon the conversion of the preferred stock outstanding, if converted at $2.50, $2.00, and $2.00 for the Series B, C, and D preferred respectively, were excluded from the weighted average share calculations, as the effect was antidilutive. Basic and diluted loss per share for the quarter ended March 31, 2004 includes warrants to purchase 32,462 shares of common stock, exercisable at $.01 per share reflected as outstanding from the date of grant. As of March 31, 2003, an aggregate of 1,611,843 outstanding warrants and options, and an aggregate of 4,553,097 shares of common stock issuable upon the conversion of the preferred stock outstanding, if converted at $2.50, were excluded from the weighted average share calculations, as the effect would be antidilutive. Basic and diluted loss per share, for the quarter ended March 31, 2003, includes 37,692 warrants, exercisable at $.01 per share reflected as outstanding from the date of grant and 44,000 options which were granted in 2002, were exercised in February 2003 and considered outstanding for the entire quarter. 14 NOTE 4 - EMPLOYEES STOCK OPTIONS As permitted by SFAS 148, the Company continues to account for its employee stock options under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net loss for the quarter ended March 31, 2004, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share for the quarter ended March 31, 2004 and 2003, if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Quarter ended Quarter ended March 31, 2004 March 31, 2003 --------------------------------------------------------------------- -------------------- ------------------- Net loss, as reported $(4,044,800) $(8,335,742) --------------------------------------------------------------------- -------------------- ------------------- Deduct: Total stock-based employee compensation expense determined under fair value based method (89,000) (183,000) --------------------------------------------------------------------- -------------------- ------------------- Pro forma net loss $(4,133,800) $(8,518,742) --------------------------------------------------------------------- -------------------- ------------------- Loss per share: --------------------------------------------------------------------- -------------------- ------------------- Basic and Diluted - as reported $(.75) $(3.35) --------------------------------------------------------------------- -------------------- ------------------- Basic and Diluted - pro forma $(.77) $(3.43) --------------------------------------------------------------------- -------------------- -------------------
NOTE 5 - OBLIGATIONS UNDER REVENUE INTEREST ASSIGNMENTS On August 29, 2001, the Company entered into a Royalty Revenue Interest Assignment agreement with Paul Capital Royalty Acquisition Fund L.P. ("Paul Capital"), which terminates on August 29, 2011. Under such agreement the Company was eligible to receive $10,000,000 during 2001. The Company received $6,000,000 during 2001 and the remaining $4,000,000 in January 2002. In February 2003, Paul Capital and the Company signed an amendment to the agreement, restating and updating certain provisions of the original agreement, including removing additional funding requirements by Paul Capital. On February 26, 2003, Paul Capital invested an additional $500,000 in Series B preferred stock, in concurrence with this amendment. In consideration for the $10,000,000, Paul Capital will receive a minimum of 3.33% of end user sales of the Company's products in the U.S., Canada and Mexico. Such percentage may be further adjusted upward or downward, based on the volume of net sales to end users of the Company's products in those three countries. Beginning January 1, 2003, Paul Capital was entitled to receive each year advances from the first proceeds to the Company from end user sales of its products in North America. The agreement provides for quarterly and annual accountings between Paul Capital and the Company for those advance payments. Such annual amounts that Paul Capital will be able to draw in advance range from $600,000 in 2003 to $7,500,000 in 2005 and thereafter. The Company did not pay Paul Capital any advances in 2003, as there were no sales during the year as we discontinued the commercial sale of OrCel in the second half of 2002 due to budgetary constraints resulting from a difficult investment climate. The amounts received from Paul Capital have been classified as debt. Pursuant to the default provisions under the agreement which entitles Paul Capital to compel us to repurchase its interest in our revenues at a price equal to one hundred thirty (130) percent of $10,000,000, the purchase price paid to Ortec by Paul Capital, interest has been accrued at 30% per annum. For the quarters ended March 31, 2004 and 2003, the Company has accordingly recorded interest expense related to this obligation of $1,361,979 and $1,042,633, respectively. At such time when the default provisions are no longer applicable, the effective interest rate imputed on the obligation will be determined using the interest method and payments to Paul Capital will be recorded as a reduction of the Company's obligation under the revenue interest assignment. This may result in an imputed interest rate, which is significantly below 30% and could have a potential material financial impact. However, no assurances can be given that such lower rate could be achieved. In the event of a change in control of the Company or upon the occurrence of certain other events, including insolvency, as defined in the agreement, Paul Capital has the option to put its revenue interest back to the Company for an amount of cash flows which will generate a 30% internal rate of return to Paul Capital. The Company also has the option to repurchase Paul Capital's interest upon the occurrence of a change in control of the Company or a complete divestiture by the Company of its interests in its products, for an amount of cash flows that will generate a 35% internal rate of return to Paul Capital. At March 31, 2004, the Company's liabilities exceeded the value of its assets and as such, the Company was technically in default of the solvency requirement under the Paul Capital agreement. Although Paul Capital has had the right for well over a year to compel the Company to repurchase