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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, 1999
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: September 30, 1999 Class: Common Stock, par value $.01 per share
Shares Outstanding: 1,325,938
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<PAGE>
DERMA SCIENCES, INC.
FORM 10-QSB
INDEX
Description Page
Part I - Financial Information
Item 1. Consolidated Financial Statements
Balance Sheet - September 30, 1999..................................... 2
Statements of Operations - Three months ended September 30, 1999
and September 30, 1998.............................................. 3
Statements of Operations - Nine months ended September 30, 1999
and September 30, 1998.............................................. 4
Statements of Cash Flows - Nine months ended September 30, 1999
and September 30, 1998.............................................. 5
Notes to Consolidated Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K................................ 13
1
<PAGE>
DERMA SCIENCES, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS September 30, 1999
------------------
CURRENT ASSETS
Cash and cash equivalents $1,137,495
Accounts receivable, net 2,139,865
Inventories 1,273,081
Current portion of officers' notes receivable 19,330
Prepaid expenses and other current assets 417,818
Total Current Assets 4,987,589
PROPERTY AND EQUIPMENT, NET 323,840
OTHER ASSETS
Officers' notes receivable 76,034
Goodwill and other intangibles, net 1,579,085
Other 13,916
Total Assets $6,980,464
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit $ 900,000
Accounts payable 1,325,057
Accrued expenses and other current liabilities 770,368
Convertible bond 800,000
Total Current Liabilities 3,795,425
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 15,000,000 shares authorized;
issued and outstanding: 1,325,938 shares 13,259
Convertible preferred stock, $.01 par value; 5,083,333 shares
authorized; issued and outstanding: 939,168 shares 9,392
Additional paid-in capital 10,798,198
Accumulated deficit (7,635,810)
Total Shareholders' Equity 3,185,039
Total Liabilities and Shareholders' Equity $6,980,464
See Notes to Consolidated Financial Statements.
2
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DERMA SCIENCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
( Unaudited )
Three months ended
September 30,
1999 1998
---------- ------------
Net Sales $2,351,765 $2,008,047
Cost of Sales 1,041,208 437,606
Gross Profit 1,310,557 1,570,441
Operating expenses 2,077,726 2,474,061
Other income and expense, net 10,669 (40,527)
2,088,395 2,433,534
Loss before income taxes (777,838) (863,093)
Income tax provision 0 0
Net Loss ($ 777,838) ($ 863,093)
Loss per common share
Basic and Diluted ($0.59) ($0.69)
Shares used in computing loss per common share 1,325,938 1,250,672
See Notes to Consolidated Financial Statements.
3
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DERMA SCIENCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
( Unaudited )
Nine months ended
September 30,
1999 1998
---------- ------------
Net Sales $7,388,305 $6,512,346
Cost of Sales 2,957,689 1,450,844
Gross Profit 4,430,616 5,061,502
Operating expenses 6,730,611 6,651,507
Other income and expense, net (7,273) (55,363)
6,723,338 6,596,144
Loss before income taxes (2,292,722) (1,534,642)
Income tax provision 0 0
Net Loss ($2,292,722) ($1,534,642)
Loss per common share
Basic and Diluted ($1.73) ($1.23)
Shares used in computing loss per common share 1,325,938 1,250,672
See Notes to Consolidated Financial Statements.
4
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DERMA SCIENCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
( Unaudited )
Nine months ended
September 30,
1999 1998
-------------- -------------
OPERATING ACTIVITIES
Net Loss ($2,292,722) ($1,534,642)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 235,239 189,264
Medicaid rebate adjustments 0 (795,866)
Provision for bad debts 43,400 1,658
Changes in operating assets and liabilities
Accounts receivable (805,046) (49,883)
Inventories 372,475 (219,084)
Prepaid expenses and other current assets (201,357) (62,142)
Other assets 2,731 65,959
Accounts payable 290,642 500,844
Accrued expenses and other current liabilities (199,819) 790,082
Net Cash Used in Operating Activities (2,554,457) (1,113,810)
INVESTING ACTIVITIES
Purchases of property and equipment, net (57,391) (39,332)
Net Cash Used In Investing Activities (57,391) (39,332)
FINANCING ACTIVITIES
Net change in bank line of credit 600,000 139,367
Principal payments on long term debt 0 (4,504)
Purchase and retirement of treasury stock (1,018) 0
Proceeds from issuance of convertible securities,
net of issuance costs 0 3,955,000
Proceeds from the issuance of common stock 0 14,558
Proceeds from exercise of stock options, net 11,809 0
Proceeds from the sale of convertible bonds 800,000 0
Net Cash Provided by Financing Activities 1,410,791 4,104,421
NET DECREASE IN CASH AND
CASH EQUIVALENTS (1,201,057) 2,951,279
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 2,338,552 2,514,560
CASH AND CASH EQUIVALENTS AT THE
END OF THE PERIOD $1,137,495 $5,465,839
See Notes to Consolidated Financial Statements.
