================================================================================
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 June 30, 1998
Commission File Number 1-31070
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)
214 Carnegie Center, Suite 100
Princeton, NJ 08540
(609) 514-4744
(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: June 30, 1998 Class: Common Stock, par value $.01 per share
Shares Outstanding: 4,570,456
================================================================================
<PAGE>
DERMA SCIENCES, INC.
FORM 10-QSB
INDEX
Description Page
Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheet - June 30, 1998 ................................... 2
Statements of Operations - Three months ended June 30, 1998
and June 30, 1997 ............................................ 3
Statements of Operations - Six months ended June 30, 1998
and June 30, 1997 ............................................ 4
Statements of Cash Flows - Six months ended June 30, 1998
and June 30, 1997 ............................................ 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 ........................................... 14
Item 2. Changes in Securities and Use of Proceeds ................... 14
Item 6. Exhibits and Reports on Form 8-K ............................ 14
<PAGE>
DERMA SCIENCES, INC.
BALANCE SHEET
June 30, 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................................... $ 1,627,402
Accounts receivable, net ...................................... 712,499
Securities subscription receivable ............................ 3,515,000
Inventory ..................................................... 587,772
Prepaid expenses and other current assets ..................... 323,886
------------
Total Current Assets ....................................... 6,766,559
PROPERTY AND EQUIPMENT, NET ...................................... 122,557
OTHER ASSETS,NET ................................................. 403,686
------------
Total Assets ................................................ $ 7,292,802
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit ........................................... $ 689,000
Accounts payable .............................................. 562,175
Accrued expenses and other current liabilities ................ 670,207
------------
Total Current Liabilities .................................. 1,921,382
------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, authorized 15,000,000 shares,
issued and outstanding 4,570,456 shares .................... 45,705
Convertible preferred stock, $.01 par value, authorized
5,083,333 shares, issued and outstanding 5,070,833 ......... 50,708
Additional paid-in capital .................................... 10,072,683
Accumulated deficit ........................................... (4,797,676)
------------
Total Shareholders' Equity ................................. 5,371,420
------------
Total Liabilities and Shareholders' Equity ............ $ 7,292,802
============
See accompanying notes.
2
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
--------------------------
1998 1997
------------ ------------
NET SALES ............................ $ 1,917,163 $ 796,246
COST OF SALES ........................ 196,739 225,852
------------ ------------
GROSS PROFIT ......................... 1,720,424 570,394
------------ ------------
OPERATING EXPENSES
Product development ............... 205,486 33,521
Selling, general and administrative 1,474,405 1,645,710
------------ ------------
Total Operating Expenses ...... 1,679,891 1,679,231
------------ ------------
INCOME (LOSS) FROM OPERATIONS ........ 40,533 (1,108,837)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income ................... 18,113 1,728
Interest expense .................. (15,613) (10,926)
Litigation settlement ............. (819,353) 0
------------ ------------
Total Other Income (Expense) .. (816,853) (9,198)
------------ ------------
LOSS BEFORE INCOME TAXES ............. (776,320) (1,118,035)
Income taxes ...................... 0 0
------------ ------------
NET LOSS ............................. ($ 776,320) ($1,118,035)
============ ============
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED ................. ($ 0.17) ($ 0.27)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ................ 4,572,740 4,067,632
============ ============
See accompanying notes.
3
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
---------------------------
1998 1997
------------ ------------
NET SALES ............................ $ 3,666,709 $ 1,547,979
COST OF SALES ........................ 440,601 409,707
------------ ------------
GROSS PROFIT ......................... 3,226,108 1,138,272
------------ ------------
OPERATING EXPENSES
Product development ............... 385,613 230,109
Selling, general and administrative 2,750,134 2,396,549
------------ ------------
Total Operating Expenses ...... 3,135,747 2,626,658
------------ ------------
INCOME (LOSS) FROM OPERATIONS ........ 90,361 (1,488,386)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income ................... 42,487 31,412
Interest expense .................. (30,318) (27,418)
Litigation settlement ............. (819,353) 0
------------ ------------
Total Other Income (Expense) .. (807,184) 3,994
------------ ------------
LOSS BEFORE INCOME TAXES ............. (716,823) (1,484,392)
Income taxes ...................... 0 0
------------ ------------
NET LOSS ............................. ($ 716,823) ($1,484,392)
============ ============
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED ................. ($ 0.16) ($ 0.36)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ................ 4,570,186 4,067,632
============ ============
See accompanying notes.