its interest in the Company's revenues at the price provided in the Company's agreement, Paul Capital has so far not exercised that right. At March 31, 2004, since the Company was in default of the 15 solvency requirement under the Revenue Interest Assignment agreement, the Company provided for an amount that approximated what it would have owed Paul Capital had they exercised their repurchase option. To date, Paul Capital has not exercised this option and has not indicated to the Company that they intend to compel it to repurchase its revenue interest. Once the Company is no longer insolvent and therefore no longer in breach of the agreement, Paul Capital bears the risk of revenue interest paid to it being significantly less than the revenue interest liability, as well as the reward of revenue interest paid to it being significantly greater than the interest liability. The Company granted Paul Capital a security interest in its United States and Canadian patents and trademarks relating to its technology for its OrCel product, to secure payments required to be made by the Company to Paul Capital under this agreement. NOTE 6 - STOCK OPTIONS AND WARRANTS The following represents stock option and warrant activity during the three months ended March 31, 2004:
Stock Options Warrants Total ------------- -------- ----- Balance at December 31, 2003 1,622,599 3,085,173 4,707,772 Granted 88,500 -- 88,500 Exercised -- -- -- Expired or cancelled (8,558) (4,716) (13,274) --------- --------- --------- Balance at March 31, 2004 1,702,541 3,080,457 4,782,998 ========= ========= =========
Additionally, as of March 31, 2004, there were 1,274,400 stock options outstanding that were granted outside of the plan. The Company accounts for its employee stock options under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net loss for the quarter ended March 31, 2004, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. NOTE 7 - ADVANCES PAYABLE During the quarter ended March 31, 2004, the Company received non-interest bearing advances aggregating $600,000 from various investors. At March 31, 2004 advances payable was $644,400. This consisted of $730,000 of advances recorded net of a $102,600 debt discount. $17,000 of this debt discount was amortized to interest expense during the quarter ended March 31, 2004. The $102,600 debt discount represented a 5% fee, or the value of 36,500 common shares, the Company expects to pay its placement agent upon conversion of $730,000 into promissory notes. $480,000 of these advances payable were converted into promissory notes in April 2004. NOTE 8 - PROMISSORY NOTES Promissory notes consist of:
March 31, December 31, 2004 2003 ---- ---- 8% investor promissory notes due June 30, 2004 $3,790,000 $3,140,000 Discount on 8% investor notes (175,000) (271,000) ---------- ---------- $3,615,000 $2,869,000 Promissory notes - Amarex, due February, 2005 648,060 - 4% Promissory note - CUH2A, due February, 2008 160,695 - ---------- ---------- $4,423,755 $2,869,000 Current portion 4,301,885 2,869,000 ---------- ---------- Noncurrent portion $ 121,870 $ - ========== ==========
The Company received additional investor notes aggregating $650,000 during the quarter ended March 31, 2004. The Company records a 5% fee paid in common stock due its placement agent on the face value of the promissory notes as a note 16 discount which is then amortized over the life of the note to interest expense. In the first quarter of 2004, the Company issued 189,500 shares of its common stock, 5% of $3,790,000, which it valued at $346,000. The Company settled its lawsuit with Amarex by issuing them a non-interest bearing promissory note. See Note 10. The CUH2A promissory note was a result of a structured payout of a previous vendor obligation. NOTE 9 - RELATED PARTY TRANSACTIONS The Company owes Dr. Mark Eisenberg, one of its directors, who is also one of our founders, an aggregate of $399,683 at March 31, 2004. Of such amount $304,478 was for consulting services Dr. Eisenberg had provided to the Company under an agreement the Company had with him, $65,919 was for payments Dr. Eisenberg made in the Company's behalf for the laboratory we maintained in Australia (including salaries and obligations to suppliers) and $29,286 for rent the Company owed him for the space occupied by our laboratory. The Company no longer operates a laboratory in Australia. The Company has reached an agreement in principal with Dr. Eisenberg to grant him options to purchase 100,000 shares of its common stock at an exercise price of $2.00 per share, as payment in full of all the amounts owed him. The Company has not yet submitted that agreement to its board of directors for their approval. NOTE 10 - COMMITMENTS AND CONTINGENCIES Placement Agent Agreement: By Letter Agreement dated February 3, 2004 the Company made Burnham Hill Partners ("BHP"), a division of Pali Capital, Inc., its exclusive placement agent in connection with the Company's sale of up to 6,000,000 shares of its common stock and warrants to purchase an additional 3,000,000 shares of our common stock, pursuant to a registration statement initially filed with the SEC on September 22, 2003. BHP shall receive a cash fee equivalent to 10% of the gross proceeds of the financing. BHP will also receive five-year warrants to purchase 10% of the number of shares sold by the Company in the financing, exercisable at the purchase price of the common shares sold by the Company in the financing. The shares underlying BHP's warrants will have piggyback registration rights, a cashless exercise provision, shall be non-redeemable and shall become exercisable six months and one day after the closing of the financing. BHP will receive an additional fee of 4% of the gross cash proceeds received by the Company from the exercise of any warrants received by the purchasers of the common stock, which are exercised within thirty-six months after the financing. If the Company elects to redeem the warrants and the warrants are thereafter exercised, then the BHP fee will be reduced to 2%. Warrant: In connection with a lease agreement dated February 27, 2004, the Company is obligated to issue a two-year warrant to purchase 14,052 shares of its common stock at $3.25. The Company has valued the warrant utilizing a Black-Scholes valuation model