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DSCI > SEC Filings for DSCI > Form 10-Q on 8-Aug-2016All Recent SEC Filings

Show all filings for DERMA SCIENCES, INC.

Form 10-Q for DERMA SCIENCES, INC.


8-Aug-2016

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q (this "Report") includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about the confidence, strategies, plans, expectations, intentions, objectives, technologies, opportunities, market demand or acceptance of new or existing products of Derma Sciences, Inc., a Delaware corporation, and its subsidiaries ("we" or "us" or the "Company"), and other statements contained in this Report that are not historical facts. Forward-looking statements in this Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission (the "Commission") reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties and other factors that could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates, current conditions and the most recent results of operations. When used in this Report, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are generally intended to identify forward-looking statements, because these forward-looking statements involve risks and uncertainties. There are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions, changes in political, economic, business, competitive, market and regulatory factors and other factors that are discussed under the section in this Report entitled "Risk Factors," as well as our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on March 15, 2016 (the "2015 Form 10-K") and other filings with the Commission. Neither we nor any other person assume responsibility for the accuracy or completeness of these forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this Report to conform these statements to actual results.

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015



Overview



Operating Results of Three Months Ended June 30, 2016 and 2015



The following table highlights the operating results for the three months ended
June 30, 2016 and 2015:



                                        Three Months Ended June 30,                 Variance
                                           2016               2015
Gross sales                           $    25,183,238     $ 25,636,623     $   (453,385 )         (1.8 )%
Sales adjustments                          (2,975,177 )     (3,080,259 )        105,082           (3.4 )%
Net sales                                  22,208,061       22,556,364         (348,303 )         (1.5 )%
Cost of sales                              13,948,215       14,185,116         (236,901 )         (1.7 )%
Gross profit                                8,259,846        8,371,248         (111,402 )         (1.3 )%

Selling, general and administrative
expense                                    10,284,886       13,701,728       (3,416,842 )        (24.9 )%
Research and development expense                    -          230,942         (230,942 )            *
Other income, net                          (4,535,101 )       (880,514 )     (3,654,587 )            *
Total                                       5,749,785       13,052,156       (7,302,371 )        (55.9 )%

Income (loss) from continuing
operations before income taxes              2,510,061       (4,680,908 )      7,190,969          153.6 %

Income tax provision                          527,525          344,857          182,668              *
Net income (loss) from continuing
operations                                  1,982,536       (5,025,765 )      7,008,301          139.4 %
Loss from discontinued operations,
net of taxes                                        -       (4,259,946 )     (4,259,946 )            *
Net income (loss)                     $     1,982,536     $ (9,285,711 )   $ 11,268,247          121.4 %

* - not meaningful

Sales Adjustments



Gross to net sales adjustments comprise the following:



                                         Three Months Ended June 30,
                                            2016               2015
              Gross sales              $    25,183,238     $ 25,636,623
              Trade rebates                 (2,033,830 )     (2,171,389 )
              Distributor fees                (256,466 )       (246,204 )
              Sales incentives                (336,723 )       (357,463 )
              Returns and allowances          (159,913 )       (107,423 )
              Cash discounts                  (188,245 )       (197,780 )
              Total adjustments             (2,975,177 )     (3,080,259 )
              Net sales                $    22,208,061     $ 22,556,364

Trade rebates decreased in 2016 versus 2015 principally due to a decrease in sales subject to rebate in the U.S. and Canada. The increase in distributor fees was commensurate with the increase in the Canadian distribution fee rate due to a change in the sales mix of products for which it is based. The decrease in sales incentives reflected lower sales subject to incentives in U.S. and Canada.

                                          2016                                               2015
                     Gross Sales       Sales Adj.       Net Sales       Gross Sales       Sales Adj.       Net Sales
By Entity Location

US                   $ 19,875,571     $ (1,523,699 )   $ 18,351,872     $ 20,301,208     $ (1,543,976 )   $ 18,757,232
Canada                  3,892,613       (1,449,431 )      2,443,182        4,292,562       (1,536,283 )      2,756,279
International           1,415,054           (2,047 )      1,413,007        1,042,853                -        1,042,853

Total                $ 25,183,238     $ (2,975,177 )   $ 22,208,061     $ 25,636,623     $ (3,080,259 )   $ 22,556,364

U.S. sales adjustments decreased due to lower rebates, sales incentives, and cash discounts, partially offset by higher returns and allowance. Rebates in the U.S. decreased as a result of a decrease in sales subject to rebate. U.S. sales incentives decreased due to decreased sales upon which the fees are based. Sales adjustments in Canada were lower in 2016 than 2015 due to lower rebates. The decrease in Canadian sales rebates was commensurate with the decrease in Canadian sales upon which the fees are based partially offset by an increase in the rebate percentage due to increased sales of higher rebated products.