4
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1998 1997
------------ ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net Loss .................................................. ($ 716,823) ($1,484,392)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities
Depreciation and amortization ......................... 108,690 98,464
Medicaid rebate adjustment ............................ (300,000) 0
Provision for bad debts ............................... 0 166,477
Changes in operating assets and liabilities:
Accounts receivable ................................. (225,092) 354,525
Inventory ........................................... 186,900 58,562
Prepaid expenses and other current assets ........... (89,352) (25,413)
Other assets ........................................ 52,996 (52,517)
Accounts payable .................................... (208,578) (113,834)
Accrued expenses and other current liabilities ...... 71,326 (102,753)
------------ ------------
Net Cash Used in Operating Activities ............. (1,119,933) (1,100,881)
------------ ------------
INVESTING ACTIVITIES
Decrease in short-term investments .................... 0 1,049,242
Purchases of property and equipment, net .............. (5,925) (74,176)
------------ ------------
Net Cash Provided by (Used in) Investing Activities (5,925) 975,066
------------ ------------
FINANCING ACTIVITIES
Net change in bank line of credit ..................... 139,367 (11,000)
Proceeds from issuance of convertible
securities, net of issuance costs .................. 440,000 0
Collection of officers' notes receivable .............. 0 221,569
------------ ------------
Net Cash Provided by Financing Activities ......... 579,367 210,569
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ........................................ (546,491) 84,754
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ................................................. 2,173,893 60,208
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $ 1,627,402 $ 144,962
============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
DERMA SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY
Derma Sciences, Inc. (the "Company") is engaged in the development, marketing
and sale of proprietary sprays, ointments and dressings for the management of
certain chronic non-healing skin ulcerations such as pressure and venous ulcers,
surgical incisions and burns. The Company markets its products principally
through independent distributors, mainly to healthcare agencies throughout the
United States. In addition, the Company's products are available in selected
markets throughout the world through strategic alliances with local companies.
NOTE 2 - 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 six-month period ended June 30, 1998,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto for the year ended December 31, 1997, included
in Form 10-KSB filed with the Securities and Exchange Commission.
NOTE 3 - INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
As of December 31, 1997 the Company had a net operating loss carryforward of
approximately $3,240,000 expiring in years 2011 and 2016. Accordingly, no
provision for income taxes has been included in the accompanying financial
statements.
6
<PAGE>
DERMA SCIENCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997
RESULTS OF OPERATIONS
Net Sales and Gross Profit
Net sales for the second quarter, 1998 increased $1,120,917, or 141%, to
$1,917,163 from $796,246 in the second quarter, 1997. The increase in net sales
is attributable primarily to the restructuring of the Company's product
distribution system, including the institution of a direct sales force during
1997 and price increases during the third quarter of 1997 and first quarter of
1998.
The Company introduced new product lines during the first quarter of 1998
consisting of Alginate Dressings (NutraStat and DermaStat), Hydrocolloid
Dressings (NutraCol and DermaCol) and Film Dressings (DermaFilm and DermaSite).
New product sales were not a material revenue producing factor in the second
quarter of 1998.
Medicaid rebates incurred by the Company are reflected as a reduction to sales.
The quarter ended June 30, 1998 included Medicaid rebate adjustments which
resulted in a net increase to sales of $85,000.
Cost of sales, expressed as a percentage of net sales, decreased from 28% in the
second quarter, 1997 to 10% in the second quarter, 1998. This decrease is
attributable primarily to the increase in net sales resulting from price
increases and the adjustment of Medicaid rebates as discussed above. Aggregate
cost of sales decreased $29,113, or 13%, to $196,739 in the second quarter, 1998
from $225,852 in the second quarter, 1997. The decrease in aggregate cost of
sales is attributable to the increase in net sales in certain product lines
which have a relatively high gross margin.
Gross profit, expressed as a percentage of net sales, increased from 72% in the
second quarter, 1997 to 90% in the second quarter, 1998. Aggregate gross profit
increased $1,150,030, or 202%, to $1,720,424 in the second quarter, 1998 from
$570,394 in the second quarter, 1997. The increase in the gross profit
percentage is attributable to the price increases and Medicaid rebate
adjustments as discussed above. The increase in the aggregate gross profit is
attributable to the sales increases, discussed above.
Operating Expenses
Operating expenses increased nominally, from $1,679,231 in the second quarter,
1997 to $1,679,891 in the second quarter, 1998. This increase represents the net
7
<PAGE>
effect of a decrease in selling, general and administrative expense and an
increase in product development expense discussed below.
Product development expense for the second quarter, 1998 increased $171,965 to
$205,486 from $33,521 in the second quarter, 1997. This increase is attributable
to licensing fees incurred on new product lines discussed above, expenses
incurred related to clinical studies and increases to salaries, employee
benefits and rent expense.
