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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 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: March 31, 1998 Class: Common Stock, par value $.01 per share
Shares Outstanding: 4,567,632
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<PAGE>
DERMA SCIENCES, INC.
FORM 10-QSB
INDEX
Description Page
Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheet - March 31, 1998 ................................... 2
Statements of Operations - Three months ended March 31, 1997
and March 31, 1998 ............................................ 3
Statements of Cash Flows - Three months ended March 31, 1997
and March 31, 1998 ............................................ 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 ............................................ 9
Item 2. Changes in Securities and Use of Proceeds .................... 9
Item 6. Exhibits and Reports on Form 8-K ............................. 9
<PAGE>
DERMA SCIENCES, INC.
BALANCE SHEET
March 31, 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................... $ 1,530,412
Accounts receivable, net ..................................... 523,924
Inventory .................................................... 856,906
Prepaid expenses and other current assets .................... 390,585
------------
Total Current Assets ...................................... 3,301,827
PROPERTY AND EQUIPMENT, NET ..................................... 134,440
OTHER ASSETS, NET ............................................... 516,377
------------
Total Assets ......................................... $ 3,952,644
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit .......................................... $ 689,000
Accounts payable ............................................. 540,663
Accrued expenses and other current liabilities ............... 510,911
------------
Total Current Liabilities ................................. 1,740,574
------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, authorized 15,000,000 shares,
issued and outstanding 4,567,632 shares ................... 45,676
Convertible preferred stock, $.01 par value, authorized 1,750,000
shares, issued and outstanding 1,750,000 shares ........... 17,500
Additional paid-in capital ................................... 6,170,250
Accumulated deficit .......................................... (4,021,356)
------------
Total Shareholders' Equity ................................ 2,212,070
------------
Total Liabilities and Shareholders' Equity ........... $ 3,952,644
============
See accompanying notes.
2
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
---------------------------
1997 1998
------------ ------------
NET SALES .............................. $ 751,733 $ 1,749,546
COST OF SALES .......................... 183,855 243,862
------------ ------------
GROSS PROFIT ........................... 567,878 1,505,684
------------ ------------
OPERATING EXPENSES
Product development ............... 196,588 180,127
Selling, general and administrative 750,839 1,275,729
------------ ------------
Total Operating Expenses ..... 947,427 1,455,856
------------ ------------
INCOME (LOSS) FROM OPERATIONS .......... (379,549) 49,828
------------ ------------
OTHER INCOME (EXPENSE)
Interest income ................... 29,684 24,374
Interest expense .................. (16,492) (14,705)
------------ ------------
Total Other Income ........... 13,192 9,669
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ...... (366,357) 59,497
Income taxes ...................... 0 0
------------ ------------
NET INCOME (LOSS) ...................... $ (366,357) $ 59,497
============ ============
NET INCOME (LOSS) PER COMMON SHARE -
BASIC AND DILUTED .................. $ (0.09) $ 0.01
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ................... 4,067,632 4,567,632
============ ============
See accompanying notes.
3
<PAGE>
DERMA SCIENCES, INC
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1998
------------ ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income (Loss) ...................................... $ (366,357) $ 59,497
Adjustments to Reconcile Net Income (Loss) to Net Cash
Used in Operating Activities:
Depreciation and amortization ................... 54,231 54,345
Medicaid rebate adjustment ...................... 0 (150,000)
Changes in operating assets and liabilities
Accounts receivable .......................... 468,155 (36,517)
Inventory .................................... 32,639 (82,234)
Prepaid expenses and other current assets .... (7,541) (156,051)
Other assets ................................. (2,000) 0
Accounts payable ............................. (96,277) (230,090)
Accrued expenses and other current liabilities (215,087) (237,970)
------------ ------------
Net Cash Used in Operating Activities ..... (132,237) (779,020)
------------ ------------
INVESTING ACTIVITIES
Increase in short-term investments ..................... (24,661) 0
Purchases of property and equipment, net ............... (8,028) (3,828)
Increase in patents and trademarks ..................... (4,741) 0
------------ ------------
Net Cash Used in Investing Activities ............... (37,430) (3,828)
------------ ------------
FINANCING ACTIVITIES
Net change in bank line of credit ...................... 130,000 139,367
Collection of officers' notes receivable ............... 110,841 0
------------ ------------
Net Cash Provided by Financing Activities ........... 240,841 139,367
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ..................................... 71,174 (643,481)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ............................................ 60,208 2,173,893
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $ 131,382 $ 1,530,412
============ ============
</TABLE>
See accompanying notes.
4
<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 three-month period ended March 31,
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.
NOTE 4 - 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 31, 1998.
5
<PAGE>
DERMA SCIENCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
RESULTS OF OPERATIONS
Net Sales and Gross Profit
Net sales for the first quarter, 1998 increased $997,813, or 133%, to $1,749,546
from $751,733 in the first 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).
Medicaid rebates incurred by the Company are reflected as a reduction to sales.