at $18,500. The Company has not yet submitted the warrant to its board of directors for their approval. Legal Matters: In December 2002 Amarex LLC commenced an action against us in the Circuit Court for Montgomery County, Maryland. Amarex provided statistical programming and data management services for us for the data generated in our clinical trials. In March 2004 the Company settled the litigation by agreeing to pay Amarex $673,060, of which we have paid $75,000 through April 2004. We are required to pay $60,000 each month thereafter until the obligation is paid in full. The settlement also provides that Amarex will release to us the work they previously performed for us in connection with our diabetic foot ulcer clinical trials. NOTE 11 - SUBSEQUENT EVENTS Financings: In April 2004 $480,000 of the Company's outstanding advances payable were converted to 8% promissory notes due June 30, 2004. The Company's placement agent will receive a fee payable in common stock equivalent to 5% of this amount, or 24,000 shares of common stock. An additional 12,500 shares will be issued to the placement agent upon conversion of the final $250,000 in advances payable. See Note 7. In April and May 2004 the Company received additional aggregate proceeds of $1,770,000, all of which were 8% promissory notes due June 30, 2004. On April 26, 2004 the Board authorized the issuance of an additional 81,000 shares of its common stock to its placement agent which represented the placement agent's 5% fee on proceeds from $1,620,000 of these 8% promissory notes. The Company's placement agent is due an additional 7,500 shares of common stock on the additional $150,000 received. Fee Received: In May 2004 the Company received a $50,000 up-front fee in connection with its sale of certain specified cell lines. 17 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and notes thereto. This discussion may be deemed to include forward-looking statements Forward Looking Information May Prove Inaccurate This Quarterly Report on Form 10-QSB contains certain forward looking statements and information relating to Ortec that are based on the beliefs of management, as well as assumptions made by and information currently available to us. When used in this document, the words "anticipate," "believe," "estimate," and "expect" and similar expressions, as they relate to Ortec, are intended to identify forward looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including those described in this discussion and elsewhere in this Quarterly Report on Form 10-QSB. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. We do not intend to update these forward-looking statements. General Since our inception we have been principally engaged in the research and development of our tissue engineered skin regeneration product, for use in the treatment of chronic and acute wounds, such as venous and diabetic skin ulcers and autograft donor site wounds for burn victims. We call our product OrCel 'r'. In February 2001 we received FDA approval to make commercial sales of OrCel for use in reconstructive surgery on patients with recessive dystrophic epidermolysis bullosa, followed by FDA approval in September 2001 for use of the product in the treatment of donor site wounds in burn patients. With these approvals, though we are still a development stage enterprise, in December 2001 we began commercial sales of our product. During 2002, we engaged a sales force organization to actively pursue sales of our product, but due to a reduction in anticipated financing, we curtailed these activities in the second half of 2002 in order to focus our efforts and resources towards completing the clinical trials for the use of OrCel for the treatment of venous stasis ulcers. As a result of this curtailment, there have been no commercial sales of our product in the current quarter. In 2003, we completed a pivotal clinical trial for the use of OrCel in its cryopreserved form for the treatment of venous stasis ulcers. Venous stasis ulcers are open lesions on the legs, which result from the poor circulation of blood returning from the legs to the heart. The study was conducted at 19 clinical sites and 136 patients were treated in the trial. One half of the patients were a control group and were treated with standard of care currently being used for treatment of venous stasis ulcers. In December 2003, we initiated the filing of the Premarket Approval (PMA) application with the Food and Drug Administration (FDA) to market OrCel for the treatment of venous leg ulcers. We submitted the Manufacturing and Controls (CMC) section, the first of two modules of the application. The final section of the PMA, which included a summary of safety and effectiveness in the clinical studies and device labeling, was filed with the FDA in February 2004. In June 2002, we received approval from the FDA to initiate a pivotal clinical trial using OrCel in the treatment of diabetic foot ulcers. Diabetic ulcers are open sores that remain after the destruction of surface tissue. We have deferred the implementation of the diabetic foot ulcers pivotal clinical trial until after FDA determination of whether we may make commercial sales of cryopreserved OrCel to treat venous stasis ulcers. From inception to date, we have incurred cumulative net losses of approximately $107.3 million. We expect to continue to incur substantial losses and may have to discontinue operations, unless we are able to secure FDA clearance for the sale of OrCel in its cryopreserved form to treat venous leg ulcers, and later diabetic foot ulcers, gain market acceptance for OrCel, and execute our production plans with our third party manufacturer. In October 2003, we entered into a contract manufacturing agreement for the production of OrCel with Cambrex Bio Science 18 Walkersville, Inc, a subsidiary of Cambrex Corporation. Cambrex's current capacity is expected to meet our commercial manufacturing requirements for the first twelve months following the market launch of OrCel if and when we receive FDA approval for the sale of our product for use in the treatment of patients with venous stasis ulcers. This agreement will allow us to avoid the costlier plan of constructing our owned manufacturing facility. We are also concurrently in the process of evaluating various sales and marketing collaborative arrangements for the distribution of our product in the United States. 