                                                2016                                               2015
                           Gross Sales       Sales Adj.       Net Sales       Gross Sales       Sales Adj.       Net Sales
By Segment

Advanced wound care        $ 11,788,430     $   (814,160 )   $ 10,974,270     $ 11,346,818     $ (1,054,802 )   $ 10,292,016
Traditional wound care       13,394,808       (2,161,017 )     11,233,791       14,289,805       (2,025,457 )     12,264,348

Total                      $ 25,183,238     $ (2,975,177 )   $ 22,208,061     $ 25,636,623     $ (3,080,259 )   $ 22,556,364

Advanced wound care sales adjustments decreased due to lower trade rebates and sales incentives. Advanced wound care rebates and sales incentives decreased due to a decrease in sales upon which the fees are based, as well as a decrease in Medicare part B rebates. Traditional wound care sales adjustments increased in 2016 versus 2015 due to higher trade rebates and distribution fees. The increase in traditional wound care sales rebates was commensurate with the increase in sales upon which the fees are based. The traditional wound care rebate percentage also increased due to increased sales of higher rebated products. A higher distribution fee percentage also impacted the traditional wound care segment.

Rebate Reserve Roll-Forward



A roll-forward of the trade rebate accruals for the three months ended June 30,
2016 and 2015 were as follows:



                                            Three Months Ended June 30,
                                               2016               2015
            Beginning balance - April 1   $     1,702,039     $  1,621,938
            Rebates paid                       (2,045,310 )     (1,902,620 )
            Rebates accrued                     2,033,830        2,171,389
            Ending balance - June 30      $     1,690,559     $  1,890,707

The $11,480 decrease in the trade rebate reserve balance at June 30, 2016 from April 1, 2016 principally reflected the timing of rebate payments and decrease in sales subject to rebate and the rebate percentage. There was no other significant change in the nature of our business during the three months ended June 30, 2016 as it related to the accrual and subsequent payment of rebates.

Net Sales



                                                                      $ Variance                               % Variance
                         2016             2015           Non FX           FX           Total        Non FX         FX         Total
By Entity Location

US                   $ 18,351,872     $ 18,757,232     $ (405,360 )   $        -     $ (405,360 )      (2.2 )%        - %       (2.2 )%
Canada                  2,443,182        2,756,279       (197,267 )     (115,830 )     (313,097 )      (7.2 )      (4.2 )      (11.4 )%
International           1,413,007        1,042,853        467,701        (97,547 )      370,154        44.8        (9.4 )       35.5 %

Total                $ 22,208,061     $ 22,556,364     $ (134,926 )   $ (213,377 )   $ (348,303 )      (0.6 )%     (0.9 )%      (1.5 )%

The decrease in net sales by the U.S. entity was driven by lower traditional wound care sales partially offset by higher advanced wound care sales. The decrease in traditional wound care sales was driven by a decrease in First Aid Division ("FAD") sales. The 2015 FAD sales included an initial stocking order for a large U.S. retail pharmacy chain. The higher advanced wound care sales were related to higher MEDIHONEY, Total Contact Casting ("TCC"), and AMNIO sales. The decrease in net sales by the Canadian entity was driven by lower traditional wound care and advanced wound care sales. Canadian entity net sales were unfavorably impacted by our exclusive distributor's rebalancing efforts. Canadian year over year market demand increased 3%. The increase in international sales was driven by higher advanced and traditional wound care sales.

                                                                $ Variance                                    % Variance
                  2016             2015           Non FX           FX            Total           Non FX           FX            Total
By Segment

Advanced
wound care    $ 10,974,270     $ 10,292,016     $  779,325     $  (97,071 )   $    682,254            7.6 %         (0.9 )%         6.6 %
Traditional
wound care      11,233,791       12,264,348       (914,251 )     (116,306 )     (1,030,557 )         (7.5 )         (0.9 )         (8.4 )

Total         $ 22,208,061     $ 22,556,364     $ (134,926 )   $ (213,377 )   $   (348,303 )         (0.6 )%        (0.9 )%        (1.5 )%

The advanced wound care sales increase was led by MEDIHONEY, TCC, and AMNIO products in the U.S and MEDIHONEY international product sales. The decrease in traditional wound care sales was driven by lower FAD sales in the U.S. and lower traditional wound care sales in Canada.

