<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-QSB
--------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996
--------------------
Commission File Number 1-31070
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Derma Sciences, Inc.
(Exact name of small business issuer as specified in its Charter)
Pennsylvania 23-2328753
(State or other jurisdiction (IRS employer
of Incorporation) identification number)
121 West Grace Street
Old Forge, PA 18518
(717) 457-1232
(Address including zip code and telephone
number, of principal executive offices)
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| |
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Date: November 11, 1996 Class: Common Stock, par value $.01 per share
Shares Outstanding: 4,054,233
<PAGE>
DERMA SCIENCES, INC.
FORM 10-QSB
INDEX
Description Page
Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheet - September 30, 1996........................................ 2
Statements of Income - Three months ended September 30, 1995
and September 30, 1996................................................. 3
Statements of Income - Nine months ended September 30, 1995
and September 30, 1996................................................. 4
Statements of Cash Flows - Nine months ended September 30, 1995
and September 30, 1996................................................. 5
Notes to Condensed Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 7
Part II - Other Information
Item 1. Legal Proceedings................................................ 11
Item 6. Exhibits and Reports on Form 8-K................................. 11
<PAGE>
DERMA SCIENCES, INC.
BALANCE SHEET
September 30, 1996
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,659
Short-term investments 2,110,410
Accounts receivable 1,411,882
Inventory 901,549
Other current assets 324,234
-----------------------
Total Current Assets 4,780,734
PROPERTY AND EQUIPMENT, net 209,234
OTHER ASSETS 834,705
-----------------------
TOTAL ASSETS $ 5,824,673
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Demand note payable $ 800,000
Accounts payable 430,283
Other current liabilities 306,513
------------------------
Total Current Liabilities 1,536,796
DEFERRED TAXES 23,566
NOTES PAYABLE 190,000
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 15,000,000 shares,
issued and outstanding 4,054,233 shares 40,542
Additional paid-in capital 4,584,719
Retained deficit (550,950)
-----------------------
Total Shareholders' Equity 4,074,311
-----------------------
Total Liabilities and Shareholders' Equity $ 5,824,673
=======================
See accompanying notes.
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
------------------------------------
1995 1996
----------------- -----------------
NET SALES $ 1,317,528 $ 1,311,536
COST OF SALES 326,786 281,728
----------------- -----------------
GROSS PROFIT 990,742 1,029,808
OPERATING EXPENSES:
Product development 168,503 207,868
Selling, general and administrative 771,533 1,012,216
----------------- -----------------
Total Operating Expenses 940,036 1,220,084
----------------- -----------------
INCOME (LOSS) FROM OPERATIONS 50,706 (190,276)
OTHER INCOME (EXPENSE):
Interest income 84,301 30,271
Interest expense (13,159) (16,546)
----------------- -----------------
Total Other Income 71,142 13,725
INCOME (LOSS) BEFORE INCOME TAXES: 121,848 (176,551)
Income taxes 20,812 (8,335)
----------------- -----------------
NET INCOME (LOSS) $ 101,036 $ (168,216)
================= =================
NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ (0.04)
================= =================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,054,233 4,054,233
================= =================
See accompanying notes.
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
September 30,
--------------------------------------
1995 1996
----------------- -------------------
NET SALES $ 4,020,293 $ 3,807,934
COST OF SALES 937,198 766,945
----------------- -------------------
GROSS PROFIT 3,083,095 3,040,989
OPERATING EXPENSES:
Product development 501,671 610,153
Selling, general and administrative 2,563,405 2,865,753
----------------- -------------------
Total Operating Expenses 3,065,076 3,475,906
----------------- -------------------
INCOME (LOSS) FROM OPERATIONS 18,019 (434,917)
OTHER INCOME (EXPENSE):
Interest income 191,497 109,099
Interest expense (41,014) (47,092)
Deferred Merger & Aquisition Costs (294,268) 0
----------------- -------------------
Total Other (Expense) Income (143,785) 62,007
LOSS BEFORE INCOME TAXES: (125,766) (372,910)
Income taxes (1,782) (50,302)
----------------- -------------------
NET LOSS $ (123,984) $ (322,608)
================= ===================
NET LOSS PER COMMON SHARE $ (0.03) $ (0.08)
================= ===================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,054,233 4,054,233
================= ===================
See accompanying notes.