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 marketing and distribution of our product. We anticipate that our operating activities will result in substantial net losses until we obtain FDA clearance to sell OrCel and we successfully market OrCel for the treatment of venous stasis ulcers. Critical Accounting Estimates Revenue Recognition. Product revenue is recognized upon shipment of OrCel when title and risk of loss pass to the customer, which occurs when the product is received by the end user hospital. Royalties from licensees will be based on third-party sales of licensed products and will be recorded in accordance with contract terms when third-party results are reliably measurable and collectibility is reasonable assured. Fees paid to Ortec upon entering a license agreement are recognized when earned as defined by the terms of the agreement. Research and Development Costs. As we are still engaged in clinical trials of our product and remain a development stage enterprise, the cost of producing product for clinical trials and for sale, is included in Research and Development costs. Additionally, all research and development costs, which comprise of product production and laboratory costs, rent, consulting, personnel and depreciation and amortization expenses, are expensed as incurred. Obligation under Revenue Interest Assignment Agreement. We account for our Revenue Interest Assignment Agreement with Paul Capital Royalty Acquisition Fund, L.P. in a manner similar to that of debt. Currently, our liabilities exceed the value of our assets and as such, we are technically in default of the solvency requirement under this agreement. Pursuant to the default provisions, which entitles Paul Capital to compel us to repurchase its interest in our revenues at a price equal to one hundred thirty (130) percent of $10,000,000, the purchase price paid to Ortec by Paul Capital, interest on such debt has been accrued at an amount which would yield a 30% internal rate of return to Paul Capital. At such time when the default provisions are no longer applicable and a reasonable estimate of future revenues can be determined, the effective interest rate imputed on the obligation will be determined using the interest method and payments to Paul Capital will be recorded as a reduction of our obligation under the revenue interest assignment agreement. This may result in an imputed interest rate, which is significantly below 30% and could have a potential material financial impact. However, no assurances can be given that such lower rate could be achieved. Additionally, we had no revenues in the first quarter of 2004 as we suspended sales of OrCel in 2002 to focus on completing a clinical trial for venous stasis ulcers and submitting the results to the Food and Drug Administration (FDA). We hope to obtain FDA approval to sell OrCel for the treatment of venous stasis ulcers in the second half of 2004; however approval cannot be assured. In addition, if approval is obtained from the FDA, the timing of such event may not be in line with our expectations. For these reasons, we may not be able to make a reasonable estimate of future revenues and payments that may become due to Paul Capital under this financing agreement in 2004, if we are no longer in technical default of this agreement, and as such may not be able to determine an effective interest rate to apply to the debt. Therefore, given these uncertainties, once we are no longer in technical default, we will charge revenue interest expense as revenues subject to the revenue interest obligation are recognized. When we are able to make a reasonable estimate of our related revenue interest obligation, interest expense will be charged based upon the interest method. RESULTS OF OPERATIONS Three Months Ended March 31, 2004 and March 31, 2003. Revenues As previously discussed, our sales activities were curtailed in the second half of 2002, resulting in no product revenues generated in the quarter ended March 31, 2004. Expenses Expenses decreased by approximately $.5 million to approximately $3.9 million in the 2004 quarter from approximately $4.4 19 million in the 2003 quarter. Product and laboratory costs. These expenses increased by approximately $.4 million to $.8 million in the 2004 quarter, compared with $.4 million in the 2003 quarter. During 2004 we have increased our costs as we begin the commercial validation of our product. Increased costs in the 2004 quarter included $.3 million paid to Cambrex for contract production costs, and approximately $80,000 paid to the FDA as a filing fee to obtain a PMA to market OrCel for the treatment of venous stasis ulcers. Additionally we began clinical trials on diabetic foot ulcers and incurred approximately $30,000 in costs. Consulting. During the current quarter, we did not incur any significant consulting expenses, as we have been focused on completing the venous stasis clinical trial, and as such have utilized primarily existing personnel. Personnel. Personnel costs were comparable at approximately $1.0 in the 2004 and 2003 quarters. General and Administrative. These expenses decreased by approximately $.2 million to $.4 million in the 2004 quarter from $.6 million in the 2003 quarter, primarily due to reductions in depreciation of $30,000, investor and public relations of $47,000, and $75,000 in insurance expenses incurred in 2004 compared with 2003. Rent and Lease Termination Costs. Rent expense decreased by approximately $150,000 in the 2004 quarter to $121,000 from $273,000. In 2004 we leased laboratory space in New Jersey covering 800 square feet compared to 26,000 square feet in 2003. This accounted for $110,000 of the decrease in cost. The balance of the decrease was attributable to extra space that we occupied in our New York City office and laboratory facility in the 2003 quarter. Lease termination costs of $1.1 million in 2003 included .9 million in lease settlement costs we paid to the NJ Economic Development Authority, and $.2 million of other leasehold costs incurred directly by us. The lease was terminated in the second quarter of 2003. Interest Expense. Interest expense increased by approximately $.6 million in the quarter