Selling, general and administrative expense for the second quarter, 1998
decreased $171,305, or 10%, to $1,474,405 in the second quarter, 1998 from
$1,645,710 in the second quarter, 1997. The primary factors contributing to the
change in selling, general and administrative expense for the second quarter,
1998 compared to the second quarter, 1997 are explained below.
Aggregate wages and benefits expense increased $166,793 to $772,475 for the
second quarter, 1998 from $605,682 for the second quarter, 1997. These increases
are attributable to compensation incident to the hiring of marketing and sales
personnel.
During 1997, the Company restructured the method of compensating its wholesalers
and distributors replacing sales commissions to master distributors with various
product pricing and sales growth incentives. Incentive expense for the second
quarter, 1998 expressed as a percentage of sales increased to 22% from 11% in
the second quarter, 1997. Aggregate incentive expense increased $332,557 to
$418,409 for the second quarter, 1998 from $85,852 for the second quarter, 1997.
Aggregate bad debt expense decreased $140,582 during the second quarter, 1998
compared to the second quarter, 1997.
Recruiting fees of $83,000 were incurred in the second quarter, 1997 in
connection with the hiring of marketing and sales personnel. No comparable costs
were incurred in the second quarter, 1998.
Income (Loss) from Operations
The Company generated income from operations for the second quarter, 1998 in the
amount of $40,533 compared to a loss from operations of $1,108,837 for the
second quarter, 1997. This income from operations is attributable to the
increase in net sales discussed above under "Net Sales and Gross Profit."
Litigation Settlement
On June 8, 1998 the Company and ABS LifeSciences, Inc. ("ABS"), a subsidiary of
Integra Life Sciences, Inc., agreed to a settlement of their respective claims
and counter claims asserted in the civil action ABS LifeSciences, Inc. v. Derma
8
<PAGE>
Sciences, Inc. (the "Action"). The settlement provided that the Company pay ABS
a total of $550,000 and return all unsold Chronicure inventory. The settlement
further provides for the dismissal of all claims and counter claims asserted in
the action. The settlement resulted in a charge to operations of $819,353 in the
quarter ended June 30, 1998.
Net Loss
The Company generated a net loss of $776,320, or $0.17 per share, for the second
quarter, 1998 compared to a loss of $1,118,035, or $0.27 per share, for the
second quarter, 1997. The net loss for the second quarter, 1998 is attributable
to the factors discussed above under "Income (Loss) from Operations" and the
"Litigation Settlement" charge to operations of $819,353.
Other Events
On May 12, 1998, the Company announced the execution of a nonbinding letter of
intent to acquire Genetic Laboratories Wound Care, Inc. ("GLWC"). The
acquisition would be accomplished by the merger of a newly formed, wholly owned
subsidiary of the Company into GLWC. GLWC markets proprietary wound care
products; primarily wound closure strips, specialty fastners, and net dressings.
Sales are made primarily to medical supply distributors throughout the United
States and in foreign countries, mainly Europe, utilizing independent sales
representatives. GLWC shareholders would receive 0.7 shares of the Company's
common stock for each share GLWC common stock owned. The Boards of Directors of
the Company and GLWC approved the acquisition on June 26, 1998. The acquisition
is conditioned upon approval of the acquisition by majority vote of the
shareholders of the Company and GLWC; such meetings are presently scheduled to
be held on September 9, 1998.
On July 14, 1998, the Company announced the execution of a nonbinding letter of
intent to acquire Sunshine Products, Inc. ("Sunshine") whereby Sunshine would be
acquired by a wholly owned subsidiary of the Company. Sunshine shareholders
would receive $1.2 million in cash for its issued and outstanding capital stock.
Sunshine, a private closely-held corporation, is a manufacturer of general
purpose and specialized skincare products for hospitals, nursing homes and other
institutional facilities. Closing of the acquisition is subject to execution of
a definitive purchase contract, completion of due diligence, approvals of the
boards of directors and shareholders of both companies and certain other
conditions.
Further, on July 14, 1998 the Company announced that it closed its private
placement of Convertible Securities effective June 30, 1998 in which an
aggregate of $4 million was raised. Terms of the Securities require that upon
approval of the Company's shareholders of a new class of Series B Convertible
Preferred Shares ("Preferred Stock"), the Securities will automatically convert
into units ("Unit(s)"), as hereafter defined, at the rate of $1.20 per Unit.