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-------------------------
1995 1996
------------- -----------
OPERATING ACTIVITIES:
Net Loss $ (123,999) $ (322,608)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and amortization 29,754 73,370
Provision for bad debts 0 64,324
Changes in operating assets and liabilities:
Accounts receivable 242,002 (130,193)
Inventory (391,898) 168,136
Other current assets (53,895) (92,872)
Other assets 30,176 (359,699)
Accounts payable 227,679 48,650
Income taxes payable 0 (88,123)
Accrued expenses (67,987) 19,437
------------- ------------
Net Cash Used in Operating Activities (108,168) (619,578)
INVESTING ACTIVITIES:
Deferred merger & acquisition costs 294,268 0
(Increase) Decrease in short-term investments (143,693) 269,065
Purchases of property and equipment (48,068) (64,668)
Increase in patents and trademarks (19,443) (37,686)
Proceeds from sale of fixed assets 10,000 0
------------- ------------
Net Cash Provided by Financing Activities 93,064 166,711
FINANCING ACTIVITIES:
Net change in revolving line of credit 70,000 100,000
Principal payments on long-term debt and capitalized
lease obligations (6,235) (247)
Note payable from acquisition 0 190,000
------------- ------------
Net Cash Provided by Financing Activities 63,765 289,753
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 48,661 (163,114)
------------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 8,693 195,773
------------- -----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 57,354 $ 32,659
============= ===========
See accompanying notes.
<PAGE>
DERMA SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
. The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended September 30,
1996, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. For further information, refer to the financial
statements and footnotes thereto for the year ended December 31, 1995, included
in Form 10-KSB filed with the Securities and Exchange Commission on March 29,
1996.
Note 2 - Officers Note Receivable
Various officers of the Company received draws against incentive
compensation during 1994 totaling approximately $296,156. The Compensation
Committee of the Board of Directors subsequently determined that no incentive
compensation was payable relative to 1994. Accordingly, the officers executed
promissory notes requiring repayment of the incentive compensation over a period
of ten years with interest of 8.01% per annum. In 1995, the Compensation
Committee approved forgiveness of one officer's promissory note in the amount of
$34,292 as part of the officer's severance package.
Note 3 - Morgan Paris Acquisition
During May 1996, the Company acquired the contract rights under the Morgan
Paris Master Distributorship Agreement for $350,000. The Company paid $160,000
at the date of closing. The remaining purchase price will be paid in two equal
installments of $95,000 on or before December 31, 1997 and 1998, respectively.
The cost of the acquisition has been capitalized and is being amortized
over the remaining thirty-month term of the master distributorship agreement.
<PAGE>
DERMA SCIENCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995
Results of Operations
Net Sales and Gross Profit
Net sales for the third quarter, 1996 decreased $5,992, to $1,311,536 from
$1,317,528 in the third quarter, 1995. Increases and decreases in the sales of
the Company's products are discussed below.
Net sales of Dermagran Ointment increased $312,613, or 47%, to $981,280 in
the third quarter, 1996 from $668,667 in the third quarter, 1995. Net sales of
Dermagran Spray decreased $21,134, or 24%, to $67,313 in the third quarter, 1996
from $88,447 in the third quarter, 1995. Net sales of Dermagran Hydrophilic
Wound Dressing decreased $220,550, or 51%, to $212,034 in the third quarter,
1996 from $432,584 in the third quarter, 1995. The decrease in net sales of
Dermagran Hydrophilic Wound Dressing is primarily a result of the restructuring
of Medicare reimbursement relative to various sizes of this product used for
certain purposes. A secondary factor in this decrease is the lowering of prices
for this type of dressing by the Company's competition. Net sales of Dermagran
Zinc-Saline Wet Dressing decreased $20,321, or 60%, to $13,361 in the third
quarter, 1996 from $33,682 in the third quarter, 1995. The decrease in net sales
of Dermagran Zinc-Saline Wet Dressing is primarily a result of the restructuring
of Medicare reimbursement. Net sales of Dermagran Wet Dressing (Saline)
decreased $41,073, or 93%, to $3,120 in the third quarter, 1996 from $44,193 in
the third quarter, 1995. The decrease in the sales of this dressing is
attributable to the loss of Medicare reimbursement.
