<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1997
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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: March 31, 1997 Class: Common Stock, par value $.01 per share
Shares Outstanding: 4,067,632
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DERMA SCIENCES, INC.
FORM 10-QSB
INDEX
Description Page
- ----------- ----
Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheet - March 31, 1997............................................ 2
Statements of Operations - Three months ended March 31, 1996
and March 31, 1997..................................................... 3
Statements of Cash Flows - Three months ended March 31, 1996
and March 31, 1997..................................................... 4
Notes to Condensed Financial Statements................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 6
Part II - Other Information
Item 1. Legal Proceedings................................................. 8
Item 6. Exhibits and Reports on Form 8-K.................................. 8
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DERMA SCIENCES, INC.
BALANCE SHEET
March 31, 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 131,382
Short-term investments 1,911,832
Accounts receivable 851,698
Inventory 805,020
Other current assets 259,018
----------------
Total Current Assets 3,958,950
PROPERTY AND EQUIPMENT, net 110,538
OTHER ASSETS 698,094
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TOTAL ASSETS $ 4,767,582
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Demand note payable $ 930,000
Accounts payable 649,265
Accrued expenses 438,866
----------------
Total Current Liabilities 2,018,131
NOTES PAYABLE 95,000
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 15,000,000 shares,
issued and outstanding 4,067,632 shares 40,676
Additional paid-in capital 4,644,741
Retained deficit (2,030,966)
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Total Shareholders' Equity 2,654,451
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Total Liabilities and Shareholders' Equity $ 4,767,582
================
See accompanying notes.
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DERMA SCIENCES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------------
1996 1997
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NET SALES $ 1,043,174 $ 751,733
COST OF SALES 259,862 183,855
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GROSS PROFIT 783,312 567,878
OPERATING EXPENSES:
Product development 204,575 196,588
Selling, general and administrative 893,193 750,839
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Total Operating Expenses 1,097,768 947,427
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LOSS FROM OPERATIONS (314,456) (379,549)
OTHER INCOME (EXPENSE):
Interest income 41,451 29,684
Interest expense (14,482) (16,492)
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Total Other Income 26,969 13,192
LOSS BEFORE INCOME TAXES: (287,487) (366,357)
Income taxes (18,163) 0
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NET LOSS $ (269,324) $ (366,357)
=============== ==============
NET LOSS PER COMMON SHARE $ (0.07) $ (0.09)
=============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,054,233 4,067,632
=============== ==============
See accompanying notes.
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DERMA SCIENCES, INC
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
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1996 1997
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OPERATING ACTIVITIES:
Net Loss $ (269,324) $(366,357)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and amortization 12,319 54,231
Changes in operating assets and liabilities:
Accounts receivable 437,915 468,155
Inventory (42,131) 32,639
Other current assets 5,327 (7,541)
Other assets 22,679 (2,000)
Accounts payable 235,662 (96,277)
Accrued expenses (118,415) (215,087)
Income taxes payable (42,598) 0
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Net Cash Provided by (Used in) Operating
Activities 241,434 (132,237)
INVESTING ACTIVITIES:
Increase in short-term investments (341,461) (24,661)
Purchases of property and equipment (20,136) (8,028)
Increase in patents and trademarks (11,219) (4,741)
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Net Cash Used in Investing Activities (372,816) (37,430)
FINANCING ACTIVITIES:
Net change in revolving line of credit 0 130,000
Officers' note receivable 0 110,841
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Net Cash Provided by Financing Activities 0 240,841
NET (INCREASE) DECREASE IN CASH AND ------------- -----------
CASH EQUIVALENTS (131,382) 71,174
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 195,773 60,208
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,391 $ 131,382
============= ===========
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 three-month period ended March 31,
1997, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. For further information, refer to the financial
statements and footnotes thereto for the year ended December 31, 1996, included
in Form 10-KSB filed with the Securities and Exchange Commission on March 24,
1997.
Note 2 - Contingency
ABS Life Sciences, Inc. has instituted litigation against the Company. For
further information relative to the ABS litigation, please refer to Form 10-KSB
filed by the Company on March 24, 1997.
Note 3 - 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. The Board of Directors has
determined that the officers may tender either common stock of the Company or
cash in payment of the promissory notes.
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. In January, 1997, a former officer repaid his promissory note in the
amount of $77,893 inclusive of principal and interest and two officers tendered
common stock of the Company at the stock's closing price quoted by Nasdaq on the
date of tender ($2.00 per share) in satisfaction of payments due during 1996
with respect to their promissory notes.
<PAGE>
DERMA SCIENCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
Results of Operations
Net Sales and Gross Profit
Net sales for the first quarter, 1997 decreased $291,441, or 28%, to
$751,733 from $1,043,174 in the first quarter, 1996. This decrease is partially
attributable to the Company's decision not to impose a first quarter, 1997 price
increase and customers' consequent lack of incentive to front-load inventory in
the first quarter. In the past, the Company has announced price increases for
its products effective April 1. This announcement typically results in customers
increasing inventory levels during the first quarter.
While sales are down as compared to the first quarter, 1996 they are steady
as compared with the fourth quarter, 1996. Management believes that sales
decreases have stabilized. The Company has hired two seasoned executives in the
positions of Vice President for Sales and Vice President for Marketing in
connection with its strategic plan to increase sales.
