<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
FEBRUARY 28, 1996
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER
33-15607
DERMARX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3301899
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
400 COLORADO BLVD., SUITE 420
DENVER, COLORADO 80222
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (303) 333-4600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. Yes [ X ]
No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
<PAGE>
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $49,738
As of May 20, 1996, the aggregate market value of the 5,982,884 issued
and outstanding Shares of Common Stock of the registrant (based upon the
average of the bid and asked price of these shares as reported by the
NASDAQ Bulletin Board) held by non-affiliates was approximately $4,487,163.
The number of shares outstanding of the registrant's common stock, par
value $.05, as of February 28, 1996 was 7,052,363 shares.
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(A) BUSINESS DEVELOPMENT
DermaRx Corporation (the "Company"), a Delaware corporation formerly
known as Innotek, Inc., was organized in June 1985 to develop, design,
manufacture and market products utilizing proprietary speech-generated
tactile feedback devices (the "Devices") containing methodology for which a
patent was allowed in December 1986 and FDA clearance was granted in
October 1987 (referred to collectively herein as the "VFD Technology").
The Company completed an initial public offering of its securities in
October 1987. In January 1992, the Company effected a 1 for 6.3 reverse
stock split of the Common Stock. Additionally, the Company amended the par
value of the Common Stock to $.05 par value per share. All share amounts
listed have been adjusted to reflect this reverse stock split unless
otherwise noted. The Company's shares of Common Stock are publicly traded
in the over-the-counter market and are reported on the NASD electronic
bulletin board.
On September 1, 1992, the Company's wholly-owned subsidiary,
InnoVisions, Inc., a Delaware corporation ("InnoVisions Delaware"),
acquired all of the outstanding shares of stock of InnoVisions, Inc.
("InnoVisions Ohio," a private, closely-held Ohio corporation) in exchange
for 110,000 shares of Innotek, Inc. common stock (the "Common Stock") and a
$10,000 note payable to Ms. M. Sue Benford. InnoVisions manufactured and
marketed two "over-the-counter" skin care products, BottomBetter-TM-
and DermaMend-TM-, which are based on InnoVisions' patent. (See InnoVisions-
Patent.) InnoVisions, Inc. is no longer a going concern. All of its
shares are held by the Company.
In 1993 the Company decided to concentrate its efforts on the
marketing of two skin protective products. DermaMend-TM- and BottomBetter-TM-
were found, through clinical trials and user satisfaction, to be highly
effective products. Unfortunately, lawsuits filed in early 1992 with the
product's developer demanded all of the Company's resources, forcing the
delay of marketing efforts. The lawsuit's settlement in the spring of 1994
provided the Company with the undisputed ownership of the patent for the
two skin protectant products; however, a thorough business analysis
revealed a potential distribution problem.
There were indications that marketing a single product in the wound
care industry would be extremely expensive if not impossible. In order to
take advantage of the potential of both DermaMend-TM- and the rapidly growing
wound care industry and to create a commercially viable product line, the
Company decided to develop an extended line of wound care products.
Accordingly, four new products, a skin tear therapy (GeriMend-TM-),
an antibacterial wound cleanser (DermaMend-TM- Cleanser), a polyurethane
foam dressing (DermaMend-TM- Foam) and an amorphous hydrogel (DermaMend-TM-
3
<PAGE>
Gel) have been developed. All products are considered proprietary. A
patent has been awarded for the DermaMend-TM- formulation. The names
DermaMend-TM- and GeriMend-TM- have been trademarked. The U.S. Patent office
has recently notified the Company that its patent applications for
GeriMend-TM- and DermaMend-TM- Cleanser have been approved for patent. A
patent is pending for DermaMend-TM- Foam. There is no assurance that a
patent will be allowed.
In October 1994, the Company elected Maryanne Carroll as President.
Dr. Gerit Mulder, a leading wound care expert, became Vice President of
Medical and Business Development on November 1, 1995. Since October 1994,
the majority of the resources of the Company have been devoted to research
and development of new wound care products, fund-raising, and establishing
a distribution network for its new expanded line of products.
On March 3, 1995, the Company issued a Confidential Private Offering
Memorandum offering units comprised of 100,000 shares of Common Stock per
unit, at $50,000 per unit to seven "accredited investors" (as defined
within the Securities Act of 1933 and the Regulations promulgated
thereunder) and to a limited number of non-accredited investors. The net
proceeds have been used for operating overhead, debt reduction, initial
marketing activities, and the preparation of a FDA 510(k) notification. In
July 1995 the Board of Directors approved an increase in the offering from
$350,000 to $500,000. This private placement raised gross proceeds of
$359,250.
In April 1995, the Company registered to do business in Colorado, and
in January 1996 established new corporate headquarters in Denver, Colorado.
On September 15, 1995, the Company commenced another private placement
offering of 2,000,000 shares of the Company's stock at the price of $.50
per common share. The Company raised gross proceeds of $1,000,000 in this
offering as of February 28, 1996.
In August of 1995, the Company extended an offer to certain holders of
the Company's debt to convert such debt to common shares of the Company's
stock. Holders of such debt converted $296,112 of debt and accrued
interest into 604,898 shares of the Company's common stock subsequent to
August 31, 1995, thereby reducing the Company's outstanding debt
significantly.
In August 1995, the Company received approval from the FDA to market
DermaMend-TM- Foam.
On November 1, 1995 the Company entered into an employment contract
with Dr. Gerit D. Mulder.
In May 1996, the Company submitted a 510(k) notification to the FDA
requesting approval to market the Company's new amorphous hydrogel.
The Company has not been involved in any bankruptcy, receivership or
similar proceedings from the time of its organization.
4
<PAGE>
The Company did not have any material reclassification, merger,
consolidation, or purchase or sale of a significant amount of assets not in
the ordinary course of business during the fiscal year.
(b) BUSINESS OF ISSUER:
The Company has a dual focus in the wound care industry which includes
a six product line of topical non-prescription products, and an education
and protocol developmental consulting service. All products are
proprietary preparations designed primarily for the topical treatment and
management of skin wounds, disorders and irritations including venous,
pressure and diabetic ulcers, diaper rash, urinary and fecal incontinence,
skin chaffing, abrasions, minor burns and skin tears. The services,
educational training for nurses and physicians, and the customized
protocols for wound care clinics, are based on the highly successful
courses and materials developed and offered through the Wound Healing
Institute (WHI) in Denver, Colorado. The Company also owns the patent to a
proprietary speech-generated tactile feedback device which it no longer
actively markets. The Company's primary objective is to design, develop
and market, in conjunction with a marketing partner, a full line of "value-
added," clinically proven, over-the-counter treatments for the management
of chronic wounds, and to become a leading provider of educational and
management services to the clinics that provide wound treatments.
(1) Principal products or services:
The Company's comprehensive wound program of both products and
services is designed to address the rapidly growing market of people
suffering from chronic wounds, and of the hospitals, nursing homes, home
health care agencies and wound clinics that provide wound care treatments.
Chronic wounds frequently affect the elderly as well as people with
diabetes, venous insufficiency and those who are immobilized.
The products include:
a. BottomBetter-TM-: BottomBetter-TM- is a white topical cream that
meets FDA guidelines for over-the-counter ("OTC") diaper rash remedies
and produces proven positive results in healing diaper rash. It is packaged
in unique single-dose, disposable containers (18 per package) to prevent
contamination.
b. DermaMend-TM- Barrier: DermaMend-TM- Barrier is a topical cream
which meets all FDA standards for ingredients and labeling as an OTC
skin protectant. The product was previously marketed for skin irritations
and superficial wounds. The new indication will be for irritation
and inflammation of intact skin caused by fecal or urinary incontinence.
