EX-99 4 ex99-2.htm

Exhibit 99.2

Derma Sciences, Inc.

Unaudited Pro Forma Condensed Consolidated Financial Statements
for the Nine Months Ended September 30, 2007 and Year Ended December 31, 2006

Index to Condensed Financial Statements

  PAGE
 
Basis of Presentation 2
 
Condensed Balance Sheet as of September 30, 2007 (Unaudited) 3
 
Condensed Statement of Operations for the Nine Months ended
      September 30, 2007 (Unaudited) 		4
 
Condensed Statement of Operations for the Year ended
      December 31, 2006 (Unaudited) 		5
 
Notes to Condensed Financial Statements (Unaudited) 6


Basis of Presentation

        The accompanying Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2007 and Pro Forma Condensed Consolidated Statements of Operations for the nine months ended September 30, 2007 and the year ended December 31, 2006, are based on the audited and unaudited historical financial statements of Derma Sciences, Inc. (the “Company”) and F.A. Products, L.P. (“FAP”). The acquisition of substantially all of the assets of FAP by the Company consummated on November 8, 2007 will be accounted for using the purchase method of accounting as of and from that date. The Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2007 was prepared assuming the FAP acquisition was completed on September 30, 2007. The Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 2007 was prepared assuming the FAP acquisition was completed on January 1, 2007. The Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2006 was prepared assuming the FAP acquisition was completed on January 1, 2006.

        The Unaudited Pro Forma financial statements are presented for informational purposes only. The Pro Forma Condensed Consolidated Balance Sheet and Statements of Operations do not purport to represent what the Company’s actual financial position or results of operations would have been had the acquisition of FAP occurred as of such dates, or to project the Company’s financial position or results of operations for any subsequent period or date, nor does it give effect to any matters other than those described in the notes hereto. In addition, the allocation of the purchase price by the Company to the assets and liabilities of FAP it acquired is preliminary. The final allocation which will be made on the basis of the estimated fair values of such assets and liabilities as of November 8, 2007 may differ from the amounts reflected herein. The Unaudited Pro Forma Condensed Consolidated Balance Sheet and Unaudited Pro Forma Statements of Operations should be read in conjunction with the Company’s historical financial statements contained in its Annual Report on Form 10-KSB for the year ended December 31, 2006 and Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007 previously filed with the Securities and Exchange Commission and the historical audited and unaudited financial statements of FAP contained herein.

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DERMA SCIENCES, INC.

Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
September 30, 2007

ASSETS
 		       Derma
Sciences		     FAP     Seller
Excludables
(1)		     Transaction
Funding
(2)		     Allocation
of Purchase
Price
(3)		     Total
Pro Forma
Adjustments		     Consolidated
Pro Forma		  
Current Assets                                
   Cash   $ 674,871   $ 1,000   $ (1,000 ) $ (674,871 )  -   $ (675,871 )  -  
   Accounts receivable, net    2,111,042    2,158,000    -    -    -    -   $ 4,269,042  
   Inventories    6,386,112    4,025,000    -    -    -    -    10,411,112  
   Prepaids and other current assets    311,495    158,000    (158,000 )  -    -    (158,000 )  311,495  
Total current assets    9,483,520    6,342,000    (159,000 )  (674,871 )  -    (833,871 )  14,991,649  
Equipment and improvements    4,742,648    681,000    (681,000 )  -   $ 300,000    (381,000 )  5,042,648  
Goodwill    2,441,542    -    -    -    6,254,000    6,254,000    8,695,542  
Other intangible assets, net    2,787,577    -    -    -    3,000,000    3,000,000    5,787,577  
Investment in FAP    -    -    -    13,000,000    (13,000,000 )  -    -  
Other assets, net    322,056    132,000    (132,000 )  1,410,000    (920,000 )  358,000    812,056  
Total assets   $ 19,777,343   $ 7,155,000   $ (972,000 ) $ 13,735,129   $ (4,366,000 ) $ 8,397,129   $ 35,329,472  
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current Liabilities  
   Line of credit borrowings   $ 11,607    -    -   $ 2,195,135    -   $ 2,195,135   $ 2,206,742  
   Current maturities LTD    86,616    -    -    1,200,000    -    1,200,000    1,286,616  
   Accounts payable       1,305,545     1,817,000     -     -     -     -     3,122,545  
   Accrued expenses and other current liabilities       1,179,786     588,000     (588,000 )   -     -     (588,000 )   1,179,786  
   Deferred Revenue       -     345,000     (345,000 )   -     -     (345,000 )   -  
Total current liabilities    2,583,554    2,750,000    (933,000 )  3,395,135    -    2,462,135    7,795,689  
Long term debt, less current portion    615,001    -    -    4,800,000    -    4,800,000    5,415,001  
Other long term liabilities    448,995    -    -    -    -    -    448,995  
Total liabilities    3,647,550    2,750,000    (933,000 )  8,195,135    -    7,262,135    13,659,685  
Preferred stock    22,804    -    -    -    -    -    22,804  
Common stock    252,583    -    -    85,714    -    85,714    338,297  
FAP parent investment    -    4,405,000    (4,405,000 )  -    -    (4,405,000 )  -  
Net assets contributed by Seller    -    -    4,366,000    -    (4,366,000 )  -    -  
APIC    27,671,491    -    -    5,454,280    -    5,454,280    33,125,771  
Acc. Other comprehensive income    1,838,858    -    -    -    -    -    1,838,858  
Accumulated deficit    (13,655,943 )  -    -    -    -    -    (13,655,943 )
Total shareholders' equity    16,129,793    4,405,000    (39,000 )  5,539,994    (4,366,000 )  1,134,994    21,669,787  
Total liabilities and shareholders' equity   $ 19,777,343   $ 7,155,000   $ (972,000 ) $ 13,735,129   $ (4,366,000 ) $ 8,397,129   $ 35,329,472  