Cost of sales, expressed as a percentage of net sales, decreased from 25%
in the third quarter, 1995 to 21% in the third quarter, 1996. Aggregate cost of
sales decreased $45,058, or 14%, to $281,728 in the third quarter, 1996 from
$326,786 in the third quarter, 1995. These decreases resulted from shifts in the
product mix toward relatively higher margin products.
Gross profit, expressed as a percentage of net sales, increased from 75% in
the third quarter, 1995 to 79% in the third quarter, 1996. Aggregate gross
profit increased $39,066, or 4%, to $1,029,808 in the third quarter, 1996 from
$990,742 in the third quarter, 1995.
<PAGE>
Operating Expenses
Operating expenses increased $280,048, or 30%, from $940,036 in the third
quarter, 1995 to $1,220,084 in the third quarter, 1996. Product development
expense for the third quarter, 1996 increased as a percentage of sales to 16%
from 13% in the third quarter, 1995 and in the aggregate $39,365, or 23%, to
$207,868 from $168,503 in the third quarter, 1995. The increase in product
development expense is primarily attributable to: (1) submission of a patent and
the commencement of clinical trials relative to a new product; (2) submission of
a FDA 510(k) application relative to extended claims with respect to one of the
Company's products; and, (3) the hiring of a Director of Research and Medical
Communications and research consultants.
Selling, general and administrative expense for the third quarter, 1996
increased as a percentage of net sales to 77% from 59% in the third quarter,
1995 and increased $240,683, or 31%, to $1,012,216 in the third quarter, 1996
from $771,533 in the third quarter, 1995. The increase is primarily attributable
to increases in litigation expense, travel and entertainment expense, sales and
marketing expense and salaries and wages expense.
Litigation expense for the third quarter, 1996 expressed as a percentage of
sales increased to 10% from 3% in the third quarter, 1995. Aggregate litigation
expense increased $94,957 to $129,518 for the third quarter, 1996 from $34,561
for the third quarter, 1995. This increase is primarily attributable to
depositions and continuing discovery in ABS LifeSciences, Inc. v. Derma
Sciences, Inc. Travel and entertainment expense for the third quarter, 1996
expressed as a percentage of sales increased to 7% from 3% in the third quarter,
1995. Aggregate travel and entertainment expense increased $52,006 to $95,259
for the third quarter, 1996 from $43,253 for the third quarter, 1995. This
increase is primarily attributable to furthering the development of
international business relationships.
Sales and marketing expense for the third quarter, 1996 expressed as a
percentage of sales increased to 12% from 7% in the third quarter, 1995.
Aggregate sales and marketing expense increased $72,235, or 80%, to $162,000 for
the third quarter, 1996 from $89,765 for the third quarter, 1995. This increase
is primarily attributable to the continuance of the Company's disease management
program and increased advertising and product promotional expenses. Salaries and
wages expense for the third quarter, 1996, expressed as a percentage of sales,
increased to 21% from 15% in the third quarter, 1995. Aggregate salaries and
wages expense increased $79,525, or 41%, to $271,182 for the third quarter, 1996
from $191,657 for the third quarter, 1995. This increase is primarily
attributable to the hiring of additional personnel, including the Chairman of
the Board and Director of Clinical Education, and raises in salaries for
existing personnel.