DermaMend-TM- Barrier is packaged in unique individual packets for
convenience, and to prevent cross contamination.
c. GeriMend-TM- Skin Care Therapy: GeriMend-TM- Skin Care Therapy
is a topical cream designed primarily for use on skin tears. GeriMend-TM-
5
<PAGE>
is currently in compliance with all FDA standards for ingredients and
labeling as an OTC skin protectant. It is packaged in unique individual
packets.
d. DermaMend-TM- Cleanser: DermaMend-TM- Cleanser is a non-ionic
surfactant anti-microbial cleanser designed to assist with debridement of
dead tissue and other debris on the wound surface without damaging healing
skin. The product also contains ingredients which are beneficial to
healing and which help decrease skin contaminants which may contribute to
infection or odor. DermaMend-TM- Cleanser is currently in compliance with
all FDA standards for ingredients and labeling as an OTC antimicrobial
wound cleanser. It requires no further FDA approval for marketing.
e. DermaMend-TM- Foam: DermaMend-TM- Foam is a second generation
hydrophilic polyurethane foam dressing which contains an odor repressing
ingredient. The sponge-like foam wafer is indicated as a wound filler for
full thickness wounds. An FDA 510(k) notification was filed in March 1995.
The Company received FDA approval to market the product in August 1995.
f. DermaMend-TM- Gel: DermaMend-TM- Gel is an amorphous hydrogel
designed to create an optimal moist wound environment for acute and chronic
wounds. FDA approval must be received prior to commercialization. An FDA
501(k) notification was submitted in May 1996.
g. Vocal Feedback Devices: The Company also owns the rights to a
vocal feedback device designed as a mechanical aid for speech therapy.
During its fiscal year ended February 28, 1994, the Company elected to
discontinue active marketing of the vocal feedback device and to
concentrate primarily on marketing and manufacturing of its skin care
products.
(2) DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES:
The Company has recently entered into a distribution agreement with
Boots Healthcare for distribution of all products in Australia. In order
to achieve rapid market penetration, the Company is actively seeking a
marketing partner having a complimentary line of products and a strong
established sales force. Numerous potential partners have been identified
and discussions are in progress for both the U.S. and Europe.
The Company's educational services and protocol development programs
are being marketed directly by the Company and a marketing partner is being
sought.
To the extent that it is successful in consummating an acceptable
agreement, the Company intends to license the BottomBetter-TM- product to a
pharmaceutical company with an existing line of consumer baby products.
Discussions are in progress with several interested companies, however,
there is no assurance that a licensing agreement will be obtained.
6
<PAGE>
The Company is currently negotiating with companies which are
interested in distributing the Company's products. There is no assurance,
however, that such negotiations will be concluded successfully.
(3) STATUS OF ANY PUBLICLY ANNOUNCED NEW PRODUCT OR SERVICE:
BOTTEMBETTER-TM- - patented; Licenser is currently being
sought; available for shipment.
DERMAMEND-TM- BARRIER - patented; launched at the Symposium
for Advanced Wound Repair in Atlanta, Georgia, April 1996;
available for shipment July 1996.
GERIMEND-TM- SKIN CARE THERAPY - name trademarked; patent
application approved for issuance; launched at the Symposium
for Advanced Wound Repair in Atlanta, Georgia, April 1996;
available for shipment July 1996.
DERMAMEND-TM- CLEANSER - patent application approved for
issuance; launched at the Symposium for Advanced Wound
Repair in Atlanta, Georgia, April 1996; available for
shipment July 1996.
DERMAMEND-TM- FOAM - patent pending; launched at the Symposium
for Advanced Wound Repair in Atlanta, Georgia, April 1996;
currently available for shipment - 5 cm round and 11 cm x 11
cm square.
DERMAMEND-TM- GEL - product is currently in research and
development; patent application in progress; a FDA 510(k)
was filed in May 1996.
CUSTOMIZED EDUCATIONAL PROGRAMS - course outline and
materials developed; program ready to be marketed.
WOUND CARE PROTOCOLS, POLICIES AND PROCEDURES - program
completed and marketing begun.
(4) COMPETITIVE BUSINESS CONDITIONS AND THE SMALL BUSINESS
ISSUER'S COMPETITIVE POSITION IN THE INDUSTRY AND METHODS OF
COMPETITION:
The Company will compete directly with several major, multi-national
corporations, each of which has resources substantially greater than those
of the Company. The Company currently has a negligible portion of the
markets.
The wound care market is characterized by rapid growth and
competition. The Company's competitors market several varieties of wound
care products which compete with those of the Company. Competing products
7
<PAGE>
fall into the categories of skin protectants, wound cleaners, gauze
dressings, antimicrobials and antiseptics, transparent films,
hydrocolloids, gels/hydrogels, calcium alginates and foam wafers.
The wound care industry is new, highly fragmented and one of the most
rapidly growing areas of health care as the population of elderly and
infirm continues to demonstrate record growth. The last two years have
shown marked changes in the industry as the number of supply companies has
increased substantially, managed care is becoming driving forces in the
market place and reimbursement is being decreased.
DermaRx provides cost-effective and efficacious products, unique
delivery systems, the ability to rapidly and effectively market in niches
with minimal competition, a synergistically designed product line and the
experience and reputation of Dr. Mulder, a recognized leader in the field.
While the small size offers distinct advantages in terms of product
development and marketing, it has limitations for distribution.
The top selling over-the-counter diaper rash ointments fall into three
basic categories: zinc oxide-based products such as Desitin Diaper Rash
Ointment (Pfizer, Inc.), Diaparene Medicated Cream (L & F Personal
Products, Inc.), petroleum-based products such as Vaseline Petroleum Jelly
(Chesebrough-Ponds, Inc.), and vitamin-based ointments such as A&D Ointment
(Schering Corp.). These products are primarily packaged in multi-dose
tubes or jars. A relative "newcomer" to the diaper rash market is a
product called Dyprotex Diaper Rash Pads (Blistex, Inc.).
The diaper rash market is a mature market as the baby population has
not been growing, nor is it expected to in the future. Increased demand
for diaper rash products is the result of the use of new antibiotics and
the introduction of certain foods, both of which may cause diarrhea and
result in diaper rash. As a mature industry, the market is dominated by
three products which are manufactured by very large, well established
pharmaceutical companies.
(5) SOURCES AND AVAILABILITY OF RAW MATERIALS AND THE NAMES OF
PRINCIPAL SUPPLIERS:
The Company does not maintain manufacturing facilities and it
contracts for the production and packaging of all its products.
BottomBetter-TM-, DermaMend-TM- Barrier, GeriMend-TM- Skin Care Therapy,
and DermaMend-TM- Cleanser are currently blended by unaffiliated contract
manufacturers. DermaMend-TM- Foam is manufactured, by a separate,
unaffiliated polyurethane foam manufacturer. The foam is shipped to Denver
where it is packaged, sterilized, tested and stored for shipment. All the
products are inventoried in Denver.
The Company's products utilize readily available components. There
are numerous laboratories and production facilities with the capability of
producing the Company's products to the standards required by the FDA.
Given availability of other suppliers, the Company does not believe that
the loss of one or more of its suppliers would have a major impact on its
business, however, down time could result from a change in contract
manufacturers as safety stability, sterility and efficiency tests would
have to be repeated.
8
<PAGE>
(6) DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS:
Not applicable.
(7) PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS,
ROYALTY AGREEMENTS OR LABOR CONTRACTS, INCLUDING DURATION:
On May 5, 1992, a patent titled ERADICATION AND TREATMENT OF DIAPER
DERMATITIS AND OTHER RELATED SKIN DISORDERS was allowed by the U.S. Patent
and Trademark Office.
The Company entered into a royalty and security agreement with a law
firm, to which the Company owes $205,487.32. The agreement calls for
payment of the outstanding balance by payment of a royalty equal to 7% of
gross sales of BottomBetter-TM- and DermaMend-TM- Cream until the entire
balance plus interest accruing at 9% is paid.
BottomBetter-TM-, DermaMend-TM- and GeriMend-TM- are registered trade
names of the Company. Patent applications have recently been approved for
allowance for GeriMend-TM- and DermaMend-TM- Cleanser. An application was
filed with the U.S. Patent office in the Spring of 1995 for DermaMend-TM-
Foam. There is no assurance that this application will be allowed.
On December 10, 1986, the U.S. Patent and Trademark Office issued a
Notice of Allowance and Issue Fee Due with respect to the grant of a patent
covering two claims arising out of the Vocal Feedback Device technology.
For the duration of these patents, the Company is the only entity permitted
to utilize the technology to treat speech disorders.
On September 18, 1990, the European Patent Office allowed the grant of
a European Patent on the Devices, which patent was granted to the Company
in July 1991 and became effective in August 1992.
All formulations used by the Company are considered proprietary.
