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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, 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: March 31, 1999 Class: Common Stock, par value $.01 per share
Shares Outstanding: 6,235,789
<PAGE>
DERMA SCIENCES, INC.
FORM 10-QSB
INDEX
Description
Part I - Financial Information
Item 1. Consolidated Financial Statements
Balance Sheet - March 31, 1999...................................... 2
Statements of Operations - Three months ended March 31, 1999
and March 31, 1998............................................... 3
Statements of Cash Flows - Three months ended March 31, 1999
and March 31, 1998............................................... 4
Notes to Consolidated Financial Statements.......................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 8
Part II - Other Information
Item 1. Legal Proceedings...............................................10
Item 6. Exhibits and Reports on Form 8-K................................10
<PAGE>
DERMA SCIENCES, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1999
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,039,975
Accounts receivable, net 1,855,870
Inventories 1,602,018
Current portion of officers' notes receivable 19,330
Prepaid expenses and other current assets 249,477
----------
Total Current Assets 5,766,670
PROPERTY AND EQUIPMENT, NET 387,552
OTHER ASSETS
Officers' notes receivable 76,034
Goodwill and other intangibles, net 1,639,054
Other 17,508
-----------
Total Assets $7,886,818
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit $1,000,000
Accounts payable 920,542
Accrued expenses and other current liabilities 969,266
-----------
Total Current Liabilities 2,889,808
-----------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 15,000,000 shares
authorized; issued and outstanding: 6,235,789 shares 62,357
Convertible preferred stock, $.01 par value; 5,083,333
shares authorized; issued and outstanding: 5,070,833
shares 50,709
Additional paid-in capital 10,695,973
Accumulated deficit (5,812,029)
-----------
Total Shareholders' Equity 4,997,010
-----------
Total Liabilities and Shareholders' Equity $7,886,818
===========
See Notes to Consolidated Financial Statements.
2
<PAGE>
DERMA SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------- -----------
NET SALES $2,583,818 $2,203,710
COST OF SALES 898,962 533,218
---------- -----------
GROSS PROFIT 1,684,856 1,670,492
---------- -----------
Selling, general and administrative expenses 2,163,384 1,592,982
Other income and expense, net (9,587) (10,981)
---------- -----------
2,153,797 1,582,001
---------- -----------
(Loss) income before provision for income taxes (468,941) 88,491
Provision for income taxes 0 16,880
---------- -----------
NET (LOSS) INCOME $ (468,941) $71,611
========== ===========
(LOSS) INCOME PER COMMON SHARE
Basic and diluted ($0.08) $0.01
========== ===========
Shares used in computing (loss) income
per common share 6,235,789 6,248,971
========== ===========
See Notes to Consolidated Financial Statements.
3
<PAGE>
DERMA SCIENCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (468,941) $ 71,611
Adjustments to reconcile net (loss) income to net cash
used in operating activities
Depreciation and amortization 78,413 62,260
Medicaid rebate adjustments 0 (150,000)
Provision for bad debts 13,400 0
Changes in operating assets and liabilities
Accounts receivable (491,051) (18,647)
Inventories 43,538 (143,635)
Prepaid expenses and other current assets (33,016) (147,343)
Other assets (861) (210)
Accounts payable (113,873) (161,710)
Accrued expenses and other current liabilities (921) (245,927)
----------- -----------
Net Cash Used in Operating Activities (973,312) (733,601)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment, net (24,247) (7,006)
----------- -----------
Net Cash Used In Investing Activities (24,247) (7,006)
----------- -----------
FINANCING ACTIVITIES
Net change in bank line of credit 700,000 139,367
Principal payments on long term debt 0 (1,470)
Purchase and retirement of treasury stock (1,018)
----------- -----------
Net Cash Provided by Financing Activities 698,982 137,897
----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (298,577) (602,710)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 2,338,552 2,514,559
----------- -----------
CASH AND CASH EQUIVALENTS AT THE
END OF THE PERIOD $2,039,975 $1,911,849
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
4
<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.
5
<PAGE>
DERMA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 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, 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 has 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 is not in compliance with the Nasdaq SmallCap Market
("SmallCap Market") listing requirement relative to maintenance of a minimum bid
price per share of $1.00. The Company intends to formulate and implement plans
for achieving compliance with the SmallCap Market's minimum bid price
requirements so as to maintain the Company's SmallCap Market listing.
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. 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
6
<PAGE>
DERMA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 first quarter, 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.
7
<PAGE>
DERMA SCIENCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
RESULTS OF OPERATIONS
Net Sales and Gross Profit
Net sales for the first quarter, 1999 increased $380,108, or 17%, to
$2,583,818 from $2,203,710 in the first quarter, 1998. The increase in net sales
is the result of the addition of Sunshine Products net sales of $693,000 offset
by decreases in Derma Sciences and Genetic Labs net sales of $294,892 and
$18,000, respectively.
Medicaid rebates incurred by the Company are reflected as a reduction
to sales. The quarter ended March 31, 1999 included Medicaid rebates of $64,042
while the quarter ended March 31, 1998 had net Medicaid rebate adjustments which
resulted in an increase to sales of $150,000.
