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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 June 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: June 30, 1999 Class: Common Stock, par value $.01 per share
Shares Outstanding: 6,629,689
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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 - June 30, 1999......................................... 2
Statements of Operations - Three months ended June 30, 1999
and June 30, 1998.................................................. 3
Statements of Operations - Six months ended June 30, 1999
and June 30, 1998.................................................. 4
Statements of Cash Flows - Six months ended June 30, 1999
and June 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................................. 12
1
<PAGE>
DERMA SCIENCES, INC.
CONSOLIDATED BALANCE SHEET
( Unaudited )
ASSETS June 30, 1999
---------------
CURRENT ASSETS
Cash and cash equivalents $1,379,300
Accounts receivable, net 2,016,555
Inventories 1,452,151
Current portion of officers' notes receivable 19,330
Prepaid expenses and other current assets 349,146
---------------
Total Current Assets 5,216,482
PROPERTY AND EQUIPMENT, NET 352,634
OTHER ASSETS
Officers' notes receivable 76,034
Goodwill and other intangibles, net 1,610,865
Other 13,916
---------------
Total Assets $7,269,931
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit $1,000,000
Accounts payable 1,355,544
Accrued expenses and other current liabilities 951,510
---------------
Total Current Liabilities 3,307,054
---------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 30,000,000 shares authorized;
issued and outstanding: 6,629,689 shares 66,297
Convertible preferred stock, $.01 par value; 5,083,333 shares
authorized; issued and outstanding: 4,695,833 shares 46,958
Additional paid-in capital 10,707,594
Accumulated deficit (6,857,972)
---------------
Total Shareholders' Equity 3,962,877
---------------
Total Liabilities and Shareholders' Equity $7,269,931
===============
See Notes to Consolidated Financial Statements.
2
<PAGE>
DERMA SCIENCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
( Unaudited )
Three months ended
June 30,
1999 1998
------------ ------------
Net Sales $2,452,722 $2,300,589
Cost of Sales 1,017,518 480,020
------------ ------------
Gross Profit 1,435,204 1,820,569
------------ ------------
Operating expenses 2,489,502 2,584,465
Other income and expense, net (8,356) (3,856)
------------ ------------
2,481,146 2,580,609
------------ ------------
Loss before income taxes (1,045,942) (760,040)
Income tax provision 0 4,338
------------ ------------
Net Loss ($1,045,942) ($764,378)
============ ============
Loss per common share
Basic and Diluted ($0.16) ($0.12)
============ ============
Shares used in computing loss per common share 6,623,389 6,252,402
============ ============
See Notes to Consolidated Financial Statements.
3
<PAGE>
DERMA SCIENCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
( Unaudited )
Six months ended
June 30,
1999 1998
------------ ------------
Net Sales $5,036,540 $4,504,299
Cost of Sales 1,916,480 1,013,238
------------ ------------
Gross Profit 3,120,060 3,491,061
------------ ------------
Operating expenses 4,652,885 4,177,447
Other income and expense, net (17,942) (14,837)
------------ ------------
4,634,943 4,162,610
------------ ------------
Loss before income taxes (1,514,883) (671,549)
Income tax provision 0 21,218
------------ ------------
Net Loss ($1,514,883) ($692,767)
============ ============
Loss per common share
Basic and Diluted ($0.24) ($0.11)
============ ============
Shares used in computing loss per common share 6,429,589 6,250,686
============ ============
See Notes to Consolidated Financial Statements.