Each Unit will consist of one share of Preferred Stock convertible into one
share of Common Stock and one warrant ("Warrant(s)") to purchase one share of
Common Stock exercisable at $1.35 per share. As of June 30, 1998, $440,000 had
been received net of issuance costs, the remaining $3,515,000, reflected on the
Company's Balance Sheet as a securities subscription receivable, was received in
July 1998.
9
<PAGE>
DERMA SCIENCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
RESULTS OF OPERATIONS
Net Sales and Gross Profit
Net sales for the six months ended June 30, 1998 increased $2,118,730, or 137%,
to $3,666,709 from $1,547,979 in the six months ended June 30, 1997. The
increase in net sales is attributable primarily to the restructuring of the
Company's product distribution system, including the institution of a direct
sales force during 1997 and price increases during the third quarter of 1997 and
first quarter of 1998.
The Company introduced new product lines during the first quarter of 1998
consisting of Alginate Dressings (NutraStat and DermaStat), Hydrocolloid
Dressings (NutraCol and DermaCol) and Film Dressings (DermaFilm and DermaSite).
New product sales were not a material revenue producing factor in the six months
ended June 30, 1998.
Medicaid rebates incurred by the Company are reflected as a reduction to sales.
The six months ended June 30, 1998 included Medicaid rebate adjustments which
resulted in a net increase to sales of $170,000.
Cost of sales, expressed as a percentage of net sales, decreased from 26% in the
six months ended June 30, 1997 to 12% in the six months ended June 30, 1998.
This decrease is attributable primarily to the increase in net sales resulting
from price increases and the adjustment of Medicaid rebates as discussed above.
Aggregate cost of sales increased $30,894, to $440,601 in the six months ended
June 30, 1998 from $409,707 in the six months ended June 30, 1997. The increase
in aggregate cost of sales is attributable to the increase in net sales
discussed above.
Gross profit, expressed as a percentage of net sales, increased from 74% in the
six months ended June 30, 1997 to 88% in the six months ended June 30, 1998.
Aggregate gross profit increased $2,087,836, or 183%, to $3,226,108 in the six
months ended June 30, 1998 from $1,138,272 in the six months ended June 30,
1997. The increase in the gross profit percentage is attributable to the price
increases and Medicaid rebate adjustments as discussed above. The increase in
the aggregate gross profit is attributable to the sales increases, discussed
above.
10
<PAGE>
Operating Expenses
Operating expenses increased $509,089, or 19%, from $2,626,658 in the six months
ended June 30, 1997 to $3,135,747 in the six months ended June 30, 1998. This
increase is attributable to the increases in both product development expense
and selling, general and administrative expense discussed below.
Product development expense for the six months ended June 30, 1998 increased
$155,504, or 68%, to $385,613 from $230,109 in the six months ended June 30,
1997. This increase is attributable to licensing fees incurred on new product
lines discussed above, expenses incurred related to clinical studies and
increases to salaries, employee benefits and rent expense.
Selling, general and administrative expense for the six months ended June 30,
1998 increased $353,585, or 15%, to $2,750,134 in the six months ended June 30,
1998 from $2,396,549 in the six months ended June 30, 1997. The aggregate
increase is primarily attributable to costs associated with the institution of a
direct sales force including increases in wages, benefits, travel and
entertainment expenses and product pricing and sales growth incentives offset by
a decrease in bad debt expense and recruiting fees.
Aggregate wages and benefits expense increased $82,983 to $688,665 for the six
months ended June 30, 1998 from $605,682 for the six months ended June 30, 1997.
These increases are attributable to compensation incident to the hiring of
marketing and sales personnel.
Aggregate travel and entertainment expense increased $79,771 to $293,376 for the
six months ended June 30, 1998 from $213,605 for the six months ended June 30,
1997. These increases are primarily attributable to the institution of a direct
sales force as discussed above.
During 1997, the Company restructured the method of compensating its wholesalers
and distributors replacing sales commissions to master distributors with various
product pricing and sales growth incentives. Incentive expense for the six
months ended June 30, 1998 expressed as a percentage of sales increased to 21%
from 13% in the six months ended June 30, 1997. Aggregate incentive expense
increased $553,877 to $749,056 for the six months ended June 30, 1998 from
$195,179 for the six months ended June 30, 1997.
Aggregate bad debt expense decreased $166,477 during the six months ended June
30 , 1998 compared to the six months ended June 30, 1997.
Recruiting fees of $83,000 were incurred in the six months ended June 30, 1997
in connection with the hiring of marketing and sales personnel. No comparable
costs were incurred in the six months ended June 30, 1998.