(8) NEED FOR ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR
SERVICES. IF GOVERNMENT APPROVAL IS NECESSARY AND THE SMALL
BUSINESS ISSUER HAS NOT YET RECEIVED THAT APPROVAL, DISCUSS
THE STATUS OF THE APPROVAL WITHIN THE GOVERNMENT APPROVAL
PROCESS:
Discussed above.
(9) EFFECT OF EXISTING OF PROBABLE GOVERNMENT REGULATIONS ON THE
BUSINESS:
The manufacture, distribution and advertising claims of the Company's
products are subject to regulation by numerous federal and state
governmental agencies. In the United States, the Food and Drug
Administration (FDA) is responsible for enforcement of the Federal Food,
9
<PAGE>
Drug and Cosmetic Act (the "FDC Act") which regulates drugs and devices
manufactured and distributed in interstate commerce. The Company's
products are either drugs or medical devices regulated under the FDA Act.
The Federal Trade Commission (FTC) administers the Federal Trade Commission
Act (the "FTC Act") which regulates the advertising of products including
drugs and devices.
In addition to the foregoing requirements, there are other
requirements of state, local and foreign law which may apply to the
manufacture and marketing of the Company's products. The FDA also has the
authority, among other things, to conduct detailed inspection of
manufacturing facilities, establish "good manufacturing practices" which
must be followed in the manufacturing of medical products, require periodic
reporting of product defects, and prohibit the exportation of products that
do not comply with the law and promulgate performance standards.
All products designed for use on or in the human body and which have
characteristics that do not require prescription dispensing (drugs not safe
for use except under professional supervision) are considered to be over-
the-counter (OTC) drugs. The Company's wound care products are classified
as OTC drugs.
Two of the Company's wound care products will be marketed as OTC skin
protectant products. Skin protectant products are the subject of an
ongoing FDA rulemaking procedure which will result in the issuance of a
final regulation specifying those active ingredients which are permitted
in, and designating labeling requirements for, such products. Preliminary
Monographs and Tentative Monographs were issued by the FDA in 1978 and
1981, respectively. It is currently impossible to predict when the FDA
will promulgate a final regulation, what the final regulation will provide
or how a final regulation (monograph) will affect the Company's products.
The Company believes that its products have been formulated and labeled in
accordance with the proposals outlined in the Preliminary and Tentative
Monographs. It is the Company's intention to manufacture and label two of
its products pursuant to the FDA's Final Monograph relative to "skin
protectants" which could eventually require a formulation and/or labeling
change. Two products DermaMend-TM- Foam, and DermaMend Gel will not be
marketed in compliance with published monographs but rather will be
registered for FDA 510(k) approval.
The FDA 510(k) notification for DermaMend-TM- Foam was submitted in
March 1995 and approved in August 1995. The FDA 510(k) notification
for DermaMend Gel was submitted in May 1996.
(10) ESTIMATE OF THE AMOUNT SPENT DURING EACH OF THE LAST TWO
FISCAL YEARS ON RESEARCH AND DEVELOPMENT ACTIVITIES, AND IF
APPLICABLE THE EXTENT TO WHICH THE COST OF SUCH ACTIVITIES
ARE BORNE DIRECTLY BY CUSTOMER:
1994 $50,000
1995 $150,000
The extent to which the cost of such activities are borne directly by
customers: Not Applicable.
10
<PAGE>
(11) COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
(FEDERAL, STATE AND LOCAL):
Not applicable.
(12) NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEE:
The Company currently has five full-time employees and one part-time
employee. Maryanne Carroll is the Company's President and Chief Executive
Officer. Dr. Gerit Mulder is the Vice President of Medical Affairs and
Business Department.
ITEM 2. DESCRIPTION OF PROPERTY.
On January 1, 1996, the Company entered into a sublease for 3,125
square feet of office space in the Norwest Bank Building located at 400
South Colorado Boulevard, Denver, Colorado. The sublease is for a period
of 16 months (expiring on April 30, 1997).
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceeding, nor is its
property the subject of any pending legal proceeding. Further, the Company
is not aware of any proceeding that a governmental authority is
contemplating. Additionally, the Company is not aware of any material
proceeding to which any director, officer or affiliate of the Company, any
owner of record or beneficially of more than 5% of any class of voting
securities of the Company, or security holder is a party adverse to the
Company or has a material interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no matter submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during fiscal year 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET INFORMATION:
The Common Stock is traded publicly in the over-the-counter market on
the NASD electronic bulletin board and listed in what is referred to as the
"pink sheets."
The following table sets forth the range of high and low bid
quotations of the Common Stock (as reported by the over-the-counter market
11
<PAGE>
on the NASD electronic bulletin board) and representative market-makers
making a market in the Company's securities for each fiscal quarter within
its two most recent fiscal years. These quotations reflect inter-dealer
prices, without retail markups, mark-downs or commissions, and may not
necessarily represent actual transactions. There is a limited public
trading market with respect to the Company's securities.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING BID
--------------------- ---
Fiscal 1995 High Low
----------- ---- ---
<S> <C> <C>
May 1995 5/8 3/8
August 1995 3/4 7/16
November 1995 7/8 1/2
February 1996 1 1/16 5/8
Fiscal 1994
-----------
May 1994 5/8 1/2
August 1994 5/16 1/4
November 1994 5/8 3/8
February 1995 5/8 1/4
</TABLE>
There were 228 holders of record of the Common Stock, including those
shares held in "street name" as of February 28,1996. As of May 20, 1996,
the closing "bid" and "asked" prices were 5/8 and 7/8 per share
respectively.
The Company did not declare or pay dividends during Fiscal 1995. The
Company intends to invest earnings, if any, in its business, and to fund
operations and development.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS - FISCAL 1995 COMPARED TO FISCAL 1994
The primary focus of activity for fiscal 1995 was fund raising; the
secondary focus was preparing the newly developed line of products for
marketing. Results of activities included raising net proceeds of
$1,200,850 in two private placements; receiving two patent approvals from
the U.S. Patent Office; obtaining 510(k) approval from the FDA to market
DermaMend-TM- Foam; completing export documentation and receiving quality
approval for a distribution agreement with Boots Healthcare-Australia;
completing safety, stability and sterilization testing; completing
packaging designs for all products; and completing development of an
amorphous hydrogel. Product completion allowed the Company to formally
launch its products at the Symposium for Advanced Wound Repair in April
1996, and to begin the second phase of distribution negotiations for Europe
12
<PAGE>
and the U.S. The Company is seeking a marketing partner for its wound care
products, and is negotiating with several pharmaceutical companies to
license the BottomBetter-TM- product.
During fiscal 1995, revenues were substantially equal to those of
1994, primarily because no resources were devoted to marketing and because
the new wound care line was not available for sale. Revenues are not
expected to increase until the second half of 1996.
For fiscal year 1995, the Company had a net loss of $463,353, as
opposed to $246,958 for fiscal 1994. The increase in operating loss was
primarily attributable to the cost of commission, legal and accounting fees
associated with fund raising activities (over $100,000), to the increase in
research and development costs (approximately $100,000), the costs related
to launching the products such as packaging and packaging design, and to an
increase in overhead resulting from increased personnel and new operating
headquarters.
LIQUIDITY AND CAPITAL RESOURCES
LIST ANY OF THE FOLLOWING THAT ARE APPLICABLE:
A) ANY KNOWN TRENDS, EVENTS OR UNCERTAINTIES THAT HAVE OR ARE REASONABLY
LIKELY TO HAVE A MATERIAL IMPACT ON THE COMPANY'S SHORT-TERM OR LONG-
TERM LIQUIDITY:
The ability to secure additional working capital and the ability to
obtain successful distribution for its products are reasonably
likely to have a material impact on the Company's short-term or
long-term liquidity.
B) INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY:
There are and will be negligible internal sources of liquidity
until new products are completed and shipment begins.
C) ANY MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES AND THE EXPECTED
SOURCES OF FUNDS FOR SUCH EXPENDITURES:
None.
D) ANY KNOWN TRENDS, EVENTS OR UNCERTAINTIES THAT HAVE OR ARE REASONABLY
LIKELY TO HAVE A MATERIAL IMPACT ON THE COMPANY'S NET SALES OR REVENUES
OR INCOME FROM CONTINUING OPERATIONS:
Pending FDA approval on products as discussed above, as well as
successful distribution of products are events or uncertainties
that are reasonably likely to have a material impact on the
Company's net sales or revenues or income from continuing
operations.
