Exhibit 99.3
Derma Sciences, Inc.
Unaudited Pro Forma Condensed Consolidated Financial Statements
Basis of Presentation
The accompanying Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2006 and Pro Forma Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and the year ended December 31, 2005, are based on the audited and unaudited historical financial statements of Derma Sciences, Inc. (the “Company”) and Western Medical, Inc. (“Western Medical”). The acquisition of Western Medical by the Company consummated on April 18, 2006 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 March 31, 2006 was prepared assuming the Western Medical acquisition was completed on March 31, 2006. The Pro Forma Condensed Consolidated Statement of Operations for the three months ended March 31, 2006 was prepared assuming the Western Medical acquisition was completed on January 1, 2006. The Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2005 was prepared assuming the Western Medical acquisition was completed on January 1, 2005.
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 Western Medical 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 Western Medical it acquired is preliminary and the final allocation which will be made on the basis of the estimated fair values of such assets and liabilities as of April 18, 2006 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, 2005 and Quarterly Report on Form 10-QSB for the quarter ended March 31, 2006 previously filed with the Securities and Exchange Commission and the historical audited and unaudited financial statements of Western Medical contained herein.
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DERMA SCIENCES, INC.
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
March 31, 2006
Western Allocation
Medical Transaction of Purchase Total
ASSETS Derma Western Excludables Funding Price Pro Forma Consolidated
Sciences Medical (1) (2) (3) Adjustments Pro Forma
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Current Assets
Cash and cash equivalents $ 68,246 $ 586,240 $ (586,240) $ (68,246) - $ (654,486) -
Marketable securities 903,024 (903,024) - - (903,024) -
Accounts receivable, net 1,303,068 390,556 - - - - $ 1,693,624
Inventories 4,740,795 935,000 - - - - 5,675,795
Prepaid expenses and other current assets 341,302 1,600 (1,600) - - (1,600) 341,302
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Total current assets 6,453,411 2,816,420 (1,490,864) (68,246) - (1,559,110) 7,710,721
Equipment and improvements, net 3,312,597 67,754 (67,754) - 500,000 432,246 3,812,597
Goodwill 200,000 - - - 3,677,424 3,677,424 3,877,424
Other intangible assets, net 278,779 - - - 2,160,000 2,160,000 2,438,779
Investment in Western Medical - - - 6,500,000 (6,500,000) - -
Other assets, net 323,811 - - 932,000 (860,000) 72,000 395,811
Net assets transferred by seller - - (1,022,576) - 1,022,576 - -
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Total Assets $10,568,598 $2,884,174 $(2,581,194) $7,363,754 - $4,782,560 $18,235,332
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current Liabilities
Line of credit borrowings $ 854,144 - - 63,754 - 63,754 $ 917,898
Current maturities of long-term debt 289,227 - - 194,439 - 194,439 483,666
Accounts payable 1,497,754 306,558 (3,578) - - (3,578) 1,800,734
Accrued expenses and other current
liabilities 386,683 - - - - - 386,683
Notes payable to shareholders - 459,687 (459,687) - - (459,687) -
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Total current liabilities 3,027,808 766,245 (463,265) 258,193 - (205,072) 3,588,981
Other long-term debt, net of current maturities 311,131 - - 805,561 - 805,561 1,116,692
Promissory note payable to seller - - - 500,000 - 500,000 500,000
Other long-term liabilities 105,925 - - - - - 105,925
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Total Liabilities 3,444,864 766,245 (463,265) 1,563,754 - 1,100,489 5,311,598
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Commitments
Shareholders' Equity
Convertible preferred stock, $.01 par value;
1,750,000 shares authorized; issued and
outstanding: 2,280,407 shares (liquidation
preference of $4,210,231) 22,804 - - - - - 22,804
Common stock, $.01 par value; 30,000,000
shares authorized; issued and outstanding:
12,285,768 shares - historical; 22,978,160
shares - proforma 122,858 - - 106,924 - 106,924 229,782
Western Medical share capital - 977,800 (977,800) - - (977,800) -
Additional paid-in capital 19,943,684 - - 5,693,076 - 5,693,076 25,636,760
Accumulated other comprehensive income 871,802 (6,112) 6,112 - - 6,112 871,802
Accumulated deficit (13,837,414) 1,146,241 (1,146,241) - - (1,146,241) (13,837,414)
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Total Shareholders' Equity 7,123,734 2,117,929 (2,117,929) 5,800,000 - 3,682,071 12,923,734
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Total Liabilities and Shareholders' Equity $10,568,598 $2,884,174 $(2,581,194) $7,363,754 - $4,782,560 $18,235,332
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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)
Three Months Ended March 31, 2006
Western
Medical Total
Derma Western Excludables Incremental Pro Forma Consolidated
Sciences Medical (4) Costs Adjustments Pro Forma
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Net sales $5,756,914 $1,498,533 - - - $7,255,447
Cost of sales 3,564,913 897,983 $ (4,168) $ 12,400 (5) $ 8,232 4,471,128
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Gross Profit 2,192,001 600,550 4,168 (12,400) (8,232) 2,784,319
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Operating expenses 2,121,752 407,388 (149,523) 108,000 (6) (41,523) 2,487,617
Interest expense, net 82,050 4,120 (4,120) 53,500 (7) 49,380 135,550
Other income, net (69,521) (5,320) 5,320 - 5,320 (69,521)
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Total Expenses 2,134,281 406,188 (148,323) 161,500 13,177 2,553,646
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Income before provision for income taxes 57,720 194,362 152,491 (173,900) (21,409) 230,673
Provision for income taxes - 2,600 (2,600) - (2,600) -
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Net Income $ 57,720 $ 191,762 $ 155,091 $(173,900) $(18,809) $ 230,673
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Income per common share - basic $0.00 - - - - $0.01
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Income per common share - fully diluted $0.00 - - - - $0.01
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Shares used in computing income per common
share - basic 12,285,768 - - - - 22,906,160
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Shares used in computing income per common
share - fully diluted 15,659,185 - - - - 26,387,407
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See accompanying notes to unaudited pro forma condensed consolidated financial statements.