Gross Profit



                                                               $ Variance                                    % Variance
                 2016            2015            Non FX            FX            Total          Non FX           FX            Total
By Segment

Advanced
wound care    $ 5,852,464     $ 4,862,036     $  1,059,939     $  (69,511 )   $    990,428          21.8 %         (1.4 )%        20.4 %
Traditional
wound care      2,407,382       3,509,212       (1,070,637 )      (31,193 )     (1,101,830 )       (30.5 )         (0.9 )        (31.4 )

Total         $ 8,259,846     $ 8,371,248     $    (10,698 )   $ (100,704 )   $   (111,402 )        (0.1 )%        (1.2 )%        (1.3 )%

Gross
Profit %
Advanced
wound care           53.3 %          47.2 %
Traditional
wound care           21.4 %          28.6 %

Total                37.2 %          37.1 %

The increase in gross profit dollars for the advanced wound care segment was driven by higher sales and an increase in the gross profit percentage. The increase in gross profit percentage for the advanced wound care segment was driven by favorable sales mix and lower product costs. The decrease in gross profit dollars for the traditional wound care segment was driven by lower sales and gross profit percentage. The decrease in gross profit percentage for the traditional wound care segment reflected higher sales of lower margined products, higher product costs due to foreign exchange and higher manufacturing costs.

Selling, General and Administrative Expenses



The following table highlights selling, general and administrative expenses by
function for the three months ended June 30, 2016 versus 2015:



                                                                 $ Variance                                 % Variance
                   2016             2015            Non FX           FX            Total         Non FX         FX         Total

Distribution   $    640,914     $    680,575     $    (35,249 )   $  (4,412 )   $    (39,661 )      (5.2 )%     (0.6 )%      (5.8 )%
Marketing         1,680,672        2,543,431         (856,537 )      (6,222 )       (862,759 )     (33.7 )      (0.2 )      (33.9 )
Sales             4,857,343        6,478,566       (1,582,638 )     (38,585 )     (1,621,223 )     (24.4 )      (0.6 )      (25.0 )
G&A               3,105,957        3,999,156         (864.391 )     (28,808 )       (893,199 )     (21.6 )      (0.7 )      (22.3 )

Total          $ 10,284,886     $ 13,701,728     $ (3,338,815 )   $ (78,027 )   $ (3,416,842 )     (24.3 )%     (0.6 )%     (24.9 )%

The decrease in distribution expense was related to lower operating costs due to the Company's restructuring and overall expense reduction initiatives.

The decrease in marketing expense reflected lower salaries, equity based compensation, and related travel expenses associated with the elimination of five positions, lower consulting costs, promotional spend, and product development expenses as a result of the Company's restructuring and expense reduction initiatives.

The decrease in sales expense reflected lower salaries, commissions, equity based compensation, operating costs and related travel expenses as a result of the Company's reduction from 50 territory managers to 38 along with the elimination of five specialty field representatives and four associated management and support staff in the U.S. and one International territory manager during the fourth quarter of 2015, as well as lower samples expense, trade show and meetings costs in connection with the restructuring and expense reduction initiatives, partially offset by higher volume driven group purchasing organization fees.

The decrease in general and administrative expense reflected lower salaries, equity based compensation and related travel expenses in connection with the vacant position created by the CEO separation from the Company in December 2015 together with three finance and one information technology positions eliminated in the fourth quarter of 2015, lower consulting, accounting, and legal costs, as well as lower public and investor relations spend in connection with the restructuring and expense reduction initiatives implemented in the fourth quarter of 2015, partially offset by due diligence fees incurred in 2016.

                                                                       $ Variance                                 % Variance
                         2016             2015            Non FX           FX            Total         Non FX         FX         Total
By Entity Location
US                   $  8,879,794     $ 12,025,346     $ (3,145,553 )   $       -     $ (3,145,552 )     (26.2 )%        - %      (26.2 )%
Canada                    889,103        1,148,338         (216,528 )     (42,707 )       (259,235 )     (18.9 )      (3.7 )      (22.6 )
International             515,989          528,044           23,267       (35,322 )        (12,055 )       4.4        (6.7 )       (2.3 )

Total                $ 10,284,886     $ 13,701,728     $ (3,338,814 )   $ (78,028 )   $ (3,416,842 )     (24.3 )%     (0.6 )%     (24.9 )%

The decrease in expenses in the U.S. in 2016 reflected lower marketing, sales, and executive salaries and related equity based compensation, travel expenses, consulting costs and promotional spend in connection with the fourth quarter 2015 restructuring and expense reduction initiatives, partially offset by due diligence fees incurred in 2016. The decrease in expenses in Canada in 2016 reflected lower compensation associated with the elimination of two positions, travel, and consulting costs. The decrease in International expenses in 2016 reflected lower compensation and travel costs associated with the elimination of one position.