E) ANY SIGNIFICANT ELEMENTS OF INCOME OR LOSS THAT DO NOT ARISE FROM THE
COMPANY'S CONTINUING OPERATIONS:
13
<PAGE>
The private placement offerings done during fiscal 1995 provided
significant capital to the Company which did not arise from the
Company's continuing operations.
F) THE CAUSES FOR ANY MATERIAL CHANGES FROM PERIOD TO PERIOD IN ONE OR MORE
LINE ITEMS OF THE COMPANY'S FINANCIAL STATEMENTS:
Not applicable.
G) ANY SEASONAL ASPECT THAT HAD A MATERIAL EFFECT ON THE FINANCIAL
CONDITION OR RESULTS OF OPERATION:
None.
In March 1992, the Company borrowed $30,000 from Society National Bank,
Dublin, Ohio (the "Bank Loan"). The Bank Loan bears interest at the rate
of 2% above prime (the Bank Loan currently bears interest at 8% per annum)
and is secured by all of the assets of the Company and guaranties of Ms.
Sue Benford, her husband and PHIS. At the end of Fiscal 1995, the Company
owed Society National Bank approximately $5,900. The Bank Loan matures in
March 1997 and is repayable monthly in equal installments of $500 plus
interest. The Company is current in its payments under the Bank Loan.
During the fiscal year ended February 28, 1996 the Company converted
$318,699 in debt into 637,938 shares of common stock of the Company at an
average price of $0.50 per share.
The Company has raised $1,200,850 in net proceeds from two private
placement offerings. 2,718,500 shares were sold at $.50 in these two
offerings.
The proceeds of the offerings are being used to finance the preparation
and submission of an FDA 510(k) application, the development of marketing
materials, establishing a distribution network, the completion of numerous
safety and effectiveness studies, preparation and submission of patent and
trademark applications, debt repayment, a down payment on inventory and
various other working capital items. While initial expenditures on product
research and development have been minimal, the Company expects its capital
requirements to increase significantly as the Company begins to actively
market its products. The Company is unable to predict how long the
proceeds from the private offerings will satisfy its cash requirements.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company are attached hereto as pages F-2
through F-14.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The executive officers, directors, and significant employees of the
Company and their ages, are as follows:
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- -------------
<S> <C> <C> <C>
Maryanne Carroll 48 Chief Executive Officer, 1994
Chief Financial Officer and
Director
Thomas Dean 48 Director 1995
Ronald K. Holliday 61 Director 1992
Richard S. Melnick 37 Secretary and Director 1988
Pedro H. Valdez 51 Director 1994
Gerit Mulder 43 Vice President Medical (Consultant
Affairs and Business since 1994)
Development
</TABLE>
The directors of the Company are elected to serve until the next annual
meeting of shareholders and until their respective successors are elected
and qualify.
MARYANNE CARROLL. Ms. Carroll was elected to the Board of Directors and
worked as a Consultant in May 1994. In October 1994, Ms. Carroll was
appointed Chief Executive Officer. From its inception in 1987 through its
sale in 1994, Ms. Carroll was President and a director of Prism Imaging
Incorporated, a privately-held company located in Colorado which
manufactures medical equipment.
THOMAS DEAN. Mr. Dean was elected to the Board of Directors in 1995 to
fill a vacancy. Mr. Dean is President and founder of Innovative Research
Associates, Inc., a financial consulting firm formed in 1992, and has 26
years experience as a retail/institutional broker with investment banking
firms, including Kidder Peabody (1967-76); L.F. Rothschild (1976-82);
Advest Co. (1982-86); Ladenberg, Thalmann & Co. (1986-90) and Cowen & Co.
(1990).
RONALD K. HOLLIDAY. Mr. Holliday served as President of the Company from
April 1992 through August 1992. Since 1983, Mr. Holliday has been
President of Strategy Research, a strategic planning, marketing consulting
and new product development company which he founded. At various career
points, Mr. Holliday has been President of Johnson & Johnson Ltd. (Canada);
President of Shulton USA, makers of Old Spice products; Executive Vice
President of Neutrogena Corporation; General Manager of the Toiletries
Division of Alberto Culver Corporation; Area Vice President of
International Playtex (London, England).
RICHARD MELNICK. Mr. Melnick, Secretary/Treasurer of the Company, was a
founder of the Company in 1985, was elected to the Board of Directors in
15
<PAGE>
1988 and was appointed Secretary/Treasurer in 1992. In 1991, Mr. Melnick
co-founded Saliva Diagnostic Systems, Inc., a public company. Also in 1991
Mr. Melnick co-founded the Environmental Trust, a tax exempt charitable
organization. Mr. Melnick has been a private investor for more than ten
years. From 1982 - 1984 he was a registered representative and Vice
President of Corporate Finance at A.L. Havens Securities.
PEDRO H. VALDEZ. Mr. Valdez was elected to be a Director in July 1994 to
fill a vacancy on the Board of Directors. Mr. Valdez has been President of
Protecom Inc., a pharmaceutical distribution company which distributes
products in Latin America, since 1984. From 1985 to date Mr. Valdez has
also taught Spanish in Teaneck High School.
PETER MARTIN. On April 4, 1996 Peter Martin was appointed to serve as a
director of the Company until the next annual meeting of shareholders of
the Company. Mr. Martin is an independent investment banker and has been
since 1990. Prior to 1990, Mr. Martin worked as a Vice President for
National Westminster Bank USA. Mr. Martin received a J.D. from Fordham Law
School in 1980, an M.B.A. in finance from Columbia Business School in 1973
and his B.A. in English from Fordham College in 1971.
DR. GERIT MULDER. On November 1, 1995, Dr. Mulder entered into a two year
employment contract. His title is Vice President Medical Affairs and
Business Development. His primary responsibility will be clinical
evaluations for product effectiveness, marketing partners negotiation and
design and implementation of the medical consulting services. Dr. Mulder
was the founder of the Wound Care Healing Institute in 1982 and was
President and Director until its sale in 1994. He is internationally
recognized as one of the leaders in wound care research and education. He
has had appointments at numerous universities and hospitals and serves on
the editorial board of the journal WOUNDS. Additionally, he has evaluated
over 150 wound care products, many in clinical trials, has approximately
200 presentations and publications, and directs the industry's largest
educational program on wound healing for clinicians and researchers.
DISCLOSE IF ANY LEGAL PROCEEDINGS DURING THE PAST FIVE YEARS OCCURRED THAT
ARE MATERIAL TO EVALUATING THE ABILITY OF ANY DIRECTORS OR SIGNIFICANT
EMPLOYEES. E.G.,
A) ANY BANKRUPTCY PETITION FILED BY OR AGAINST ANY BUSINESS OF WHICH
SUCH PERSON WAS A GENERAL PARTNER OR EXECUTIVE OFFICER EITHER AT
THE TIME OF THE BANKRUPTCY OR W/IN TWO YEARS PRIOR TO THAT TIME;
NONE.
B) ANY CONVICTION IN A CRIMINAL PROCEEDING OR BEING SUBJECT TO A PENDING
CRIMINAL PROCEEDING (EXCLUDING TRAFFIC VIOLATIONS AND OTHER MINOR
OFFENSES); NONE.
C) BEING SUBJECT TO ANY ORDER, JUDGMENT, OR DECREE, NOT SUBSEQUENTLY
REVERSED, SUSPENDED OR VACATED, OF ANY COURT PERMANENTLY OR TEMPORARILY
ENJOINING, BARRING, SUSPENDING OR OTHERWISE LIMITING HIS INVOLVEMENT
IN ANY TYPE OF BUSINESS, SECURITIES OR BANKING ACTIVITIES; NONE.
16
<PAGE>
D) BEING FOUND BY A COURT OF COMPETENT JURISDICTION (IN A CIVIL ACTION),
THE COMMISSION OR THE COMMODITY FUTURES TRADING COMMISSION TO HAVE
VIOLATED A FEDERAL OR STATE SECURITIES OR COMMODITIES LAW, AND THE
JUDGMENT HAS NOT BEEN REVERSED, SUSPENDED OR VACATED. NONE.