11
<PAGE>
Income (Loss) from Operations
The Company generated income from operations for the six months ended June 30,
1998 in the amount of $90,361 compared to a loss from operations of $1,488,386
for the six months ended June 30, 1997. This income from operations is
attributable to the increase in net sales discussed above under "Net Sales and
Gross Profit."
Litigation Settlement
Please refer to "Quarter Ended June 30, 1998 Compared to Quarter Ended June 30,
1997."
Net Loss
The Company generated a net loss of $716,823, or $0.16 per share, for the six
months ended June 30, 1998 compared to a loss of $1,484,392, or $0.36 per share,
for the six months ended June 30, 1997. The net loss for the six months ended
June 30, 1998 is attributable to the factors discussed above under "Income (Loss
) from Operations" and the "Litigation Settlement" charge to operations of
$819,353.
Other Events
Please refer to "Quarter Ended June 30, 1998 Compared to Quarter Ended June 30,
1997."
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments at June 30, 1998
increased $644,511, or 66%, to $1,627,402 from $982,891 at June 30, 1997. The
Company's working capital at June 30, 1998 increased $4,006,058 to $4,845,177
from $839,119 at June 30, 1997. The increase is primarily due to private
financings discussed below. The Company utilized its short-term investments in
operations during 1997 to fund the Company's losses and to reduce the
outstanding balance on the bank line of credit by $100,000.
In November, 1997 the Company issued convertible securities and received
$1,571,211 net of issuance costs. Please refer to Form 10-KSB filed by the
Company on March 31, 1998 and "Part II - Other Information, Item 2. Changes in
Securities and Use of Proceeds."
The Company issued convertible securities in June 1998 which resulted in the
Company receiving $440,000 net of issuance costs. At June 30, 1998 the Company
had a securities subscription receivable of $3,515,000, which was received in
July 1998.
The Company has a bank line-of-credit, secured by accounts receivable, inventory
and the Company's United States patent and trademarks, whose balance at June 30,
1998 was $689,000. This line-of-credit is renewable (payable in full) August 31,
1998. The Company believes that it will be able either to secure renewal of its
current credit line or secure credit upon comparable terms with another
financial institution.
Statements that are not historical facts, including statements about the
Company'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 products and prices,
product development, commercialization or technological delays or difficulties,
and trade, legal, social, financial and economic risks.
13
<PAGE>
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 and on Form 8-K
on March 31, 1998 and on June 10, 1998, respectively, is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 13, 1994, the Company consummated an initial public offering of 900,000
shares of its $.01 par value common stock and received net proceeds of
$3,221,273. On November 19, 1997 the Company closed on an offering of
convertible securities and received net proceeds of $1,571,211. In June 1998,
the Company closed on an offering of convertible securities and received net
proceeds of $440,000 with a securities subscription receivable of $3,515,000 as
of June 30, 1998. The proceeds have been used for the following purposes:
repayment of indebtedness ($470,000), working capital ($2,341,573), professional
services relative to a merger ($300,000) and acquisition of Morgan Paris, Inc.,
a former master distributor of the Company ($285,000), payments related to the
litigation settlement ($325,000). The remainder of the proceeds, $1,510,911, are
invested in short-term investment grade commercial paper and Money Market funds.
For more information relative to the use of the initial public offering proceeds
please refer to the Company's Form SR as filed with the U. S. Securities and
Exchange Commission on August 21, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS. With the exception of the following, 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 31, 1998 are
incorporated herein by reference.
Item Description
---- ------------------------------------------
10.01 Stock Option Agreement between the Company and Timothy J.
Patrick dated April 3, 1998
10.02 Stock Option Agreement between the Company and Srini
Conjeevaram dated April 3, 1998
27 Financial Data Schedule (filed electronically with the U. S.
Securities and Exchange Commission only)
(B) REPORTS ON FORM 8-K. On April 16, 1998, May 13, 1998 and June 10, 1998
the Company filed current reports on Form 8-K relative to the
appointment of Srini Conjeevaram to the Board of Directors, the
execution of the letter of intent to acquire Genetic Laboratories Wound
Care, Inc. and the litigation settlement with ABS LifeSciences, Inc.,
respectively.
14
<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: August 14, 1998 By: /s/ Stephen T. Wills
------------------------
Stephen T. Wills, CPA, MST
Chief Financial Officer
15
<PAGE>
DERMA SCIENCES, INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT, hereby made and dated as of the 3rd day of
April, 1998 (the "Grant Date"), between Derma Sciences, Inc., a Pennsylvania
corporation (the "Company") and Timothy J. Patrick, Jr. (the "Optionee").