Loss from Operations
The Company incurred a loss from operations for the third quarter, 1996 in
the amount of $190,276 compared to income from operations of $50,706 for the
third quarter, 1995. This quarter's loss from operations is primarily
attributable to the increase in operating expenses as discussed above.
<PAGE>
Net Loss
The Company had a net loss of $168,216, or $.04 per share, for the third
quarter, 1996 compared to net income of $101,036, or $.02 per share, for the
third quarter, 1995. This quarter's loss is primarily attributable to the
reasons set forth under "Loss from Operations."
Nine Months Ended September 30,1996 Compared to Nine Months Ended September 30,
1995
Results of Operations
Net Sales and Gross Profit
Net sales for the nine months ended 1996 decreased $212,359, or 5%, to
$3,807,934 from $4,020,293 in the nine months ended 1995. The decrease in net
sales is primarily attributable to lower sales during the first quarter, 1996.
Net sales of Dermagran Ointment increased $465,273, or 21%, to $2,681,028
in the nine months ended 1996 from $2,215,755 in the nine months ended 1995. Net
sales of Dermagran Hydrophilic Wound Dressing decreased $203,015, or 21%, to
$754,384 in the nine months ended 1996 from $957,399 in the nine months ended
1995. Net sales of Dermagran Spray decreased $71,259, or 24%, to $227,400 in the
nine months ended 1996 from $298,659 in the nine months ended 1995. Net sales of
Dermagran Zinc-Saline Wet Dressing decreased $35,222, or 28%, to $91,866 in the
nine months ended 1996 from $127,088 in the nine months ended 1995. Dermagran
Wet Dressing (Saline) decreased $141,769, or 91%, to $14,402 in the nine months
ended 1996 from $156,171 in the nine months ended 1995. The reasons for the
decreases in sales of certain of the Company's products are set forth under
"Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995 -
Results of Operations - Net Sales and Gross Profit."
Cost of sales, expressed as a percentage of net sales, decreased from 23%
in the nine months ended 1995 to 20% in the nine months ended 1996. Aggregate
cost of sales decreased $170,253, or 18%, to $766,945 in the nine months ended
1996 from $937,198 in the nine months ended 1995. The reason for this decrease
is set forth under "Quarter Ended September 30, 1996 Compared to Quarter Ended
September 30, 1995 - Results of Operations - Net Sales and Gross Profit."
Gross profit, expressed as a percentage of net sales, increased from 77% in
the nine months ended 1995 to 80% in the nine months ended 1996. Aggregate gross
profit decreased $42,106, or 1%, to $3,040,989 in the nine months ended 1996
from $3,083,095 in the nine months ended 1995.
<PAGE>
Operating Expenses
Operating expenses increased $410,830, or 13%, from $3,065,076 in the nine
months ended 1995 to $3,475,906 in the nine months ended 1996. Product
development expense for the nine months ended 1996 increased $108,482, or 22%,
to $610,153 from $501,671 in the nine months ended 1995. The increase in product
development expense is primarily attributable to the reasons set forth under
"Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995 -
Results of Operations - Operating Expenses." A secondary factor in the increase
is research relative to the expansion of the Company's products into the
dermatology market.
Selling, general and administrative expense for the nine months ended 1996
increased as a percentage of net sales to 75% from 64% in the nine months ended
1995 and increased in the aggregate $302,348, or 12%, to $2,865,753 in the nine
months ended 1996 from $2,563,405 in the nine months ended 1995. The increase in
selling, general and administrative expense is primarily attributable to
increases in litigation expense, sales and marketing expense, salaries and wages
expense and general administrative expense.