5
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DERMA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - The Company
Derma Sciences, Inc. and Subsidiaries (the "Company") is a full line
provider of advanced wound and skin care products. The Company markets its
products principally through independent distributors servicing the long-term
care, home health and acute care markets in the United States and select
international markets.
On September 9, 1998 the Company acquired Genetic Laboratories Wound Care,
Inc. ("Genetic Labs"), in a business combination accounted for as a pooling of
interests. Genetic Labs markets proprietary wound care products, primarily wound
closure strips, specialty fasteners 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.
On October 29, 1998 the Company acquired all of the issued and outstanding
stock of Sunshine Products, Inc. ("Sunshine Products"), in a business
combination accounted for as a purchase. Sunshine Products is a manufacturer of
general purpose and specialized skincare products for hospitals, nursing homes
and other institutional facilities.
Note 2 - Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of Derma
Sciences, Inc. and its wholly owned subsidiaries Genetic Laboratories Wound
Care, Inc. and Sunshine Products, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
For purposes of presenting cash flows, the Company considers cash and cash
equivalents as amounts on hand, on deposit in financial institutions and highly
liquid investments purchased with an original maturity of three months or less.
Note 3 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial
6
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DERMA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Basis of Presentation (cont.)
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,
1999, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the financial
statements and footnotes thereto for the year ended December 31, 1998, included
in Form 10-KSB, as amended, filed with the Securities and Exchange Commission.
Note 4 - 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.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $4,780,000 for federal tax purposes that begin to expire in years
2011 through 2018. For state tax purposes, the Company has net operating loss
carryforwards of $3,750,000 that expire in years 2004 through 2008. During 1998
the Company had a change in control as defined by the Internal Revenue Code
Section 382. Consequently, certain limitations may apply to limit the timing and
amount of such net operating loss carryforwards. Accordingly, no provision for
income taxes has been included in the accompanying financial statements.
Note 5 - The Nasdaq Stock Market Listing
The Company's common stock trades primarily on The Nasdaq SmallCap Market
("Nasdaq"). Nasdaq requires that listed companies maintain a minimum bid price
per share of at least $1.00. There can be no assurance that the Company will be
able to maintain a minimum bid price of $1.00 per share for its common stock. If
the Company's common stock should cease to be listed on Nasdaq, the common stock
would trade on the Nasdaq Bulletin Board and the Boston Stock Exchange.
Delisting of the Company's common stock from Nasdaq could make it more difficult
for the Company's shareholders to sell their shares and could also make it more
difficult for the Company to secure additional financing.
7
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DERMA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Year 2000 Compatibility
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words, date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result (for non-compliant systems) in system failures
or miscalculations causing disruptions of operations, including, among others, a
temporary inability to process transactions and information or engage in similar
normal business activities.
The Company has conducted in depth examinations of its computer systems,
and those of its vendors and suppliers, with a view to ascertaining the
compliance of these systems with the year 2000. The Company has requested
assurances from all vendors from which it has purchased, or from which it may
purchase, software that such software will correctly process all date
information at all times. The Company has also requested that its suppliers and
contractors furnish assurances that their computer systems will correctly
process date information relative to the year 2000. The Company, in each of the
foregoing cases, has received assurances satisfactory to it relative to the year
2000 issue.
During 1998 and during the nine months ended September 30, 1999, the
Company expended $25,000 and $20,000, respectively, in the conduct of the
foregoing year 2000 examinations. Based upon these examinations, the Company
believes that: (1) its computer systems, and those of its suppliers, are year
2000 compliant, (2) costs associated with addressing the year 2000 issue have
not had, and will not have, a material adverse impact on the Company's financial
position, and (3) no further examinations relative to the year 2000 issue are
warranted.