ITEM 10. EXECUTIVE COMPENSATION.
The following chart sets forth all compensation awarded to, earned by or
paid to the Company's chief executive officer and all other officers of the
Company during the last three fiscal years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name Annual Compensation Long Term Compensation
- ---- ------------------- ----------------------
Fiscal Salary Restricted Stock Awards (Options)
Year $ (#)
------ ------ ---------------------------------
<S> <C> <C> <C>
Richard Melnick 1993 36,000 -
(Former Treasurer, 1994 36,000 (125,000)
Current Secretary) 1995 12,000 (25,000)
Anthony Adler 1994 55,500 50,000
(Former President)
Maryanne Carroll 1994 37,500 (50,000)1
Current President 1995 94,166 (376,118)2
Gerit Mulder 1995 52,000 147,500 3
</TABLE>
INCENTIVE STOCK OPTION PLAN AND EXECUTIVE STOCK OPTION PLAN:
The Board of Directors of the Company adopted an Incentive Stock Option
Plan (the "ISOP") and an Executive Stock Option Plan (the "ESOP")
(collectively referred to herein as the "Plans") which provide that the
administrators of the Plans may grant to employees in the case of the ISOP
and employees, directors, and consultants in the case of ESOP, as
determined by the administrators, an option to purchase shares of Common
Stock at the fair market value of said shares on the date the option is
granted. A maximum of 111,111 shares of Common Stock have been reserved
for issuance under the ISOP and 47,619 shares of Common Stock have been
reserved for issuance under the ESOP. The options granted will be
exercisable for a period of up to five years from the date they are
granted. Under the Plans, options may be granted only during the ten year
period from the date of adoption of the Plans. The following tables
summarize the activity in options under the stock option plan:
- --------------------------
1 Options earned as consultant; April through September 1994 - 50,000.
Options through February - 104,167.
2 Options earned as President are 351,118. Options earned as a director
are 25,000.
3 Includes 67,500 shares earned as a consultant prior to joining the
Company as Vice President and 30,000 shares awarded pursuant to his
employment agreement.
17
<PAGE>
<TABLE>
<CAPTION>
Shares Price Range
------- -----------
ISOP PLAN
---------
<S> <C> <C>
Outstanding at February 28, 1993 31,000 $2.50
Canceled 31,000 $2.50
Outstanding at February 28, 1994 0 -
Outstanding at February 28, 1995 0 -
</TABLE>
<TABLE>
<CAPTION>
Shares Price Range
------- -----------
ESOP PLAN
---------
<S> <C> <C>
Outstanding at February 28, 1993 34,920 $2.36 - $2.76
Canceled 34,920 $2.36 - $2.76
Outstanding at February 28, 1994 0 -
Outstanding at February 28, 1995 0 -
</TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or Base
Options/SARs Employees in Price Exp.
Name Granted Fiscal 1995 ($/sh) Date
- ---- ------------ ------------ ---------------- ----
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS/SAR VALUES
Number of
Shares Acquired Value Unexercised Options
Name on Exercise (#) Realized ($) (All Exercisable)
- ---- --------------- ------------ -------------------
LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
None.
REISSUANCE OF STOCK OPTIONS
18
<PAGE>
Richard Melnick canceled options to purchase 100,000 shares of common
stock of the Company and the Company subsequently granted an option to
purchase 100,000 shares of common stock of the Company to Tom Dean.
COMPENSATION OF DIRECTORS.
Directors of the Company receive annual compensation of options to
purchase 25,000 shares of stock at $.65 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of February 28,
1996, with respect to (i) each person known to the Company who beneficially
owns more than five percent of the outstanding shares of Common Stock, (ii)
each director of the Company, and (iii) all officers and directors of the
Company as a group, showing in each case, the name (and address, if
required), amount and nature of shares beneficially owned, and the
percentage of the class owned by each such beneficial owner.
<TABLE>
<CAPTION>
Name and Address of Beneficial Percentage of
Beneficial Owner Ownership Class
------------------- ---------- ------------
<S> <C> <C>
Mr. Richard Melnick
764 Cottage Lane 761,422(1) 9.9%
Boulder, CO 80304
Mr. Ronald K. Holliday
22 East Oak Avenue 128,000(2) 1.7%
Moorestown, NJ 08057
Ms. Maryanne Carroll
284 Jackson Street 645,298(3) 9.1%
Denver, CO 80206
Mr. Pedro Valdez
252 Griggs Avenue 135,000(4) 1.8%
Teaneck, NJ 07666
Mr. Tom Dean
c/o Innovative Research
Assoc., Inc. 175,000(5) 2.3%
520 Madison Avenue
New York, NY 10022
David Russell
45 Park Place South, 1,300,000 17%
Suite 103
Morristown, NJ 07960
19
<PAGE>
Gerit Mulder
4720 E. Princeton Ave. 147,500(6) 1.9%
Englewood, CO 80110
All Officers and 1,992,220
Directors (1) (2) 26%
as a Group (six persons) (3) (4)
(5) (6)
</TABLE>
(1) Includes 49,530 shares owned by Vocal Research Partners ("VRP"), a
division of Redwood Capital Group, Inc. ("Redwood") and Redwood. Mr.
Richard Melnick is President, director and owns approximately 90% of
Redwood. For purposes of Rule 13d-3 promulgated under the Exchange Act,
Redwood and Mr. Melnick are deemed to beneficially own the shares of Common
Stock owned by VRP. As of February 28, 1996 this figure includes options
to purchase 64,682 shares of Common Stock exercisable at $.50 per share and
25,000 shares at $1.625 per share. Also includes 91,349 shares owned by,
and options to purchase 7,936 shares of Common Stock exercisable at $1.57
per share granted to Mr. Melnick's wife of which Mr. Melnick disclaims
beneficial interest.
(2) Includes an option to purchase 100,000 shares of Common Stock
exercisable at $.50 per share and 25,000 shares at $.625 per share granted
to Mr. Holliday.
(3) Includes options to purchase 401,118 shares of Common Stock
exercisable at $.50 per share and 25,000 shares at $.625 per share granted
to Ms. Carroll.
(4) Includes an option to purchase 25,000 shares of Common Stock
exercisable at $.625 per share.
(5) Includes an option to purchase 100,000 shares of Common Stock
exercisable at $.50 per share issued to Innovative Research Associates,
Inc., a company controlled by Mr. Tom Dean and 25,000 shares at .625 per
share.
(6) Includes an option to purchase 50,000 shares of Common Stock
exercisable at $.50 per share.
The Company is not aware of any arrangements the operation of which may
at a subsequent date result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1. Norman Dean received a $65,000 commission for the placement of 1,300,000
shares of stock in the September 15, 1995 private placement.
2. Dr. Mulder was entitled to receive 67,500 shares of stock as partial
payment for consulting services provided between October 1994 and October
1995. This stock was issued.
20
<PAGE>
3. Dr. Mulder also received a contingent assignment of 70,000 options for
shares from Richard Melnick and Maryanne Carroll. The options will vest
only upon the occurrence of any one of three contingencies:
a) Total sales of DermaRx Corporation shall exceed $3,500,000 for the
calendar year of 1996.
b) DermaRx Corporation is sold to a third party buyer for a total value
of $22,000,000 or more prior to January 1, 1997 or at that time is
under contract or in serious negotiation which consummates in a sale
prior to March 31, 1997.
c) DermaRx Corporation is sold to a third party buyer for a total value
of $16,000,000 or more prior to January 1, 1996 or at that time is
under contract or in serious negotiation which consummates in a sale
prior to March 31, 1996.
4. Dr. Mulder also received 30,000 shares as a signing bonus for entering
into an employment contract with the Company on October 27, 1995.
5. As a term of Dr. Mulder's employment contract, he will receive one option
per year to purchase 50,000 shares of common stock at $.50 per share any
time before December 31, 1999, for each year of the agreement, i.e.,
November 1, 1995 to November 1, 1997, (100,000 total shares). Options
shall be considered earned on the last day of each contract year.
6. Maryanne Carroll received shares for her participation in the debt
conversion in which she converted $54,590.00 of the Company's debt in
exchange for 109,180 shares at $.50 per share.