Cost of sales, expressed as a percentage of net sales, increased from
21% in the first quarter, 1998 to 35% in the first quarter, 1999. Aggregate cost
of sales increased $365,744, or 69%, to $898,962 in the first quarter, 1999 from
$533,218 in the first 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
76% in the first quarter, 1998 to 65% in the first quarter, 1999. This decrease
is attributable to the sales mix, primarily the addition of the Sunshine
Products skin care line, which has a higher cost of sales. Aggregate gross
profit increased $14,364, or less than 1%, to $1,684,856 in the first quarter,
1999 from $1,670,492 in the first quarter, 1998. The increase in the aggregate
gross profit is the net result of the previously mentioned increase in net sales
offset by the higher cost of sales of the Sunshine Product skin care line.
Operating Expenses
Operating expenses increased $571,796, or 36%, from $1,582,001 in the
first quarter, 1998 to $2,153,797 in the first quarter, 1999. This increase is
primarily attributable to the addition of Sunshine Products and its
manufacturing operations, plus the addition of twenty direct sales
representatives, which increased wages and travel costs.
8
<PAGE>
Net (Loss) Income
The Company generated a loss of $468,941, or $0.08 per share, for the
first quarter, 1999 compared to income of $71,611, or $0.01 per share, for the
first quarter, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments at
March 31, 1999 increased $119,614, or 6%, to $2,039,975 from $1,920,361 at March
31, 1998. The Company's working capital at March 31, 1999 increased $194,966, or
7%, to $2,876,862 from $2,681,896 at March 31, 1998.
On November 19, 1997, the Company successfully closed on its
$1,800,000 securities offering (exclusive of commissions and related expenses).
On November 24, 1997, $400,000 of such securities were converted directly into
common stock and warrants. The remaining $1,400,000 of the securities were
converted to preferred stock and warrants, effective as of December 31, 1997.
The proceeds of the convertible securities were invested in short term,
investment grade commercial paper having an aggregate market value of $1,808,000
on December 31, 1997.
Further, on July 14, 1998, the Company successfully closed a private
placement of convertible securities ("Class B Securities") in which an aggregate
of $4.0 million was raised (net proceeds were $3,955,000 after related costs).
Terms of the Class B Securities required that upon approval by the Company's
shareholders of at least 3,333,400 additional shares of preferred stock, the
Class B securities automatically convert into Class B Units at the rate of $1.20
per Unit. Each Class B Unit consists of one share of preferred stock convertible
into one share of common stock ("Class B Preferred") and one warrant to purchase
one share of common stock exercisable at $1.35 per share ("Class B Warrants").
The Class B Securities at year-end have been classified as preferred stock.
Class B Warrants issued in connection with this offering totaled 3,333,400.
The Company has a short-term line of credit facility for $1,000,000,
which $1,000,000 was outstanding at March 31, 1999, at a fluctuating rate per
annum equal to the prime rate minus 1%, (6.75% at March 31, 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,
9
<PAGE>
product development, commercialization or technological delays or difficulties,
and trade, legal, social, financial and economic risks.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and Hyperion Medical, Inc. ("Hyperion"), on or about
March 23, 1999, entered into a Settlement Agreement and stipulated to the entry
of a Final Judgment (collectively, "Agreement and Judgment") in the case of
Derma Sciences, Inc. vs. Hyperion Medical, Inc. (the "Action"). The Action was
instituted by the Company against Hyperion on June 8, 1998 to enjoin Hyperion
from infringing the Company's U.S. Patent No. 4,847,083 relative to Dermagran
Spray and Dermagran Ointment and to recover damages relative to such
infringement.
The Agreement and Judgment provides as follows: (1) Hyperion admits
that U.S. Patent No. 4,847,083 (the "Patent") is valid and enforceable; (2)
Hyperion is permanently enjoined from infringing or inducing the infringement of
the Patent; (3) the Action is dismissed; and (4) the Company and Hyperion bear
their own costs in connection with the Action.
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 January 11, 1999 and February 11, 1999 the Company
filed amended current reports on Form 8-K relative to its acquisition of
Sunshine Products, Inc.
<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, 1999 By: /s/ Stephen T. Wills
----------------------
Stephen T. Wills, CPA, MST
Vice President and
Chief Financial Officer
11
<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, 1999
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-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,039,975
<SECURITIES> 0
<RECEIVABLES> 1,855,870
<ALLOWANCES> 0
<INVENTORY> 1,602,018
<CURRENT-ASSETS> 5,766,670
<PP&E> 387,552
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,886,818
<CURRENT-LIABILITIES> 2,889,808
<BONDS> 0
0
50,709
<COMMON> 62,357
<OTHER-SE> 4,883,944
<TOTAL-LIABILITY-AND-EQUITY> 7,886,818
<SALES> 2,583,818
<TOTAL-REVENUES> 2,583,818
<CGS> 898,962
<TOTAL-COSTS> 898,962
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (468,941)
<INCOME-TAX> 0
<INCOME-CONTINUING> (468,941)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (468,941)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>