8
<PAGE>
DERMA SCIENCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
Results of Operations
Net Sales and Gross Profit
Net sales for the third quarter, 1999 increased $343,718, or 17 %, to
$2,351,765 from $2,008,047 in the third quarter, 1998. The increase in net sales
is the result of the addition of Sunshine Products net sales of $906,798 offset
by a decrease in Genetic Labs net sales of $79,497 and a decrease in Derma
Sciences net sales of $483,583.
Medicaid rebates incurred by the Company are reflected as a reduction to
sales. The quarter ended September 30, 1999 included Medicaid rebates of $27,000
while the quarter ended September 30, 1998 had net Medicaid rebate adjustments
which resulted in an increase to sales of $499,618.
Cost of sales, expressed as a percentage of net sales, increased from 22%
in the third quarter, 1998 to 44% in the third quarter, 1999. Aggregate cost of
sales increased $603,602 to $1,041,208 in the third quarter, 1999 from $437,606
in the third quarter, 1998. This increase is attributable to the sales mix,
primarily the addition of the Sunshine Products skin care line, which has a
higher cost of sales.
Gross profit, expressed as a percentage of net sales, decreased from 78% in
the third quarter, 1998 to 56% in the third quarter, 1999. Aggregate gross
profit decreased $259,884, or 17%, to $1,310,557 in the third quarter, 1999 from
$1,570,441 in the third quarter, 1998. These decreases are attributable to the
sales mix, primarily the addition of the Sunshine Products skin care line, which
has a higher cost of sales.
Operating Expenses
Operating expenses decreased $396,335, or 16%, from $2,474,061 in the third
quarter, 1998 to $2,077,726 in the third quarter, 1999. The decrease is
attributable to the non-recurring merger and restructure costs in the third
quarter of 1998 totaling $748,024 offset by the addition of Sunshine Products
and its manufacturing operations, plus the addition of twenty direct sales
representatives, which increased wages and travel costs.
Net Loss
The Company generated a loss of $777,838, or $0.59 per share, for the third
quarter, 1999 compared to a loss of $863,093, or $0.69 per share, for the third
quarter, 1998.
9
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Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Results of Operations
Net Sales and Gross Profit
Net sales for the nine months ended September 30, 1999 increased $ 875,959,
or 13 %, to $7,388,305 from $6,512,346 in the nine months ended September 30,
1998. The increase in net sales is the result of the addition of Sunshine
Products net sales of $2,375,244 offset by a decrease in Genetic Labs net sales
of $28,135 and a decrease in Derma Sciences net sales of $1,471,150.
Medicaid rebates incurred by the Company are reflected as a reduction to
sales. The nine months ended September 30, 1999 included Medicaid rebates of
$114,042 while the nine months ended September 30, 1998 had net Medicaid rebate
adjustments which resulted in an increase to sales of $774,613.
Cost of sales, expressed as a percentage of net sales, increased from 22%
in the nine months ended September 30, 1998 to 40% in the nine months ended
September 30, 1999. Aggregate cost of sales increased $1,506,845, or 104%, to
$2,957,689 in the nine months ended September 30, 1999 from $1,450,844 in the
nine months ended September 30, 1998. This increase is attributable to the sales
mix, primarily the addition of the Sunshine Products skin care line, which has a
higher cost of sales.
Gross profit, expressed as a percentage of net sales, decreased from 78% in
the nine months ended September 30, 1998 to 60% in the nine months ended
September 30, 1999. Aggregate gross profit decreased $630,886, or 12%, to
$4,430,616 in the nine months ended September 30, 1999 from $5,061,502 in the
nine months ended September 30, 1998. These decreases are attributable to the
sales mix, primarily the addition of the Sunshine Products skin care line, which
has a higher cost of sales.