WHEREAS, the Company desires to afford the Optionee an opportunity to
purchase shares of Common Stock, $.01 par value per share, of the Company
("Shares"), as hereinafter provided,
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and for other good and valuable consideration the legal sufficiency of
which is hereby acknowledged, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee the right
and option to purchase all or any part of an aggregate of 10,000 shares (the
"Option"), which Option is intended as a "nonqualified stock option". The Option
is in all respects limited and conditioned, as hereinafter provided.
2. PURCHASE PRICE. The purchase price per share (the "Option Price") of
the Shares covered by the Option (the "Option Shares") shall be the closing
price of the Company's Common Stock as quoted on the Nasdaq SmallCap Market on
the day predeeding the Grant Date, to wit: $1.875.
<PAGE>
3. TERM. Unless earlier terminated pursuant to any provision hereof the
Option shall expire on April 2, 2008 (the "Expiration Date").
4. EXERCISE OF OPTION. (a) The right of the Optionee to exercise is
subject to the condition that the Optionee be a director of the Company. The
Option shall become exercisable in five (5) equal installments and the Optionee
shall have the right to purchase from the Company, on and after the following
dates, the following number of shares:
DATE INSTALLMENT NUMBER OF
BECOMES EXERCISABLE OPTION SHARES
April 2, 1998 2,000
April 2, 1999 2,000
April 2, 2000 2,000
April 2, 2001 2,000
April 2, 2002 2,000
(b) The right of the Optionee to purchase the Option Shares may be
exercised, in whole or in part, at any time or times prior to the expiration or
other termination of the Option.
(c) If the Optionee's position as director with the Company is
terminated prior to the expiration date of his Option, such Option may be
exercised by the Optionee, to the extent of the number of Shares with respect to
which the Optionee could have exercised it on the date of such termination, or
to any greater extent permitted by the Committee, at any time prior to the
earlier of (i) three (3) months after the date of termination or (ii) the
expiration date of such Option; provided, however, if an Optionee's position as
director was terminated voluntarily by the Optionee or by the Company "for
2
<PAGE>
cause" (as defined below), the Optionee shall have no right to exercise his
Option on or after the date of such termination. As used herein, termination of
an Optionee's position as director by the Company shall be "for cause" if the
Board reasonably concludes that the Optionee has materially failed to perform
his responsibilities to the Company, materially failed to follow directives or
policies established by or at the direction of the Board, or conducted himself
in a manner materially detrimental to the interests of the Company.
5. METHOD OF EXERCISING OPTION. (a) Subject to the terms and conditions
of this Option Agreement, the Option may be exercised by giving written notice
to the Company at its principal office, specifying the number of Option Shares
to be purchased, and accompanied by payment in full of the aggregate purchase
price for the Shares. Only full Shares shall be delivered, and any fractional
share which might otherwise be deliverable upon exercise of an Option granted
hereunder shall be forfeited. Attached as Exhibit 1 is a form of written notice.
(b) The purchase price shall be payable: (i) in cash or its
equivalent, or (ii) in whole or in part through the transfer of Common Stock
previously acquired by the Optionee, provided the Common Stock so transferred
have been held for the applicable holding period set forth below:
3
<PAGE>
1. If such previously acquired shares of Common Stock
were acquired through exercise of an incentive stock option and are being
tendered as payment of the option price under an incentive stock option, such
shares have been held by the Optionee for a period not less than the holding
period described in ss.422(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code");
2. If such previously acquired shares of Common Stock
were acquired through exercise
of an incentive stock option or a nonqualified stock option and are being
tendered as payment of the option price under a nonqualified stock option, such
shares have been held by the Optionee for more than one year; or
3. If such previously acquired shares of Common Stock
were acquired through exercise
of a nonqualified stock option and are being tendered as payment of the option
price under an incentive stock option, such Shares have been held by the
Optionee for more than one year.
(c) Upon receipt of such notice and payment, the Company, as
promptly as possible, shall deliver or cause to be delivered a certificate or
certificates representing the Shares with respect to which the Option is so
exercised. The certificate or certificates for such Shares shall be registered
in the name of the person or persons exercising the Option (or, if the Optionee
shall so request in the notice exercising the Option, in the name of the
Optionee and his spouse, jointly, with right of survivorship) and shall be
delivered as provided above to or upon the written order of the person or
4
<PAGE>
persons exercising the Option. In the event the Option shall be exercised by any
person or persons after the death or legal disability of the Optionee, such
notice shall be accompanied by appropriate proof of the right of such person or
persons to exercise the Option. All shares that shall be purchased upon the
exercise of the Option as provided herein shall be fully paid and nonassessable
by the Company.