F-20
DERMA SCIENCES, INC.
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
Year Ended December 31, 2005
Western
Medical Total
Derma Western Excludables Incremental Pro Forma Consolidated
Sciences Medical (4) Costs Adjustments Pro Forma
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Net sales $23,545,475 $6,684,160 - - - $30,229,635
Cost of sales 15,756,053 4,019,163 $ (23,772) $ 49,500 (5) $ 25,728 19,800,944
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Gross Profit 7,789,422 2,664,997 23,772 (49,500) (25,728) 10,428,691
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Operating expenses 7,520,986 1,811,935 (628,570) 432,000 (6) (196,570) 9,136,351
Goodwill impairment loss 910,967 - - - - 910,967
Interest expense, net 336,867 22,269 (22,269) 210,200 (7) 187,931 547,067
Other income, net (70,294) (15,854) 15,854 - 15,854 (70,294)
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Total Expenses 8,698,526 1,818,350 (634,985) 642,200 7,215 10,524,091
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Loss before provision for income taxes (909,104) 846,647 658,757 (691,700) (32,943) (95,400)
Provision for income taxes - 7,782 (7,782) - (7,782) -
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Net Loss $ (909,104) $ 838,865 $ 666,539 $(691,700) $ (25,161) $ (95,400)
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Loss per common share - basic and fully
diluted $(0.07) - - - - $0.00
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Shares used in computing loss per common
share - basic and fully diluted 12,216,804 - - - - 22,837,197
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See accompanying notes to unaudited pro forma condensed consolidated financial statements.
F-21
DERMA SCIENCES, INC.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
1. Preliminary Allocation of Purchase Price
On April 18, 2006, the Company acquired certain assets and assumed the trade payables and the business of Western Medical for $6,500,000 of which $6,000,000 was paid in cash and $500,000 will be paid via a three-year promissory note issued to Western Medical by the Company. In addition, the Company anticipates incurring $860,000 of transaction costs related to the purchase. The purchased assets consist of trade receivables, inventory, equipment and certain identifiable intangibles. To fund the purchase, the Company raised $5,800,000 (net of $572,236 in commissions and other offering expenses) from the private sale of 2,655,098 units (the “Units”) at $2.40 per Unit each Unit consisting of four shares of common stock and one warrant to purchase one share of common stock at $1.00 per share. In addition, the placement agent for the Units received 754,806 five-year warrants each to purchase one share of common stock at $0.72 per share. The Company also received $1,000,000 in cash from a new term loan that bears interest at prime plus 5% from its U.S. lender through an amendment to its existing three year revolving credit facility. The $72,000 of deferred financing costs related to this financing are being amortized to interest expense over the three year term of the amended credit facility.
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 March 31, 2006 is outlined below:
Purchase Price:
Cash paid $6,000,000
Promissory note 500,000
Transaction costs 860,000
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Total $7,360,000
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Allocation of Purchase Price:
Trade receivables $ 390,556
Inventory 935,000
Equipment 500,000
Identifiable intangibles 2,160,000
Goodwill 3,677,424
Accounts payable (302,980)
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Total $7,360,000
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The Company is currently assessing the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed. 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 April 18, 2006 of the equipment and the identifiable intangibles acquired.
2. Explanation of Pro Forma Adjustments
| (1) | | To exclude Western Medical assets, liabilities and equity included in the Western Medical balance sheet at March 31, 2006 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 Western Medical as of March 31, 2006 by the Company in accordance with the financial terms outlined in footnote 1 above. |
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| (3) | | To preliminarily allocate the purchase price to the assets acquired and liabilities assumed at their estimate fair market values as of March 31, 2006 and the excess to goodwill. |
| (4) | | To adjust Western Medical operating expenses and taxes for income and expenses that are or are not expected to have a post-acquisition impact on the Company that are directly attributable to the acquisition. Operating expenses excluded relate to occupancy (no real estate was included in the purchase) and consulting contracts incurred by Western Medical that will not be continuing post-acquisition. Other income and interest expense excluded relate to marketable securities and shareholder loans that were not part of the purchase. |
| (5) | | To adjust depreciation expense based on the estimated fair market value of the equipment acquired being depreciated over ten years. |
| (6) | | To adjust operating expense based on the amortization of estimated amortizable intangibles acquired being amortized over an estimated life of five years. |
| (7) | | To adjust interest expense based on actual indebtedness incurred together with the amortization of estimated deferred financing costs associated with the acquisition. |
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