See accompanying notes to unaudited pro forma condensed consolidated financial statements.

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DERMA SCIENCES, INC.

Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
Nine Months Ended September 30, 2007

        Derma
Sciences		     FAP     Pro Forma
Adjustments		     Consolidated
Pro Forma		      
Net sales     $ 23,483,457   $ 12,342,000     -   $ 35,825,457  
Cost of sales       15,299,228     11,651,000     -     26,950,228  
Gross Profit       8,184,229     691,000     -     8,875,229  
Operating expenses       8,042,109     1,528,000   $ 450,000  (4)   10,020,109  
Interest expense, net       143,387     -     750,000  (5)   893,387  
Other expense, net       42,230     47,000     250,000  (6)   339,230  
Total expenses       8,227,726     1,575,000     1,450,000     11,252,726  
Loss before provision for taxes       (43,497 )   (884,000 )   (1,450,000 )   (2,377,497 )
Provision for taxes       195,165     -     -     195,165  
Net loss     $ (238,662 ) $ (884,000 ) $ (1,450,000 ) $ (2,572,662 )
Loss per share - basic and fully diluted       $(0.01 )   -     -     $(0.08 )
Shares used in computing loss per    
   common share - basic and fully diluted       25,254,465     -     -     33,825,885  

See accompanying notes to unaudited pro forma condensed consolidated financial statements.

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DERMA SCIENCES, INC.

Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
Year Ended December 31, 2006

        Derma
Sciences		     FAP     Pro Forma
Adjustments		     Consolidated
Pro Forma		      
Net sales     $ 27,887,391   $ 19,191,000     -   $ 47,078,391  
Cost of sales       18,235,003     16,252,000     -     34,487,003  
Gross Profit       9,652,388     2,939,000     -     12,591,388  
Operating expenses       8,339,227     2,376,000   $ 600,000  (4)   11,315,227  
Goodwill impairment loss       200,000     -     -     200,000  
Interest expense, net       374,079     -     920,000  (5)   1,294,079  
Other (income)/expense, net       (47,998 )   -     250,000  (6)   202,002  
Total expenses       8,865,308     2,376,000     1,770,000     13,011,308  
Income (loss) before provision for taxes       787,080     563,000     (1,770,000 )   (419,920 )
Provision for taxes       118,341     -     -     118,341  
Net income (loss)     $ 668,739   $ 563,000   $ (1,770,000 ) $ (538,261 )
Income (loss) per share - basic and fully     $ 0.03     -     -   $ (0.02 )
diluted    
Shares used in computing income (loss)
   per common share - basic		       20,591,085     -     -     29,162,505  
Shares used in computing income (loss)
   per common share - fully diluted		       24,409,760     -     -     29,162,505  

See accompanying notes to unaudited pro forma condensed consolidated financial statements.