7. Rick Melnick also received shares as a result of his participation in the
debt conversion in which he converted $99,123.30 of the Company's debt
in exchange for 198,247 shares at $.50 per share.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
--------------------
Independent Auditor's Report.
Consolidated Balance Sheet as of February 28, 1996.
Consolidated Statements of Operations for the years ended
February 28, 1996 and February 28, 1995.
Consolidated Statements of Common Stockholders' Equity (Net
Capital Deficiency) for the years ended February 28, 1996
and February 28, 1995 (as restated).
Consolidated Statements of Cash Flows for the years ended
February 28, 1996 and February 28, 1995.
21
<PAGE>
Notes to Consolidated Financial Statements.
(a) 2. Financial Statement Schedules
-----------------------------
Schedule IV - Indebtedness of and to Related Parties
Schedule IX - Short Term Borrowings
(a) 3. Other Exhibits
--------------
3(a). Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1
to the Company's Registration Statement No. 33-15607
on Form S-18 under the Act (the "S-18 Registration
Statement")).
3(b) By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the S-18 Registration Statement).
3(c) Vocal Feedback and Associates Apparatus Information
Disclosure Statement filed in the U.S. Patent and
Trademark Office on October 11, 1983, Notice or
Recordation of Assignment of Document, Amendment dated
January 21, 1985, Notice of Appeals dated June 1985;
Amendment dated July 22, 1985 and Continuation-in-Part
Application filed on November 14, 1985; Notice of
Allowance and Issue Fee Due dated December 10, 1986
(incorporated by reference to Exhibit 10.12 to the
S-18 Registration Statement).
10(b) Sublease Agreement.
10(c) Agreement between the Company and the Ashley Group
dated May 24, 1993 (incorporated by reference to
Exhibit 10(m) to the 1993 10-KSB).
10(e) Securities Registration Agreement used in the Company's
March 1993 private placement (incorporated by reference
to Exhibit 10(o) to the 1993 10-KSB).
10(f) Settlement Agreement dated March 29, 1994 among M. Sue
Benford, the Company, other others (incorporated by
reference to exhibit 10(g) to the 1994 10-KSB).
14 Notice of Grant of European Patent (incorporated by
reference to Exhibit 14 to the Company's Form 10-K for
its fiscal year ended February 28, 1991).
22
<PAGE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during its fiscal
quarter ended February 28, 1996.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DermaRx Corporation
By: /S/ Maryanne Carroll
_________________________________
Maryanne Carroll,
Chief Executive Officer
Date: May 28, 1996
_______________________________
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /S/ Maryanne Carroll
_________________________________
Maryanne Carroll,
Chief Executive Officer
24
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
REPORTS FILED PURSUANT TO SECTION 15(d) OF THE
EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report to security holders covering the registrant's last
fiscal year has been sent to security holders. No proxy statement, form of
proxy or other proxy soliciting material has been sent to more than ten of
the registrant's security holders with respect to any annual or other
meeting of security holders material has been sent to security holders. No
such report or proxy material is to be furnished to security holders
subsequent to the filing of the annual report on this Form.
25
<PAGE>
Paul C. Roberts
Certified Public Accountant
600 Bedford road, BHA
Pleasantville, N.Y. 10570
(914) 741-1508
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
DermaRX, Inc. and Subsidiary
I have audited the accompanying consolidated balance sheet of DermaRX,
Inc. and subsidiary at February 28, 1996 and the related consolidated
statements of operations, changes in common stockholders' equity and cash
flows for each of the two years in the period ended February 28, 1996. In
connection with my audit of the consolidated financial statements, I also
have audited financial statement schedules IV and IX. These consolidated
financial statements and financial statement schedules are the
responsibility of the Company's management. My responsibility is to an
express an opinion on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. I believe that my audits
provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
DermaRX, Inc. and subsidiary at February 28, 1996 and the results of their
operations and their cash flows for each of the two years in the period
ended February 28, 1996 in conformity with generally accepted accounting
principles. Also in my opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company's past
default on certain loan agreements, recurring losses, and past deficiencies
in working capital raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 2 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result from the outcome this uncertainty.
/signature/
PAUL C. ROBERTS
Certified Public Accountant
Pleasantville, New York
May 14, 1996
<PAGE>
<TABLE>
<CAPTION>
DERMARX AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1996
ASSETS
<S> <C>
Current assets:
Cash and cash equivalent $712,392
Accounts receivable - trade 5,694
Inventory - Finished goods 62,677
Prepaid expense 12,653
--------
Total current assets 793,416
--------
Property and equipment:
Computer equipment, net of accumulated depreciation of $1,342 11,753
Other assets:
Security deposits 3,286
Patents, net of accumulated amortization of $31,009 119,682
-------
122,968
-------
$928,137
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank $5,881
Accounts payable and accrued expenses 67,487
--------
Total current liabilities 73,368
--------
Other Liabilities accrued expense (see note 11) 215,166
--------
Long-term debt:
Notes payable - net of discounts 33,377
Notes payable - related party, net of discounts 47,946
Accrued interest - notes payable 3,208
Accrued interest - notes payable, related party 5,301
-------
Total long-term debt 89,832
-------
Commitments and Contingencies
Series A redeemable convertible preferred stock:
14% dividend rate; $.10 par value; 800 shares authorized; 0 shares
issued and outstanding
Common stockholders' equity:
Common stock, $.05 par value: 8,000,000 shares authorized;
7,052,363 shares issued and outstanding $352,618
Additional paid-in capital 3,955,745
Accumulated (deficit) (3,758,592)
-----------
549,771
-------
$928,137
========
See accompanying Auditor's Report and notes to Financial Statement.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
DERMARX AND SUBSIDIARY
STATEMENTS OF OPERATIONS
Years Ended February 28
1996 1995
---- ----
<S> <C> <C>
Revenues:
Sales, net discounts $49,738 $42,517
Cost of Goods sold 13,406 9,023
------ ------
Gross profit 36,332 33,194
General and Administrative 451,696 251,272
------- --------
(Loss) from operations (415,364) (217,778)
Other income (expense)
Interest income 11,134 -
Interest expense (59,123) (29,180)
Net (loss) $(463,353) $(246,958)
========== ==========
Net (loss) per common share $(.09) $(.08)
Weighed average shares outstanding 4,956,185 3,210,757
========== ==========
</TABLE>
See accompanying Auditor's Report and notes to Financial Statement.
F-3
<PAGE>
<TABLE>
<CAPTION>
DERMARX AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 1996 AND 1995
Common Stock
------------
Additional
Par Paid-in Accumulated
Shares Value Capital Deficit Total
------ ----- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance -
February 28, 1994 2,116,813 $105,841 $2,337,175 $(3,048,281) $(605,265)
Shares issued in
preferred stock
conversion 250,000 12,500 111,050 - 123,550
Shares issued on
conversion of
accounts payable and
accrued expenses 252,558 12,627 129,230 - 141,857
Shares issued upon
conversion of notes
payable 297,804 14,890 132,110 - 147,000
Shares issued on
conversion of accrued
interest 68,558 3,428 31,038 - 34,466
Shares issued in
connection with
financing 631,000 31,550 - - 31,550
Shares issued for
services 180,000 9,000 1,000 - 10,000
Shares reacquired in
litigation settlement (197,768) (9,888) (137,612) - (147,500)
Net (loss) - - - (246,958) (246,958)
--------- ------- --------- ----------- ----------
Balance - February
28, 1995 3,598,965 179,948 2,603,991 (3,295,239) (511,300)
Shares issued in
private placements 2,718,500 135,925 1,064,925 - 1,200,850
Shares issued upon
conversion of notes
& accrued expenses 637,398 31,870 286,829 - 318,699
Shares issued per
consulting and
employment agreements
97,500 4,875 - - 4,875
Net (loss) - - - (463,353) (463,353)
--------- -------- ---------- ------------ ----------
Balance -
February 28, 1996 7,052,363 $352,618 $3,955,745 ($3,758,592) $549,771
========= ======== ========== ============ ==========
See accompanying Auditor's Report and notes to Financial Statement.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
DERMARX AND SUBSIDIARY STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 1996 AND 1995
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(463,353) $(246,958)
Adjustments to reconcile net (loss) to net cash (used) by
operating activities:
Accounts payable, accrued expenses and accrued interest 58,074 176,323
converted to common stock
Expenses paid by issuance of stock - 10,000
Discount on notes amortized 20,106 7,767
Depreciation and amortization 9,832 9,023
Changes in assets and liabilities:
Decrease in accounts receivable 5,766 3,482
Decrease (Increase) in inventory 16,251 (68,669)
(Increase) decrease in prepaid expenses (11,605) (1,048)
Decrease in other assets (3,286) 500
(Increase) (Decrease) in accounts payable, accrued
interest and accrued expenses (81,057) (38,533)
(Decrease) dividends in arrears - (12,000)
--------- ---------
Net cash (used) by operating activities (449,272) (160,113)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (12,297) -
---------
Net cash (used) by investing activities (12,297) -
---------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,200,850 -
Proceeds from debt obligations - 315,500
Repayment of debt obligations (32,619) (6,000)
Purchase Treasury Shares - (147,500)
---------- ---------
Net cash provided by financing activities 1,168,231 162,000
---------- ---------
Net increase in cash and cash equivalents 706,662 1,887
Cash and cash equivalents, beginning of year 5,730 3,843
---------- ---------
Cash and cash equivalents, end of year $712,392 $5,730
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $7,416 $1,400
====== ======
See accompanying Auditor's Report and notes to Financial Statement.