ended March 31, 2004, compared with the expense incurred in the quarter ended March 31, 2003. Approximately $.3 million of the increase was due to the non-cash imputed interest accrued on the Paul Capital agreement. Although interest was accrued at 30% per annum for both periods, at March 31, 2004, interest was accrued on a higher level of debt outstanding. Due to the default provisions under the agreement, interest has been accrued at 30% per annum in 2004, which provision may be adjusted in the future if the default provisions are not longer applicable and interest will then be accrued based on the expected level of future revenues. The additional $.3 million increase was attributable to the interest charges related to the outstanding promissory notes and advances payable. LIQUIDITY AND CAPITAL RESOURCES Since inception (March 12, 1991) through March 31, 2004, we have accumulated a deficit of approximately $107.4 million and we expect to continue to incur substantial operating losses until we obtain FDA approval to sell our product, OrCel, for the treatment of venous stasis ulcers and successfully market OrCel to the medical community. We have financed our operations primarily through private placements of our common stock, preferred stock, promissory notes payable and convertible debentures, our initial public offering, and the exercise of our publicly traded Class A warrants at the end of 1997. From inception to March 31, 2004, we received approximately $78.5 million from our financing activities. This consisted of cash proceeds from the sale of equity securities, net of share issuance expenses, of approximately $53.6 million, cash proceeds from the issuance of debentures, promissory notes and preferred stock of $14.9 million, and a total of $10.0 million from the sale of a percentage interest in our future revenues from the sale of our product in North America. For the three months ended March 31, 2004, we used net cash for operating activities of approximately $1.9 million. Cash used in operating activities resulted primarily from our net loss of $3.9 million, offset by depreciation and amortization of approximately $.3 million and approximately $1.4 million of non-cash interest expense on the Paul Capital revenue interest assignment obligation. In the quarter ended March 31, 2004, we received gross proceeds of $1.25 million consisting of $650,000 of 8% promissory notes due June 30, 2004 and $600,000 of advances payable. In April 2004 $480,000 of these advances payable were converted to 8% promissory notes due June 30, 2004. In the quarter we issued common stock to our placement agent equivalent to 5% of the face value of our outstanding $3.79 million in promissory notes, or 189,500 shares, in connection with these financings. In August 2001 we entered into a Revenue Interests Assignment agreement with Paul Capital Royalty Acquisition Fund, L.P. pursuant to which we agreed in consideration of Paul Capital paying us $10,000,000, to pay to Paul Capital 3 1/3% of the end user sales prices paid for our OrCel product in the United States, Canada and Mexico through the period ending in 2011. Such percentage interest in our revenues in those three countries may be adjusted upward or downward based on the volume of sales to end users of OrCel in those three countries. In accordance with the terms of the Revenue Interest Agreement, beginning on 20 January 1, 2003 we are required to make advances payments on the revenue interest obligation as follows: the first $0.6 million of annual net sales for the year ended December 31, 2003; the first $1.0 million of annual net sales for the year ended December 31, 2004 and the first $7.5 million of annual net sales for each subsequent calendar year thereafter through the year ending December 31, 2011. The Company did not pay Paul Capital $0.6 million in 2003 as we discontinued the commercial sale of OrCel in the second half of 2002 due to budgetary constraints resulting from a difficult investment climate. We will not resume sales unless we obtain FDA approval for the use of OrCel in the treatment of venous stasis ulcers, which is not expected to occur before the second half of 2004. As security for the performance of our obligations to Paul Capital, we have granted Paul Capital a security interest in all of our U.S. patents, patent applications and trademarks. Our agreement with Paul Capital provides that in certain events Paul Capital may, at its option, compel us to repurchase the interest in our revenues that we sold to Paul Capital for a price equal to the $10,000,000 Paul Capital paid us plus an amount that would yield Paul Capital a 30% internal rate of return on their investment. That repurchase price would have been approximately $19,915,835 as of March 31, 2004. Among the events that would entitle Paul Capital to compel us to repurchase its interest in our revenues at that price is if we are insolvent or if we are unable to pay our debts as they become due. Our agreement with Paul Capital provides that in determining such insolvency any amount we owe to Paul Capital is excluded in calculating our net worth (or negative net worth). As defined in our agreement with Paul Capital we are currently insolvent. In addition, although we are currently trying to manage our debt we are not paying our debts as they become due. Although Paul Capital has had the right for well over a year to compel us to repurchase its interest in our revenues at the price provided in our agreement, Paul Capital has so far not exercised that right. If Paul Capital does exercise its right to compel us to repurchase its interest in our revenues we would be unable to pay the purchase price and Paul Capital could foreclose its security interest in our U.S. patents, patent applications and trademarks and in such event we will have to discontinue our business operations. In addition to the requirement that the Company remain solvent, as described above, the occurrence of certain events, including those set forth below, triggers Paul Capital's right to require us to repurchase its revenue interest: o a change of control of our company; o the transfer of all or substantially all of our consolidated assets; o the transfer of all or any part of our respective interests in our products other than pursuant to any distribution