6. NON-TRANSFERABILITY OF OPTION. The Option is not assignable or
transferable, in whole or in part, by the Optionee, otherwise than by will or by
the laws of descent and distribution. During the lifetime of the Optionee, the
Option shall be exercisable only by the Optionee or, in the event of his legal
disability, by his legal representative.
7. DISQUALIFYING DISPOSITION OF SHARES. The Optionee agrees to give
written notice to the Company, at its principal office, if a "disposition" of
the Shares acquired through exercise of the Option granted hereunder occurs at
any time within two years after the Grant Date or within one year after the
transfer to the Optionee of such Shares. For purposes of this Paragraph, the
term "disposition" shall have the meaning assigned to such term by Sec.424(c) of
the Code.
8. WITHHOLDING OF TAXES. The obligation of the Company to deliver
Shares upon the exercise of any Option shall be subject to any applicable
federal, state and local tax withholding requirements.
5
<PAGE>
9. GOVERNING LAW. This Agreement shall, to the maximum extent possible,
be construed in a manner consistent with the Code provisions concerning
incentive and nonqualified stock options, and its interpretation shall otherwise
be governed by Pennsylvania law.
IN WITNESS WHEREOF, the Company has caused this Stock Option Agreement
to be executed by a duly authorized officer, and the Optionee has hereunto set
his hand and seal, all as of the day and year first hereinabove written.
DERMA SCIENCES, INC.
By: /s/ Stephen T. Wills
----------------------------
Stephen T. Wills, CPA, MST
Vice President and
Chief Financial Officer
OPTIONEE
/s/ Timothy J. Patrick
--------------------------(SEAL)
Timothy J. Patrick
6
DERMA SCIENCES, INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT, hereby made and dated as of the 3rd day of
April, 1998 (the "Grant Date"), between Derma Sciences, Inc., a Pennsylvania
corporation (the "Company") and Srini Conjeevaram (the "Optionee").
WHEREAS, the Company desires to afford the Optionee an opportunity to
purchase shares of Common Stock, $.01 par value per share, of the Company
("Shares") as hereinafter provided,
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and for other good and valuable consideration, the legal sufficiency
of which is hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee the right
and option to purchase all or any part of an aggregate of 10,000 shares (the
"Option") which Option is intended as a "nonqualified stock option." The Option
is in all respects limited and conditioned as hereinafter provided.
2. PURCHASE PRICE. The purchase price per share (the "Option Price") of
the Shares covered by the Option (the "Option Shares") shall be the closing
price of the Company's Common Stock as quoted on the Nasdaq SmallCap Market on
the day predeeding the Grant Date, to wit: $1.875.
<PAGE>
3. TERM. Unless earlier terminated pursuant to any provision hereof, the
Option shall expire on April 2, 2008 (the "Expiration Date").
4. EXERCISE OF OPTION. (a) The right of the Optionee to exercise is
subject to the condition that the Optionee be a director of the Company. The
Option shall become exercisable in five (5) equal installments and the Optionee
shall have the right to purchase from the Company, on and after the following
dates, the following number of shares:
DATE INSTALLMENT NUMBER OF
BECOMES EXERCISABLE OPTION SHARES
April 2, 1998 2,000
April 2, 1999 2,000
April 2, 2000 2,000
April 2, 2001 2,000
April 2, 2002 2,000
(b) The right of the Optionee to purchase the Option Shares may be
exercised, in whole or in part, at any time or times prior to the expiration or
other termination of the Option.
(c) If the Optionee's position as director with the Company is
terminated prior to the expiration date of his Option, such Option may be
exercised by the Optionee, to the extent of the number of Shares with respect to
which the Optionee could have exercised it on the date of such termination, or
to any greater extent permitted by the Committee, at any time prior to the
earlier of (i) three (3) months after the date of termination or (ii) the
2
<PAGE>
expiration date of such Option; provided, however, if an Optionee's position as
director was terminated voluntarily by the Optionee or by the Company "for
cause" (as defined below), the Optionee shall have no right to exercise his
Option on or after the date of such termination. As used herein, termination of
an Optionee's position as director by the Company shall be "for cause" if the
Board reasonably concludes that the Optionee has materially failed to perform
his responsibilities to the Company, materially failed to follow directives or
policies established by or at the direction of the Board, or conducted himself
in a manner materially detrimental to the interests of the Company.