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DERMA SCIENCES, INC.

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

1.   Preliminary Allocation of Purchase Price

        On November 8, 2007, the Company acquired certain assets and assumed the trade payables of the F.A. Products, L.P. (“FAP”) for $13,000,000 cash and a $500,000 potential earn out bonus. The cash purchase price consisted of $10,250,000 paid to FAP, $2,000,000 deposited in a supply agreement escrow account and $750,000 deposited in an indemnification escrow account. The supply agreement escrow funds are payable to FAP quarterly, in the amount of $500,000 plus interest at 6% from the closing date, upon achievement of certain agreed-upon third party supplier product cost and delivery performance objectives. The indemnification escrow funds are being held for one year from the date of closing against any intervening adjustments to the purchase price. If certain agreed-upon third party supplier product cost and delivery performance objectives are met during the twelve month post closing period, the Company will pay to FAP an additional $500,000 classified as an addition to the purchase price. The Company anticipates capitalized transaction and deferred financing costs totaling $1,410,000 and direct expenses of $450,000 ($200,000 recorded as interest expense) related to the purchase.

        In connection with the purchase, the Company raised $5,539,994 (net of $460,000 in commission and other offering expenses) from the private sale to two institutional investors of 8,571,420 shares of the Company’s common stock at the price of $0.70 per share, together with 2,142,855 five-year warrants to purchase one share of common stock at the price of $0.77. Further, the Company entered into a new five-year credit and security agreement (the “Agreement”) comprised of an $8,000,000 revolver and a $6,000,000 term loan. The Company applied the entirety of the $6,000,000 term loan and $2,200,000 of the revolver in satisfaction of the Company’s obligations under the purchase agreement, payment of its obligations to its former lender and payment of transaction, credit facility and equity syndication closing costs.

        The acquisition will be accounted for under the purchase method. A preliminary allocation of the purchase price assuming the acquisition had been consummated as of September 30, 2007 is outlined below:

  Purchase Price:
 
    Cash paid   $ 10,250,000    
    Cash held in escrow     2,750,000    
    Transaction costs     920,000    
 
        Total   $ 13,920,000    
 
  Allocation of Purchase Price:
 
    Trade receivables   $ 2,158,000    
    Inventory     4,025,000    
    Equipment     300,000    
    Identifiable intangibles     3,000,000    
    Goodwill     6,254,000    
    Accounts payable     (1,817,000 )  
 
        Total   $ 13,920,000    

        The Company is currently assessing the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed. With the exception of inventory, it is expected that the current assets and liabilities assumed will approximate their historical carrying values as of the date of the acquisition. A valuation study is presently being conducted to establish the fair market value as of November 8, 2007 of the inventory, equipment and the identifiable intangibles acquired.

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2.   Explanation of Pro Forma Adjustments

  (1)   To exclude FAP assets, liabilities and equity included in the FAP balance sheet at September 30, 2007 that have been retained by the former owners and are not included in the assets acquired and liabilities assumed by the Company.

  (2)   To record the acquisition of FAP as of September 30, 2007 by the Company in accordance with the financial terms outlined in footnote 1 above.

  (3)   To preliminarily allocate the purchase price to the assets acquired and liabilities assumed at their estimate fair market values as of September 30, 2007 and the excess to goodwill.

  (4)   To adjust operating expense based on the amortization of estimated amortizable intangibles acquired over an estimated life of five years.

  (5)   To adjust interest expense based on actual indebtedness incurred together with the amortization of estimated deferred financing costs associated with the acquisition and a one-time $200,000 line of credit termination fee.

  (6)   To adjust other expense for estimated relocation and stay-bonus costs associated with the acquisition.

3.   Cost of Sales Reduction Initiative

        As of the acquisition date, FAP was in the process of transferring the manufacture of certain of its products to lower cost offshore third party suppliers and closing its U.S. manufacturing operation. The Company will pursue this initiative and expects thereby to generate significant product cost savings.

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