agreements, license agreements and future agreements; and o a judicial decision that has a material adverse effect on our business, operations, assets or financial condition as defined by the agreement. If a repurchase event occurred and Paul Capital required us to repurchase their interest in our revenues, we may not have sufficient cash funds to pay Paul Capital. As such, Paul Capital could foreclose on certain assets that are essential to our operations. The exact amount of the repurchase price is dependent upon certain factors, including when the repurchase event occurs. At March 31, 2004, since the Company was in default of the solvency requirement under the Revenue Interest Assignment agreement, we provided for an amount that approximated what we would have owed Paul Capital had they exercised their repurchase option. To date, Paul Capital has not exercised this option and has not indicated to us that they intend to compel us to repurchase its revenue interest. Once the Company is no longer insolvent and therefore no longer in breach of the agreement, Paul Capital bears the risk of revenue interest paid to it being significantly less than the revenue interest liability, as well as the reward of revenue interest paid to it being significantly greater than the interest liability. In February 2003, Paul Capital amended its agreement with us, restating and updating certain provisions of the original agreement. The original agreement and modifications to the agreement terminate on December 31, 2011, unless terminated earlier by either party, as permitted by the terms of the agreement. The 50 shares of Series B preferred stock are held by Paul Capital. The Series B preferred stock is convertible into common shares at any time at the option of Paul Capital, based on a fixed conversion rate of the $10,000 per Series B preferred share liquidation amount of not less than $3.00 per common share, based on an alternative conversion rate of the $10,000 per Series B preferred share liquidation amount of 90% of the average of the five lowest volume weighted average prices for our common stock for the twenty trading days immediately prior to conversion, subject to a minimum conversion rate of $2.50 per common share of common stock. The 948 shares of Series C preferred stock are convertible at any time at the option of the holders into 2,844,999 shares of common stock (the $6,000 per Series C preferred share liquidation amount at a conversion rate of $2.00 per common share). 21 The conversion rate may be reduced should we sell shares of our common stock at less than $2.00 per share. An accrued dividend of $478,800 (inclusive of $142,250 accrued in the current quarter) at March 31, 2004 has been provided within stockholders' equity / (deficit) as it is our intent to issue common shares in payment of these dividends. The Series C convertible preferred stock shall automatically convert if the common stock of the Company trades at a price equal to or greater than $6.00 per share for a period of 10 consecutive trading days. Additionally, each investor was issued 1,800 five-year warrants for each Series C convertible preferred share purchased. The Series C warrants have an exercise price of $3.60 per common share. Beginning May and July 2005 the Company may redeem the Series C warrants for $.10 per warrant of our common stock closes above $10.80 per share for 10 consecutive trading days. The 483 Series D shares of preferred stock are convertible at any time at the option of the holders into 1,931,540 shares of common stock (the $10,000 per Series D preferred shares liquidation amount at a conversion rate of $2.50 per common share). The preferred stock has redemption provisions, where upon occurrences of certain events, the holders can require us to redeem the shares. Such provisions include: o the consolidation, merger or other business combination of the Company with or into another Person, except for a migratory merger effected solely for the purpose of changing jurisdiction of incorporation, or if the holders of the Company's voting power have the ability after the transaction is completed to elect a majority of members of the board of directors of the surviving entity or entities; o the sale or transfer of more than 20% of the Company's assets other than inventory in the ordinary course of business; or o consummation of a purchase, tender or exchange offer made to the holders of more than 30% of the outstanding shares of Common Stock. The redemption price is payable, at the option of the Company, in cash or in common stock. If we do not have sufficient authorized shares to effect the redemption payment in common stock, we may pay the remainder of the redemption in non-redeemable preferred stock with a dividend rate of 18%. In October 2003, we entered into a cell therapy manufacturing agreement with Cambrex Bio Science Walkersville, Inc., a subsidiary of Cambrex Corporation, for the commercial manufacture of Ortec's tissue engineered product, OrCel. It is expected that Cambrex will begin production of OrCel in the first half of 2004 and this inventory may be used for sale in the second half of 2004 if we receive FDA clearance to market OrCel for use on patients in the treatment of venous stasis ulcers. Pursuant to the terms of this agreement, we are required to pay Cambrex a monthly fee for the use of a production suite in their facility located in Walkersville, Maryland while we are in Phase I of the production plan, as defined by the agreement. During Phase I only, we may terminate this agreement by giving 6 months advance notice of the effective date of such termination. However no such termination will be effective prior to November 1, 2004. At any time during Phase I, we can elect to initiate Phase II of the agreement by written notice to Cambrex. The monthly payments we will make to Cambrex will increase if we require Cambrex to build us a larger production facility to meet our requirements for the production of OrCel. Such annual payments we are required to make will further increase by a small percentage each year. Such monthly payments include some services and overhead expenses provided and paid for by Cambrex. We are required to pay a portion of the cost of construction of that larger production facility. However, the amount we