The quarter ended March 31, 1998 included Medicaid rebate adjustments which
resulted in an increase to sales of $150,000.
Cost of sales, expressed as a percentage of net sales, decreased from 25% in the
first quarter, 1997 to 14% in the first 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 increased $60,007, or 33%, to $243,862 in the first quarter, 1998
from $183,855 in the first quarter, 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 76% in the
first quarter, 1997 to 86% in the first quarter, 1998. Aggregate gross profit
increased $937,806, or 165%, to $1,505,684 in the first quarter, 1998 from
$567,878 in the first 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 $508,429, or 54%, from $947,427 in the first
quarter, 1997 to $1,455,856 in the first quarter, 1998. This increase represents
the net effect of the increase in selling, general and administrative expense
and the decrease in product development expense discussed below.
6
<PAGE>
Product development expense for the first quarter, 1998 decreased $16,461, or
8%, to $180,127 from $196,588 in the first quarter, 1997. This decrease is
attributable to a decrease in product development staffing.
Selling, general and administrative expense for the first quarter, 1998
increased $524,890, or 70%, to $1,275,729 in the first quarter, 1998 from
$750,839 in the first quarter, 1997. The aggregate increase is primarily
attributable to costs associated with the institution of a direct sales force
including increases in wages and benefits, travel and entertainment expenses and
product pricing and sales growth incentives.
Aggregate wages and benefits expense increased $120,810 to $372,430 for the
first quarter, 1998 from $251,620 for the first quarter, 1997. These increases
are attributable to compensation incident to the hiring of marketing and sales
personnel.
Aggregate travel and entertainment expense increased $91,093 to $138,492 for the
first quarter, 1998 from $47,399 for the first quarter, 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 first
quarter, 1998 expressed as a percentage of sales increased to 19% from 13% in
the first quarter, 1997. Aggregate incentive expense increased $231,320 to
$330,647 for the first quarter, 1998 from $99,327 for the first quarter, 1997.
Income (Loss) from Operations
The Company generated income from operations for the first quarter, 1998 in the
amount of $49,828 compared to a loss from operations of $379,549 for the first
quarter, 1997. This income from operations is attributable to the increase in
net sales discussed above under "Net Sales and Gross Profit."
Net Income (Loss)
The Company generated net income of $59,497, or $0.01 per share, for the first
quarter, 1998 compared to a loss of $366,357, or $0.09 per share, for the first
quarter, 1997. The net income for the first quarter, 1998 is attributable to the
factors discussed above under "Income (Loss) from Operations."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments at March 31,
1998 decreased $512,802, or 25%, to $1,530,412 from $2,043,214 at March 31,
1997. The Company's working capital at March 31, 1998 decreased $379,566, or
7
<PAGE>
20%, to $1,561,253 from $1,940,819 at March 31, 1997. 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 $241,000.
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" herein.
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 March
31, 1998 was $689,000. This line-of-credit is renewable (payable in full) May
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.
The Company is presently investigating several sources of investment capital
relative to the financing of its growth strategies. Although there can be no
assurance that these efforts will be successful, the Company believes that it
will be able to secure financing in the amounts, and upon terms, acceptable to
it.
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.
8
<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 on March 31,
1998, 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. The proceeds
have been used for the following purposes: repayment of indebtedness ($470,000),
working capital ($2,226,734), professional services relative to a merger
($300,000) and acquisition of Morgan Paris, Inc., a former master distributor of
the Company ($285,000). The remainder of the proceeds, $1,510,750, are invested
in short-term investment grade commercial paper and Money Market funds. For more
information relative to the use of 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
---- -----------
27 Financial Data Schedule (filed electronically with the U. S.
Securities and Exchange Commission only)
(B) REPORTS ON FORM 8-K. On February 12, 1998, February 19, 1998 and April 16,
1998 the Company filed current reports on Form 8-K relative to fourth quarter
1997 results of operations and the appointments of Timothy J. Patrick and Srini
Conjeevaram to the Board of Directors, respectively.
9
<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: May 14, 1998 By: /s/ Stephen T. Wills
----------------------
Stephen T. Wills, CPA, MST
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited financial statements for the quarter ended March 31, 1998
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-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,530,412
<SECURITIES> 0
<RECEIVABLES> 523,924
<ALLOWANCES> 0
<INVENTORY> 856,906
<CURRENT-ASSETS> 3,301,827
<PP&E> 134,440
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,952,644
<CURRENT-LIABILITIES> 1,740,574
<BONDS> 0
0
17,500
<COMMON> 45,676
<OTHER-SE> 2,148,894
<TOTAL-LIABILITY-AND-EQUITY> 3,952,644
<SALES> 1,749,546
<TOTAL-REVENUES> 1,749,546
<CGS> 243,862
<TOTAL-COSTS> 243,862
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,705
<INCOME-PRETAX> 59,497
<INCOME-TAX> 0
<INCOME-CONTINUING> 59,497
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,497
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