</TABLE>
F-5
<PAGE>
DERMARX (FORMERLY INNOTEK, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1996 AND 1995
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business:
The Company was organized on June 4, 1985 under the name
Vocaltech, Inc. On December 11, 1992 the Company changed
its name to Innotek, Inc. and on January 24, 1995 again
changed its name to DermaRx, Inc. The Company is engaged in
the development for future sale of non-prescription products
to hospitals, nursing homes and health care centers.
Consolidation:
The consolidated financial statements and accompanying data
include DermaRx, Inc. and its wholly-owned subsidiary. All
material transactions between companies are eliminated. The
subsidiary is on a calendar year basis in order to enable a
more efficient and timely audit at year end.
Revenue Recognition:
The Company and its subsidiary recognize sales and the
related costs of sales upon shipment of goods.
Depreciation and Amortization:
Property and equipment are reflected at cost.
Property and equipment are being depreciated over estimated
useful lives of five years, principally using the straight-
line method for both book and tax reporting purposes.
Patents are being amortized using the straight-line method
over a period of ten to seventeen years.
(Loss) Per Share:
(Loss) per share is computed on the basis of the weighted-
average number of common shares outstanding during the
periods. The weighted-average number of shares of common
stock does not include common equivalent shares for the
assumed exercise of the common stock options and warrants,
as the effect would be antidilutive.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents.
Use of Estimate:
F-6
<PAGE>
The preparation of the financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Inventory:
Inventory is valued at the lower of cost or market, with
cost determined by the first in, first out (FIFO) method.
Note 2 - OPERATING RESULTS AND MANAGEMENT'S PLANS
The Company has had recurring operating losses, has been in
default of certain debt agreements and has had deficiencies
in working capital in the past which raise doubt about the
Company's ability to continue as a going concern.
Management's plans have included the conversion of certain
debt and liabilities to common stock of the Company, and a
change in marketing strategy during the 1991 fiscal year.
The Company also acquired Innovisions, Inc. The Company has
raised $1,200,850 net of costs in private placements and
converted debt and liabilities to common stock. The Company
is devoting all its resources to developing and marketing
its over the counter skin care products.
Note 3 - NOTES PAYABLE -- OTHER
In September, 1992, the Company completed a private
placement whereby it sold 4.68 units, each unit consisting
of a $25,000, one year promissory note bearing interest at
the rate of 8% per annum and 12,500 shares of common stock
of the Company. The Company raised $117,000 in this
placement, of which $25,000 was from a director of the
Company. During the fiscal year ended February 28, 1994, a
holder of a $10,000 note converted to 20,000 common shares
of the Company. During the fiscal year ended February 28,
1995, the holders of $47,000 of the notes converted to
common stock of the Company. During the fiscal year ended
February 28, 1996, the holders of $35,000 of the notes
converted to common stock of the Company and the remaining
$25,000 was repaid.
Note 4 - LONG TERM DEBT
During the year ended February 28, 1995, the Company raised
$315,500 in a private placement by issuance of three year
notes which bear interest at a rate of 6% per annum. In
connection with the issuance of the notes, the Company
issued 631,000 shares of its common stock to the
noteholders. During the year ended February 25, 1996,
holders of $230,500 of the notes plus interest accrued
thereon converted to common stock of the Company. Of this
amount $140,500 was converted by officers and directors of
the Company.
F-7
<PAGE>
In connection with its acquisition of Innovisions, Inc. the
Company acquired an obligation to a bank in the amount
$27,500. The note is payable at the rate of $500 per month.
The final payment is due March 10, 1997. The note is
collateralized by a blanket lien on the assets of
Innovisions, Inc. and guaranteed by a shareholder of the
Company. The balance at February 28, 1996 is $5,881.
Aggregate maturities of notes payable are as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1997 $5,881
1998 -
1999 $93,509
-------
$99,390
Less: Discounts (3,677)
-------
95,713
Less: Current Portion 5,881
-------
$89,832
=======
</TABLE>
Note 5 - INCOME TAXES
The Company has changed its method of accounting for income
taxes to comply with the provisions of SFAS No. 109,
Accounting for Income Taxes. This accounting change had no
significant impact on the Company's financial statements.
As of February 28, 1996, the Company has net operating loss
carryforwards of approximately $3,600,000 for both financial
statement and income tax purposes which expire in the years
2001 through 2011, and unused research and development
credits of $21,000 which expire in 2001. The Company has
provided a full valuation reserve against the benefit of the
net operating loss and unused R&D Credits due to uncertainty
regarding its ability to use them.
Note 6 - REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized 800 shares of $.10 par value
preferred stock and issued at $100 per share, all 800 shares
of $.10 par value Series A 14% convertible preferred stock.
The Series A preferred stock is redeemable upon 30 days
written notice by the Company or the registered holder at
$100 per share. The holders of the Series A preferred stock
are entitled to 15 votes per share on all matters submitted
to a vote of the common shareholders and is entitled in
liquidation to $100 per share plus all accrued and unpaid
dividends.
During the year ended February 28, 1995, the holder of all
800 shares of outstanding preferred stock converted these
shares and accrued dividends thereon into 250,000 shares of
common stock of the Company and $12,000 in cash.
F-8
<PAGE>
Note 7 - RELATED PARTY TRANSACTION
During the year ended February 28, 1995, the Company
incurred consulting fees of $37,500 from officers and
directors of the Company.
During the fiscal year ended February 28, 1995, the Company
received $190,500 from officers and directors of the Company
in its private placement (See Note 4).
Note 8 - COMMON STOCK
During the year ended February 28, 1996, the Company issued
2,718,500 shares of its common stock in private offerings
for net proceeds of $1,200,850.
During the years ended February 28, 1996 and 1995, the
Company converted $265,500 and $147,000 of notes payable
into 531,000 and 297,804 shares of common stock of the
Company, respectively.
During the years ended February 28, 1996 and 1995, the
Company converted $53,199 and $176,323 of liabilities into
106,398 and 330,082 shares of common stock of the Company,
respectively.
During the years ended 1996 and 1995, the Company issued
97,500 and 180,000 shares of the common stock of the Company
in exchange for services, respectively.
During the year ended February 28, 1995, the Company issued
631,000 shares of common stock of the Company in connection
with the receipt of $315,500 of financing.
During the year ended February 28, 1995, the Company issued
250,000 shares of common stock upon the conversion of all
outstanding shares of preferred stock plus dividends in
arrears.
Note 9 - STOCK OPTIONS
(a) The Company has an incentive stock option plan (ISOP)
for employees and an executive stock option plan (ESOP)
for employees, directors, and consultants, under which
options to purchase common stock may be granted at fair
market value on the grant date or otherwise as specified
under the executive stock option plan. A maximum of
111,111 shares and 47,619 shares have been reserved for
issuance under the ISOP and the ESOP, respectively. No
options were outstanding at February 28, 1996 and 1995
under either plan.