4
<PAGE>
DERMA SCIENCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
( Unaudited )
Six months ended
June 30,
1999 1998
-------------- ------------
OPERATING ACTIVITIES
Net Loss ($ 1,514,883) ($ 692,767)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 156,826 125,771
Medicaid rebate adjustments 0 (300,000)
Provision for bad debts 26,400 0
Changes in operating assets and liabilities
Accounts receivable (664,736) (189,212)
Inventories 193,405 112,958
Prepaid expenses and other current assets (132,685) (100,951)
Other assets 2,731 50,608
Accounts payable 321,129 (118,960)
Accrued expenses and other current liabilities (18,677) 34,878
-------------- ------------
Net Cash Used in Operating Activities (1,630,490) (1,077,675)
-------------- ------------
INVESTING ACTIVITIES
Purchases of property and equipment, net (39,553) (26,105)
-------------- ------------
Net Cash Used in Investing Activities (39,553) (26,105)
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FINANCING ACTIVITIES
Net change in bank line of credit 700,000 139,367
Principal payments on long term debt 0 (2,970)
Purchase and retirement of treasury stock (1,018) 0
Proceeds from issuance of convertible securities,
net of issuance costs 440,000
Proceeds from exercise of stock options, net 11,809 0
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Net Cash Provided by Financing Activities 710,791 576,397
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NET DECREASE IN CASH AND
CASH EQUIVALENTS (959,252) (527,383)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 2,338,552 2,514,559
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CASH AND CASH EQUIVALENTS AT THE
END OF THE PERIOD $ 1,379,300 $ 1,987,176
============== ============
See Notes to Consolidated Financial Statements.
5
<PAGE>
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 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,
6
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DERMA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
three-month period ended June 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 announced that its shareholders had approved an amendment to
its articles of incorporation authorizing a 1:5 reverse split of the Company's
common and preferred stock. Implementation of the reverse split is a condition
to the Company's continued listing on The Nasdaq SmallCap Market via an
exception to Nasdaq's minimum bid price requirements.
The Company was notified of its failure to maintain the minimum bid price
on February 3, 1999 and has been granted a temporary exception to this standard
subject to meeting certain conditions. The final date for initiating compliance
with these conditions is August 16, 1999.
In the event the Company is deemed to have met the conditions of the
exception, it will continue to be listed on The Nasdaq SmallCap Market. The
Company believes that it can meet these conditions, however, there can be no
assurance that it will do so. If at some future date the Company's common stock
should cease to be listed on The Nasdaq SmallCap Market, it may continue to be
listed on the OTC-Bulletin Board. For the duration of the exception (estimated
to be 10 trading days), the Company's Nasdaq symbol will be DSCCD.
The Company's failure to maintain a minimum bid price per share of $1.00
would ultimately result in the Company's common stock being delisted from the
SmallCap Market.
7
<PAGE>
DERMA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Were this to occur, the common stock would trade exclusively on the Nasdaq
Bulletin Board, the Boston Stock Exchange and the Pacific Exchange. Delisting of
the Company's common stock from the SmallCap Market 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.
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 six months ended June 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 JUNE 30, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998
Results of Operations
Net Sales and Gross Profit
Net sales for the second quarter, 1999 increased $152,133, or 7%, to
$2,452,722 from $2,300,589 in the second quarter, 1998. The increase in net
sales is the result of the addition of Sunshine Products net sales of $775,151
and an increase in Genetic Labs net sales of $55,101 offset by a decrease in
Derma Sciences net sales of $678,119.
Medicaid rebates incurred by the Company are reflected as a reduction to
sales. The quarter ended June 30, 1999 included Medicaid rebates of $23,000
while the quarter ended June 30, 1998 had net Medicaid rebate adjustments which
resulted in an increase to sales of $50,000.
Cost of sales, expressed as a percentage of net sales, increased from 21%
in the second quarter, 1998 to 41% in the second quarter, 1999. Aggregate cost
of sales increased $537,498 to $1,017,518 in the second quarter, 1999 from
$480,020 in the second 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 79% in
the second quarter, 1998 to 59% in the second quarter, 1999. Aggregate gross
profit decreased $385,365, or 21%, to $1,435,204 in the second quarter, 1999
from $1,820,569 in the second 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 $99,463, or 4%, from $2,580,609 in the second
quarter, 1998 to $2,481,146 in the second quarter, 1999. The decrease is
attributable to the non-recurring litigation settlement from the second quarter
of 1998 totaling $819,353 offset by restructuring charges of $250,000 in the
second quarter of 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.