Litigation expense for the nine months ended 1996 expressed as a percentage
of sales increased to 5% from 3% in the nine months ended 1995. Aggregate
litigation expense increased $82,108, or 79%, to $185,469 from $103,361 for the
nine months ended 1995. The reason for this increase is set forth under "Quarter
Ended September 30, 1996 Compared to Quarter Ended September 30, 1995 - Results
of Operations - Operating Expenses." Sales and marketing expense for the nine
months ended 1996 expressed as a percentage of sales increased to 14% from 10%
in the nine months ended 1995. Aggregate sales and marketing expense increased
$128,159, or 33%, to $518,052 for the nine months ended 1996 from $389,893 for
the nine months ended 1995. This increase is primarily attributable to the
development of the company's interactive wound care brochure, development and
introduction of the Company's disease management program, implementation of a
telemarketing program and increased advertising and product promotional
expenses.
Salaries and wages expense for the nine months ended 1996, expressed as a
percentage of sales, increased to 19% from 15% in the nine months ended 1995.
Aggregate salaries and wages expense increased $141,561, or 24%, to $727,769 for
the nine months ended 1996 from $586,208 for the nine months ended 1995. The
reason for this increase is set forth under "Quarter Ended September 30, 1996
Compared to Quarter Ended September 30, 1995 - Results of Operations - Operating
Expenses." General administrative expense for the nine months ended 1996
expressed as a percentage of sales increased to 3% from 1% in the nine months
ended 1995. Aggregate general administrative expense increased $55,571, or 93%,
to $115,464 for the nine months ended 1996 from $59,893 for the nine months
ended 1995. This increase is primarily attributable to business consultants and
increased public relations activity.
<PAGE>
Loss from Operations
The Company incurred a loss from operations for the nine months ended 1996
in the amount of $434,917 compared to income from operations of $18,019 for the
nine months ended 1995. The loss from operations is primarily attributable to
increased operating expenses discussed above.
Net Loss
The Company incurred a net loss of $322,608, or $.08 per share, for the
nine months ended 1996 compared to a net loss of $123,984, or $.03 per share,
for the nine months ended 1995.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments at
September 30, 1996 decreased $621,880, or 22%, to $2,143,069 from $2,764,949 at
September 30, 1995. The Company's working capital at September 30, 1996
decreased $318,314, or 9%, to $3,243,938 from $3,562,252 at September 30, 1995.
Part II - Other Information
Item 1. Legal Proceedings
Information required by Item 103 of Regulation S-B and required hereunder,
as filed with the Securities and Exchange Commission on Form 10-KSB on March 29,
1996 and on Form 8-K on July 2, 1996 is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. Except for setforth below, all exhibits required by Item 601
of Regulation S-B and required hereunder, as filed with the Securities and
Exchange Commission on Form 10-KSB on March 29, 1996 and on Form 10-QSB on
August 13, 1996 are incorporated herein by reference.
Item Description
27 Financial Data Schedule
(b) Reports of Form 8-K. On July 2, 1996 the Company filed a Form 8-K
relative to the settlement of Morgan Paris, Inc. v. Derma Sciences, Inc.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DERMA SCIENCES, INC.
Dated: November 13, 1996 By:
By: /s/ Gary L. Borthwick
---------------------
Gary L. Borthwick, Vice President for
Finance and Operations and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Balance Sheet at September 30, 1996 (unaudited) and the Condensed
Statement of Income for the nine months ended September 30, 1996 (unaudited) and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000892160
<NAME> Derma Sciences, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Sep-30-1996
<CASH> 32,659
<SECURITIES> 0
<RECEIVABLES> 1,411,882
<ALLOWANCES> 0
<INVENTORY> 901,549
<CURRENT-ASSETS> 4,780,734
<PP&E> 209,234
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,824,673
<CURRENT-LIABILITIES> 1,536,796
<BONDS> 0
0
0
<COMMON> 40,542
<OTHER-SE> 4,033,769
<TOTAL-LIABILITY-AND-EQUITY> 5,824,673
<SALES> 3,807,934
<TOTAL-REVENUES> 3,807,934
<CGS> 766,945
<TOTAL-COSTS> 766,945
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,092
<INCOME-PRETAX> (372,910)
<INCOME-TAX> (50,302)
<INCOME-CONTINUING> (322,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (322,608)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0
</TABLE>