Operating Expenses
Operating expenses increased $79,104, or 1%, from $6,651,507 in the nine
months ended September 30, 1998 to $6,730,611 in the nine months ended September
30, 1999. The increase is attributable to the non-recurring litigation
settlement from the nine months ended September 30, 1998 totaling $819,353 in
addition to restructure and merger costs equaling $748,024, offset by
restructuring charges of $250,000 in the nine months ended September 30, 1999
and the addition of Sunshine Products and its manufacturing operations, plus the
addition of twenty direct sales representatives, which increased wages and
travel costs.
10
<PAGE>
Net Loss
The Company generated a loss of $2,292,722, or $1.73 per share, for the
nine months ended September 30, 1999 compared to a loss of $1,534,642, or $1.23
per share, for the nine months ended September 30, 1998.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments at
September 30, 1999 decreased $4,328,344, or 79%, to $1,137,495 from $5,465,839
at September 30, 1998. The Company's working capital at September 30, 1999
decreased $3,986,043, or 77% to $1,192,164 from $5,178,207 at September 30,1998.
The Company has a short-term line of credit facility with a bank for
$1,000,000, of which $900,000 was outstanding at September 30, 1999, at a
fluctuating rate per annum equal to the prime rate minus 1%, (7.25% at September
30, 1999). This line of credit is secured by cash on deposit with the bank.
The Company's convertible bonds in the aggregate principal amount of
$800,000 (the "Bonds") mature on August 15, 2000 (the "Maturity Date"). The
Company may not have sufficient resources to retire the Bonds on their Maturity
Date. The Company is currently investigating alternatives to retirement of the
Bonds, including extension of the Maturity Date, refinancing of the Bonds with
the proceeds of additional investment capital and/or conversion of the Bonds, in
accordance with their terms, into series C preferred stock of the Company.
Although there can be no assurance that its efforts in this regard will be
successful, the Company believes that it will be able to meet its obligations
under the Bonds upon terms acceptable to it.
The Company has implemented the following measures with a view to
increasing operating efficiency:
(1) Closed its St. Paul, Minnesota facility;
(2) Consolidated customer service functions relative to its Genetic
Laboratories and Sunshine Products lines in St. Louis, Missouri;
(3) Consolidated warehousing functions relative to its Genetic
Laboratories and Derma Sciences product lines in Old Forge,
Pennsylvania; and
(4) Restructured its sales force eliminating 3 management positions and 11
sales representative positions.
Closing of the St. Paul facility together with the consolidation of
customer service and warehouse operations are expected to result in annual
reductions in personnel and site costs of approximately $450,000. Restructuring
of the sales force is expected to result in annual reductions in personnel and
travel expenses of approximately $1,250,000.
11
<PAGE>
The Company believes that the foregoing consolidations and restructuring
will enable the Company to sustain its upward sales trend, support its customer
base and provide a foundation for intermediate and long-term growth.
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.
12
<PAGE>
Part II - Other Information
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, 1999, 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 August 6, 1999 the Company filed a current report on
Form 8-K with the Securities and Exchange Commission disclosing that the
Company's shareholders had approved an amendment to the Company's articles of
incorporation effecting a one-for-five reverse split of the Company's common
stock, class A convertible preferred stock and class B convertible preferred
stock. On August 20, 1999 the Company filed a current report of Form 8-K with
the Securities and Exchange Commission disclosing that the Company had completed
a private offering of convertible bonds in which an aggregate of $800,000 was
raised.
13
<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 15, 1999 By: /s/ Stephen T. Wills
---------------------------
Stephen T. Wills, CPA, MST
Vice President and Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited financial statements for the nine months ended September 30,
1999 and is qualified in its entirety by reference to those financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,137,495
<SECURITIES> 0
<RECEIVABLES> 2,139,865
<ALLOWANCES> 0
<INVENTORY> 1,273,081
<CURRENT-ASSETS> 4,987,589
<PP&E> 323,840
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,980,464
<CURRENT-LIABILITIES> 3,795,425
<BONDS> 0
0
9,392
<COMMON> 13,259
<OTHER-SE> 3,162,388
<TOTAL-LIABILITY-AND-EQUITY> 6,980,464
<SALES> 7,388,305
<TOTAL-REVENUES> 7,388,305
<CGS> 2,957,689
<TOTAL-COSTS> 2,957,689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,292,722)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,292,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,292,722)
<EPS-BASIC> (1.73)
<EPS-DILUTED> (1.73)
</TABLE>