Net Loss
The Company generated a loss of $1,045,942, or $0.16 per share, for the
second quarter, 1999 compared to a loss of $764,378, or $0.12 per share, for the
second quarter, 1998.
9
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Results of Operations
Net Sales and Gross Profit
Net sales for the six months ended June 30, 1999 increased $532,241, or
12%, to $5,036,540 from $4,504,299 in the six months ended June 30, 1998. The
increase in net sales is the result of the addition of Sunshine Products net
sales of $1,468,446 and an increase in Genetic Labs net sales of $51,362 offset
by a decrease in Derma Sciences net sales of $987,567.
Medicaid rebates incurred by the Company are reflected as a reduction to
sales. The six months ended June 30, 1999 included Medicaid rebates of $87,042
while the six months ended June 30, 1998 had net Medicaid rebate adjustments
which resulted in an increase to sales of $300,000.
Cost of sales, expressed as a percentage of net sales, increased from 22%
in the six months ended June 30, 1998 to 38% in the six months ended June 30,
1999. Aggregate cost of sales increased $903,242, or 89%, to $1,916,480 in the
six months ended June 30, 1999 from $1,013,238 in the six months ended June 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 six months ended June 30, 1998 to 62% in the six months ended June 30, 1999.
Aggregate gross profit decreased $371,001, or 11%, to $3,120,060 in the six
months ended June 30, 1999 from $3,491,061 in the six months ended June 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 $472,333, or 11%, from $4,162,610 in the six
months ended June 30, 1998 to $4,634,943 in the six months ended June 30, 1999.
The increase is attributable to the non-recurring litigation settlement from the
six months ended June 30, 1998 totaling $819,353 offset by restructuring charges
of $250,000 in the six months ended June 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.
Net Loss
The Company generated a loss of $1,514,883, or $0.24 per share, for the six
months ended June 30, 1999 compared to a loss of $692,767, or $0.11 per share,
for the six months ended June 30, 1998.
10
<PAGE>
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments at June 30,
1999 decreased $608,603, or 31%, to $1,379,300 from $1,987,903 at June 30, 1998.
The Company's working capital at June 30, 1999 decreased $4,050,535, or 68%, to
$1,909,428 from $5,959,963 at June 30, 1998.
The Company has a short-term line of credit facility for $1,000,000, which
$1,000,000 was outstanding at June 30, 1999, at a fluctuating rate per annum
equal to the prime rate minus 1%, (6.75% at June 30, 1999). This line of credit
is secured by cash on deposit with the bank.
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.
11
<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
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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 May 27, 1999, the Company filed a current report on
Form 8-K with the Securities and Exchange Commission disclosing that the
Company's shareholders approved an amendment to the Company's articles of
incorporation increasing the number of authorized shares of common stock from
15,000,000 to 30,000,000. On June 11, 1999, the Company filed a current report
on Form 8-K with the Securities and Exchange Commission disclosing that the
Company executed a sales agreement for skin care soaps and lotions with Beverly
Enterprises, Inc., a large nursing home chain.
12
<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 16, 1999 By: /s/ Stephen T. Wills
--------------------------------
Stephen T. Wills, CPA, MST
Vice President and
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited financial statements for the six months ended June 30, 1999
and is qualified in its entirety by reference to those financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,379,300
<SECURITIES> 0
<RECEIVABLES> 2,016,555
<ALLOWANCES> 0
<INVENTORY> 1,452,151
<CURRENT-ASSETS> 5,216,482
<PP&E> 352,634
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,269,931
<CURRENT-LIABILITIES> 3,307,054
<BONDS> 0
0
46,958
<COMMON> 66,297
<OTHER-SE> 3,849,622
<TOTAL-LIABILITY-AND-EQUITY> 7,269,931
<SALES> 5,036,540
<TOTAL-REVENUES> 5,036,540
<CGS> 1,916,480
<TOTAL-COSTS> 1,916,480
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,514,883)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,514,883)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,514,883)
<EPS-BASIC> (.024)
<EPS-DILUTED> (.024)
</TABLE>