contribute to the construction of that larger facility will be repaid to us by credits against a portion of the future monthly payments we are required to make to Cambrex after the larger facility is in use. We are also required to pay specified hourly charges for the Cambrex employees engaged in the production of OrCel as well as certain other charges. After construction of the larger production facility we are required to acquire from Cambrex virtually all of our requirements for OrCel that Cambrex can produce. Prior to our election to have Cambrex construct the larger production facility for us, either we, or Cambrex, may terminate the agreement on 6 months notice by us and 12 months notice by Cambrex, except that such termination will not be effective prior to November 1, 2004. If we elect to have Cambrex construct the larger production facility for us the agreement will continue for 6 years after the larger production facility is constructed. However, even after such construction we, and Cambrex, may elect to scale down over the following three years the portion of our requirements for OrCel that Cambrex will produce for us. We may elect the scale down period at any time after one year after the larger production facility is constructed and in operation in which event there are additional payments we must make to Cambrex. Either Cambrex or we may elect the scale down period later than 3 years after that facility is in operation and neither of us will be required to make any additional payments to the other because of that election. If after the construction of the larger production facility, we breach a material term of our agreement with Cambrex, or elect to terminate the agreement, there are substantial payments we must make to Cambrex. 22 As of March 31, 2004, payment of approximately $2.5 million of the approximately $3 million we owed to our trade creditors was past due. While we have arranged for payment of some our obligations over a period of time, and have to make some payments of past due obligations to our current and ongoing suppliers, our ability to make payments we have agreed to pay and to insure continued receipt of needed supplies, and to continue reducing our past due obligations, will depend on our ability to secure needed financing. Raising additional capital can be dependent on numerous factors, such as our ability to obtain regulatory approval for the commercial sale of OrCel to treat venous stasis ulcers, and, later diabetic foot ulcers as well as the general investment climate. We require substantial funding to continue our research and development activities, clinical trials, manufacturing, sales, distribution and administrative activities. We have raised funds in the past through the public or private sale of equity securities and debentures, the issuance of promissory notes to lenders most of whom were investors in our Series C Convertible Preferred Stock, and through the agreement with Paul Capital. We will need to raise additional funds in the future through collaborative arrangements with a pharmaceutical sales company and through the sale of our securities to the public and through private placements, debt financing or short-term loans. We can give no assurance of the total amount of financing that will be secured. We are continuing to use the services of an investment banking firm in raising capital in 2004. Our capital funding requirements depend on numerous factors, including: o the progress and magnitude of our research and development programs; o the time involved in obtaining regulatory approvals for the commercial sale of our OrCel product in its cryopreserved form to treat venous stasis ulcers, and later diabetic foot ulcers; o the costs involved in filing and maintaining patent claims; o technological advances; o competitive and market conditions; o our ability to establish and maintain collaborative arrangements; o the successful implementation of an agreement we have entered into with Cambrex Bio Science Walkersville, Inc. for manufacturing of our OrCel product in its cryopreserved form; and o the cost and effectiveness of commercialization activities and arrangements. We have filed a registration statement with the Securities and Exchange Commission to register our sale of 6,000,000 shares of our common stock together with the issuance of warrants to purchase an additional 3,000,000 shares of our common stock. We hope that the proceeds we may receive from this offering will enable us to execute our production plan with our third party manufacturer and prepare for sales in 2004, pay a portion of our past due obligations, repay a portion of our short-term promissory note borrowings, initiate the pivotal clinical trial for the use of OrCel in its cryopreserved form for the treatment of diabetic foot ulcers, and provide for our general and corporate working capital requirements for 2004. We believe that our cash and cash equivalents on hand at March 31, 2004 of approximately $421,000, as well as the additional funds we have raised and hope to raise from the registered offering will enable us to continue our operations for the next 12 months. However, we can give no assurance that additional investment or other funds can be secured. We are also likely to continue to encounter difficulties which are common to development stage companies, including unanticipated costs relating to development, delays in the testing of products, regulatory approval and compliance and competition. 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 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 3. CONTROLS AND PROCEDURES 23 1. Evaluation of disclosure controls and procedures. The Company's chief executive officer and its chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of a date within 90 days of the filing date of the quarterly report (the "Evaluation Date") have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared. 2. Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken. PART II Item 1. LEGAL PROCEEDINGS In December 2002 Amarex LLC commenced an action against us in the Circuit Court for Montgomery County, Maryland. Amarex provided statistical programming and data management services for us for the data generated in our clinical trials. In March 2004 the Company settled the litigation by agreeing to pay Amarex $673,060, of which we have paid $75,000 through April 2004. We are required to pay $60,000 each month thereafter until the obligation is paid in full. The settlement also provides that Amarex will release to us the work they previously performed for us in connection with our diabetic foot ulcer clinical trial. Item 2. CHANGES IN SECURITIES (c) Recent Sales of Unregistered Securities On February 6, 2004 we issued 189,500 shares to our placement agent, Burnham Hill Partners, a division of Pali Capital, Inc, and its designees. The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as a transaction by an issuer not involving any public offering. During the first quarter of 2004 we granted to 32 employees seven-year options under our Employee Stock Option Plan, to purchase an aggregate of 88,500 shares of our common stock, at an exercise price of $2.25 per share. The grant of such options was exempt from the registration requirements of the Act pursuant to the provisions of Section 4(2) thereof because such option grants did not involve any public offering and because such option grants did not constitute sales of securities. Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION 24 The Board of Directors does not have a nominating committee and the usual functions of such committee are performed by the entire Board of Directors. Although the Board of Directors will consider nominees to serve as directors of Ortec recommended by security holders, the Board has not adopted any procedures to be followed by security holders in submitting such recommendations. Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description ----------- ----------- 3.1 Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.2 of the Company's quarterly report on Form 10-Q for the period ended September 30, 2001, filed with the Commission on November 14, 2001, Commission File No. 0-27368) 3.2 Amendment to Restated Certification of Incorporation (Incorporated by reference to Exhibit 3.2 of the Company's annual report on Form 10-K for the period ended December 31, 2002, filed with the Commission on April 15, 2003, Commission File No. 0-27368) 3.3 Amendment to Certificate of Incorporation adopted June 28, 2002, being a Certificate of Designation of the Relative Rights and Preferences of the Series A convertible preferred stock (Incorporated by reference to Exhibit 3.4 of the Company's quarterly report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 19, 2002, Commission File No. 0-27368) 3.4 Amendment to Certificate of Incorporation filed on August 26, 2002, being an Amended Certificate of Designation of the Relative Rights and Preferences of the Series B convertible preferred stock (Incorporated by reference to Exhibit 3.2 of the Company's annual report on Form 10-K for the period ended December 31, 2002, filed with the Commission on April 15, 2003, Commission File No. 0-27368) 3.5 Amendment to Certificate of Incorporation filed on May 23, 2003, being the Certificate of Designation of the Relative Rights and Preferences of the Series C convertible preferred stock (Incorporated by reference to Exhibit 3.5 of the Company's quarterly report on Form 10-Q for the period ended June 30, 2003, filed with the Commission on August 14, 2003, Commission File No. 0-27368) 3.6 Amendment to Certificate of Incorporation filed on June 10, 2003 (Incorporated by reference to Exhibit 3.6 of the Company's annual report on Form 10-K for the period ended December 31, 2003, filed with the Commission on March 30, 2004, Commission File No. 0-27368) 3.7 Amendment to Certificate of Incorporation filed on August 19, 2003 being the Certificate of Designation of the Relative Rights and Preferences of the Series D convertible preferred stock (Incorporated by reference to Exhibit 3.6 of the Company's quarterly report on Form 10-Q for the period ended September 30, 2003, filed with the Commission on November
25 14, 2003, Commission File No. 0-27368) 3.8 By-Laws (Incorporated by reference to the Exhibit of the Company's Registration Statement on Form SB-2, or Amendment 1 thereto, filed with the Commission, Commission File No. 33-96090) 31.1 * Rule 13a-14(a) / 15d- 14 (a) Certification of Principal Executive Officer 31.2 * Rule 13a-14(a) / 15d -14 (a) Certification of Principal Financial Officer 32.1 * Section 1350 Certification of Principal Executive Officer 32.2 * Section 1350 Certification of Principal Financial Officer
- --------------------- * filed herewith (b) Reports on Form 8-K We did not file any reports on Form 8-K in the first quarter of 2004. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized. Registrant: ORTEC INTERNATIONAL, INC. Date: May 17, 2004 By: /s/ Steven Katz ----------------------------------- Steven Katz, PhD Chairman (Principal Executive Officer) Date: May 17, 2004 By: /s/ Ron Lipstein ----------------------------------- Ron Lipstein Vice Chairman/CEO and Chief Financial Officer (Principal Financial Officer) 26 STATEMENT OF DIFFERENCES The registered trademark symbol shall be expressed as..................... 'r' EX-31 2 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, Steve Katz, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Ortec International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 17, 2004 By: /s/ Steven Katz ---------------------------- Steven Katz Chairman EX-31 3 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Ron Lipstein, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Ortec International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 17, 2004 By: /s/ Ron Lipstein --------------------------- Ron Lipstein Chief Financial Officer EX-32 4 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Ortec International, Inc. ("Ortec"), hereby certifies that Ortec's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Ortec. /s/ Steven Katz Dated: May 17, 2004 - ------------------------------------ Steven Katz Chairman Principal Executive Officer EX-32 5 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Ortec International, Inc. ("Ortec"), hereby certifies that Ortec's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of Ortec. /s/ Ron Lipstein Dated: May 17, 2004 - ------------------------------------ Ron Lipstein Chief Financial Officer Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----