5. METHOD OF EXERCISING OPTION. (a) Subject to the terms and conditions
of this Option Agreement, the Option may be exercised by giving written notice
to the Company at its principal office, specifying the number of Option Shares
to be purchased, and accompanied by payment in full of the aggregate purchase
price for the Shares. Only full Shares shall be delivered, and any fractional
share which might otherwise be deliverable upon exercise of an Option granted
hereunder shall be forfeited. Attached as Exhibit 1 is a form of written notice.
(b) The purchase price shall be payable: (i) in cash or its
equivalent, or (ii) in whole or in part through the transfer of Common Stock
previously acquired by the Optionee, provided the Common Stock so transferred
have been held for the applicable holding period set forth below:
3
<PAGE>
1. If such previously acquired shares of Common Stock
were acquired through exercise of an incentive stock option and are being
tendered as payment of the option price under an incentive stock option, such
shares have been held by the Optionee for a period not less than the holding
period described in ss.422(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code");
2. If such previously acquired shares of Common Stock
were acquired through exercise
of an incentive stock option or a nonqualified stock option and are being
tendered as payment of the option price under a nonqualified stock option, such
shares have been held by the Optionee for more than one year; or
3. If such previously acquired shares of Common Stock
were acquired through exercise
of a nonqualified stock option and are being tendered as payment of the option
price under an incentive stock option, such Shares have been held by the
Optionee for more than one year.
(c) Upon receipt of such notice and payment, the Company, as
promptly as possible, shall deliver or cause to be delivered a certificate or
certificates representing the Shares with respect to which the Option is so
exercised. The certificate or certificates for such Shares shall be registered
in the name of the person or persons exercising the Option (or, if the Optionee
shall so request in the notice exercising the Option, in the name of the
Optionee and his spouse, jointly, with right of survivorship) and shall be
4
<PAGE>
delivered as provided above to or upon the written order of the person or
persons exercising the Option. In the event the Option shall be exercised by any
person or persons after the death or legal disability of the Optionee, such
notice shall be accompanied by appropriate proof of the right of such person or
persons to exercise the Option. All shares that shall be purchased upon the
exercise of the Option as provided herein shall be fully paid and nonassessable
by the Company.
6. NON-TRANSFERABILITY OF OPTION. The Option is not assignable or
transferable, in whole or in part, by the Optionee, otherwise than by will or by
the laws of descent and distribution. During the lifetime of the Optionee, the
Option shall be exercisable only by the Optionee or, in the event of his legal
disability, by his legal representative.
7. DISQUALIFYING DISPOSITION OF SHARES. The Optionee agrees to give
written notice to the Company, at its principal office, if a "disposition" of
the Shares acquired through exercise of the Option granted hereunder occurs at
any time within two years after the Grant Date or within one year after the
transfer to the Optionee of such Shares. For purposes of this Paragraph, the
term "disposition" shall have the meaning assigned to such term by Sec.424(c) of
the Code.
8. WITHHOLDING OF TAXES. The obligation of the Company to deliver
Shares upon the exercise of any Option shall be subject to any applicable
federal, state and local tax withholding requirements.
5
<PAGE>
9. GOVERNING LAW. This Agreement shall, to the maximum extent possible,
be construed in a manner consistent with the Code provisions concerning
incentive and nonqualified stock options, and its interpretation shall otherwise
be governed by Pennsylvania law.
IN WITNESS WHEREOF, the Company has caused this Stock Option Agreement
to be executed by a duly authorized officer, and the Optionee has hereunto set
his hand and seal, all as of the day and year first hereinabove written.
DERMA SCIENCES, INC.
By: /s/ Stephen T. Wills
--------------------------
Stephen T. Wills, CPA, MST
Vice President and
Chief Financial Officer
OPTIONEE
/s/ Srini Conjeevaram
--------------------------(SEAL)
Srini Conjeevaram
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited financial statements for the quarter ended June 30, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000892160
<NAME> Derma Sciences, Inc.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,627,402
<SECURITIES> 0
<RECEIVABLES> 742,499
<ALLOWANCES> (30,000)
<INVENTORY> 587,772
<CURRENT-ASSETS> 6,766,559
<PP&E> 122,557
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,292,802
<CURRENT-LIABILITIES> 1,921,382
<BONDS> 0
0
50,708
<COMMON> 45,705
<OTHER-SE> 5,275,007
<TOTAL-LIABILITY-AND-EQUITY> 7,292,802
<SALES> 3,666,709
<TOTAL-REVENUES> 3,666,709
<CGS> 440,601
<TOTAL-COSTS> 440,601
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,318
<INCOME-PRETAX> (716,823)
<INCOME-TAX> 0
<INCOME-CONTINUING> (716,823)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (716,823)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