A product-by-product sales comparison follows. Net sales of Dermagran
Ointment decreased $122,033, or 20%, to $473,413 in the first quarter, 1997 from
$595,446 in the first quarter, 1996. Net sales of Dermagran Hydrophilic Wound
Dressing decreased $65,802, or 23%, to $218,929 in the first quarter, 1997 from
$284,731 in the first quarter, 1996. Net sales of Dermagran Spray decreased
$24,743, or 36%, to $43,622 in the first quarter, 1997 from $68,365 in the first
quarter, 1996. Net sales of Dermagran Wet Dressing (Saline) decreased $5,945, or
60%, to $4,027 in the first quarter, 1997 from $9,972 in the first quarter,
1996. Net sales of Dermagran Zinc-Saline Wet Dressing decreased $25,698, or 68%,
to $11,836 in the first quarter, 1997 from $37,534 in the first quarter, 1996.
Cost of sales, expressed as a percentage of net sales, remained steady
while in the aggregate cost of sales decreased $76,007, or 29%, to $183,855 in
the first quarter, 1997 from $259,862 in the first quarter, 1996. This decrease
is attributable to lower net sales.
Gross profit, expressed as a percentage of net sales, remained steady while
in the aggregate gross profit decreased $215,434, or 28%, to $567,878 in the
first quarter, 1997 from $783,312 in the first quarter, 1996.
<PAGE>
Operating Expenses
Operating expenses decreased $150,341, or 14%, from $1,097,768 in the first
quarter, 1996 to $947,427 in the first quarter, 1997. Product development
expense for the first quarter, 1997 decreased $7,987, or 4%, to $196,588 from
$204,575 in the first quarter, 1996 and increased as a percentage of net sales
from 20% in the first quarter, 1996 to 26% in the first quarter, 1997.
Selling, general and administrative expense for the first quarter, 1997
decreased $142,354, or 16%, to $750,839 in the first quarter, 1997 from $893,193
in the first quarter, 1996. The aggregate decrease in selling, general and
administrative expense is largely attributable to decreases in commissions
expense, promotions/sales support and advertising expense and legal litigation
expense.
Commission expense for the first quarter, 1997 decreased $58,186, or 37%,
to $99,327 for the first quarter, 1997 from $157,513 for the first quarter,
1996. This decrease is attributable to the decrease in net sales.
Promotions/sales support and advertising expense for the first quarter, 1997
decreased $60,161, or 57%, to $45,977 for the first quarter, 1997 from $106,138
for the first quarter, 1996. This decrease is primarily attributable to budget
cut-backs. Legal litigation expense for the first quarter, 1997 decreased
$32,291, or 67%, to $15,757 in the first quarter, 1997 from $48,048 in the first
quarter, 1996. This decrease is primarily attributable to the settlement in 1996
of Morgan Paris, Inc. v. Derma Sciences, Inc.
Loss from Operations
The Company incurred a loss from operations for the first quarter, 1997 in
the amount of $379,549 compared to $314,456 for the first quarter, 1996.
Net Loss
The Company incurred a net loss of $366,357, or $0.09 per share, for the
first quarter, 1997 compared to $269,324, or $0.07 per share, for the first
quarter, 1996.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments at March
31, 1997 decreased $742,113, or 27%, to $2,043,214 from $2,785,327 at March 31,
1996. The Company's working capital at March 31, 1997 decreased $1,539,046, or
44%, to $1,940,819 from $3,479,865 at March 31, 1996. These decreases are
attributable to lower net sales which occasioned increased use of the Company's
short-term investments and line-of-credit.
<PAGE>
Statements that are not historical facts, including statements about Derma
Sciences, Inc.'s confidence and strategies, and expectations about new or
existing products, technologies and opportunities, market demand or acceptance
of new or existing products are forward-looking statements that involve risks
and uncertainties. These uncertainties include, but are not limited to, product
demand and market acceptance risks, impact of competitive product and prices,
product development, commercialization or technological delays or difficulties,
and trade, legal, social and economic risks.
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 24,
1997 is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. Except as set forth 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 24, 1997 are incorporated herein by
reference.
Item Description
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27 Financial Data Schedule (filed electronically with the U.S.
Securities and Exchange commission only)
(b) Reports on Form 8-K. On January 6, 1997 the Company filed a Form 8-K
relative to the restructuring of its operations.
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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: May 14, 1997 By: /s/ Gary L. Borthwick
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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 March 31, 1997 (unaudited) and the Condensed
Statement of Operations for the quarter ended March 31, 1997 (unaudited) and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000892160
<NAME> Derma Sciences, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 131,382
<SECURITIES> 0
<RECEIVABLES> 851,698
<ALLOWANCES> 0
<INVENTORY> 805,020
<CURRENT-ASSETS> 3,958,950
<PP&E> 110,538
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,767,582
<CURRENT-LIABILITIES> 2,018,131
<BONDS> 0
0
0
<COMMON> 40,676
<OTHER-SE> 2,613,775
<TOTAL-LIABILITY-AND-EQUITY> 4,767,582
<SALES> 751,733
<TOTAL-REVENUES> 751,733
<CGS> 183,855
<TOTAL-COSTS> 183,855
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,492
<INCOME-PRETAX> (366,357)
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<INCOME-CONTINUING> (366,357)
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</TABLE>