(b) Other Stock Options:
The following table summarizes the activity in other options:
F-9
<PAGE>
<TABLE>
<CAPTION>
SHARES PRICE RANGE
------- ------------
<S> <C> <C>
510,416 $.75 - $2.50
------- ------------
$2.50
-----
Outstanding at February 28, 1994 522,480 $.50 - $1.58
------- ------------
Granted 145,000 $.50
Expired 56,603 $1.58
Canceled 69,841 $.50
------- -----
Outstanding at February 28, 1995 541,036 $.50 - $1.58
------- ------------
Granted 626,118 $.50
Expired 67,461 $.76 - $1.58
Outstanding at February 28, 1996 1,099,693 $.50 - $1.58
Exercisable at February 28, 1996 1,099,693 $.50 - $1.58
--------- ------------
</TABLE>
See Note 11 for other options which may be issued under
employment agreements.
Note 10 - STOCK WARRANTS
In July 1990, the Company issued warrants to purchase 19,048
shares of common stock of the Company at $3.15 per share
that expired August 1, 1994. These warrants were issued
along with convertible debentures. During the fiscal year
ended February 28, 1992 the debentures were in default. As
consideration to waive the default, the Company extended the
date of expiration for five years to August 1, 1999.
Note 11 - COMMITMENTS
Operating leases:
The Company was obligated under a lease for office
facilities which expired on March 31, 1996. The annual
rentals are $6,912, $7,200 and $7,800 for the first, second
and third years of the lease, respectively. The Company
abandoned the premises as of February 28, 1994. The
landlord has not yet declared the lease to be in default nor
commenced proceedings against the Company.
The Company is now obligated under a lease for office space
which expires April 30, 1997 at the monthly rental of $3,286
per month.
Employment agreement:
The Company has entered into an employment agreement with an
officer of the Company. The agreement provides for annual
compensation of $90,000 and $100,000 for the first and
second year of the agreement respectively, the agreement
expires on October 1, 1996. The agreement also provides for
F-10
<PAGE>
stock options to purchase up to 5% of the Company's fully
diluted capital stock after completion of its private
placement at the rate of $.50 per share any time before
October 1, 1998. Additionally, another option in the second
year of the agreement was provided to purchase up to 5% of
the Company's fully diluted capital stock at the greater of
$.50 per share or the per share financing amount of any
additional financing completed before October 1, 1996.
These options may be exercised any time before October 1,
1999.
The Company has entered into a royalty and security
agreement with a law firm to which the Company owes
$205,487.32. The agreement provides for simple interest of
9% on the outstanding balance owed. The agreement calls for
payment of the outstanding balance by payment of a royalty
equal to 7% of gross sales of certain products the Company
until the outstanding balance plus accrued interest thereon
is paid. The Company has granted a security interest in its
patent entitled "Eradication and Treatment of Diaper
Dermatitis and Related Skin Disorders" to the law firm in
conjunction with this agreement.
The Company has entered into an employment agreement
beginning on November 1, 1995 and expiring October 31, 1997.
The agreement calls for annual compensation of $106,000 plus
a performance bonus equal to 1 1/2% of annual net increases in
revenues of certain of the Company's skin care products with
a minimum of $2500 per month. The agreement also calls for
the issuance of 30,000 shares of the Company's common stock
to the employee as a signing bonus at the time the contract
is signed. The contract was signed on October 27, 1995, and
the shares were delivered. As a term of Dr. Mulder's
employment contract, he will receive one option per year to
purchase 50,000 shares of common stock at $.50 per share any
time before December 31, 1999, for each year of the
agreement, i.e., November 1, 1995 to November 1, 1997,
(100,000 total shares). Options shall be considered earned
on the last day of each contract year.
Note 12 - MAJOR CUSTOMERS
For the years ended February 28, 1996 and 1995 there were
one and three customers, respectively, who accounted for
more than ten percent of the Company's sales of one of its
two non-prescription products. The Company is not
dependent, however, and believes the loss of one of its
customers would not have a material effect on the Company's
sales.
Note 13 - MANUFACTURING
For 1996 and 1995 the Company is dependent on three
suppliers of its non-prescription products. The Company has
identified additional suppliers to serve as back-up
suppliers.
Note 14 - LITIGATION SETTLEMENT
The Company was involved in six lawsuits (as described in
further detail in Item 3 of Form 10-KSB) with M. Sue Benford
or entities controlled by her. The Company was a plaintiff
in two actions and a defendant in four others. During the
year ending February 28, 1994 all six lawsuits have been
dismissed with prejudice pursuant to a settlement agreement
as described below.
F-11
<PAGE>
The Company reached a settlement agreement with M. Sue
Benford whereby the Company paid Ms. Benford $87,500 and
issued a promissory note for another $87,500 due 120 days
from the date of the settlement agreement. The promissory
note was collateralized by 30,000 shares of common stock of
Saliva Diagnostics Systems, Inc. held and owned by a
director of the Company. The director was indemnified by
the Company for $60,000. The Company was in default of the
promissory note and it and the director have decided to
forfeit the Saliva Diagnostics Systems, Inc. shares in full
and complete satisfaction of the promissory note. Ms.
Benford, under the settlement agreement was required to
return to the Company all shares held by her, which totaled
197,768. Ms. Benford assigned to the Company all rights,
title and interest in U.S. patent number 5,110,593 entitled
"Eradication and Treatment of Diaper Dermatitis and Related
Skin Disorders." Also the employment agreement, as
discussed in Note 11, was deemed null and void and without
any force or effect.
Note 15 - SUBSEQUENT EVENT
Subsequent to fiscal year ended February 28, 1996
Innovisions, Inc. transferred all assets to DermaRx in
exchange for forgiveness of debt and Innovisions, Inc. was
then dissolved.
On April 4, 1996 Peter Martin was appointed to serve as a
director of the Company until the next annual meeting of
shareholders of the Company.
The Company issued options to purchase 125,000 shares to
five (5) directors of the Company at $.625 per share. A
510(d) application for DermMend-TM- Gel submitted to the FDA in
May 1996. Four product formally launched at the Symposium
for Advanced Wound Repair in Atlanta, Georgia, April 1996.
F-12
<PAGE>
<TABLE>
<CAPTION>
DERMARX (FORMERLY INNOTEK, INC.) AND SUBSIDIARY
SCHEDULE IV - INDEBTEDNESS OF AND TO RELATED
PARTIES - NOT CURRENT
Balance at
----------
Beginning of Indebtedness to Balance at End
------------- --------------- --------------
Description Period Additions Deductions of Period
----------- ------ --------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended February 28,
1996
Maryanne Carroll (1) $48,597 $5,893 $54,490 $0
Richard Melnick (1) $88,716 $10,407 $99,123 $0
Pedro Valdez $48,580 $4,667 $0 $53,247
(1) Deduction was a conversion of the debt to Common Stock of the Company.
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
DERMARX (FORMERLY INNOTEK, INC.) AND SUBSIDIARY
SCHEDULE IX - SHORT-TERM BORROWINGS
Maximum Average Weighted
Category of Balance at Weighted Amount Amount Average
Aggregate End of Average Outstanding Outstanding Interest Rate
Borrowings Period Interest Rate in Period in Period(a) in Period (b)
---------- ------ ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year Ended
February 28,
1996
Notes payable -
Bank $5,881 7.24% $6,000 $5,990 7.24%
</TABLE>
(a) Based upon month end balance outstanding
(b) Weighted average interest rates were computed by dividing the
related interest expense by the average amount of short-term
borrowings
F-14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<CASH> 712,392
<SECURITIES> 0
<RECEIVABLES> 5,694
<ALLOWANCES> 0
<INVENTORY> 62,677
<CURRENT-ASSETS> 793,416
<PP&E> 11,753
<DEPRECIATION> 1,342
<TOTAL-ASSETS> 928,137
<CURRENT-LIABILITIES> 288,534
<BONDS> 89,832
<COMMON> 352,618
0
0
<OTHER-SE> 197,153
<TOTAL-LIABILITY-AND-EQUITY> 928,137
<SALES> 49,738
<TOTAL-REVENUES> 49,738
<CGS> 13,406
<TOTAL-COSTS> 13,406
<OTHER-EXPENSES> 451,696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,123
<INCOME-PRETAX> (463,353)
<INCOME-TAX> 0
<INCOME-CONTINUING> (463,353)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<NET-INCOME> (463,353)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
<CHANGES> 0
</TABLE>