                                                                           $ Variance                                   % Variance
                             2016             2015            Non FX           FX            Total          Non FX          FX          Total
By Segment
Advanced wound care      $  6,227,238     $  8,463,100     $ (2,193,546 )   $ (42,316 )   $ (2,235,862 )      (25.9 )%       (0.5 )%      (26.4 )%
Traditional wound care      1,101,690        1,433,222         (324,627 )      (6,905 )       (331,532 )      (22.6 )        (0.5 )       (23.1 )
Other                       2,955,958        3,805,406         (820,641 )     (28,807 )       (849,448 )      (21.5 )        (0.8 )       (22.3 )

Total                    $ 10,284,886     $ 13,701,728     $ (3,338,814 )   $ (78,028 )   $ (3,416,842 )      (24.3 )%       (0.6 )%      (24.9 )%

Research and Development Expense

The decrease in research and development expense reflected the completion of AMNIO post marketing clinical studies in the advanced wound care segment in 2015. No additional research and development projects have been initiated to date in 2016.

Other Income, net

Other income, net increased $3,654,587 to $4,535,101 in 2016 from $880,514 in 2015 due principally to a $4,740,136 gain on the sale of the Comvita investment partially offset by the impact of foreign exchange losses. The foreign exchange losses were significantly impacted by Great Britain's referendum vote in June, 2016 to withdraw from the European Union.

Income Tax Provision

Income tax provision increased $182,668 to $527,525 in 2016 from $344,857 in 2015 due principally to the U.S. income tax impact of the unrealized gain on equity securities from accumulated other comprehensive income and tax treatment of goodwill net of amortization for financial reporting but not tax purposes of acquired identified intangible assets, partially offset by lower income from the Canadian operations.

Net Loss from Continuing Operations

For the three months ended June 30, 2016, we generated net income from continuing operations of $1,982,536, or $0.08 per share (basic and diluted), compared to a net loss from continuing operations of $5,025,765, or $0.20 per share (basic and diluted), in 2015.

Net Loss from Discontinued Operations

Effective November 2015, management approved a plan to terminate the Company's Phase 3 (DSC127) clinical program for diabetic foot ulcer healing. The decision to end the program followed the recommendation by the independent Data Monitoring Committee to stop the program based on its interim assessment. Based on this recommendation, we initiated an orderly termination of all our existing pharmaceutical development programs comprised of the diabetic foot healing program and two other programs utilizing the DSC127 compound for other therapeutic indications.

In connection with this decision, our entire pharmaceutical development staff, comprised of six positions, was terminated and the process of closing down the programs commenced. The close down activities were substantially completed by the end of 2015.

There was no loss from discontinued operations during the second quarter of 2016 as the Company ceased expenditures on the project. For the three months ended June 30, 2015, we incurred a net loss from discontinued operations of $4,259,946, or $0.17 per share (basic and diluted).

Total Net Loss

For the three months ended June 30, 2016, we generated net income of $1,982,536, or $0.08 per share (basic and diluted), compared to a net loss of $9,285,711, or $0.36 per share (basic and diluted), in 2015.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015



Overview



Operating Results of Six Months Ended June 30, 2016 and 2015



The following table highlights the operating results for the six months ended
June 30, 2016 and 2015:



                                          Six Months Ended June 30,                  Variance
                                            2016             2015
Gross sales                             $ 47,950,142     $  47,533,696     $     416,446            0.9 %
Sales adjustments                         (5,499,524 )      (5,478,680 )         (20,844 )          0.4 %
Net sales                                 42,450,618        42,055,016           395,602            0.9 %
Cost of sales                             26,483,249        26,148,642           334,607            1.3 %
Gross profit                              15,967,369        15,906,374            60,995            0.4 %

Selling, general and administrative
expense                                   20,238,000        26,960,133        (6,722,133 )        (24.9 )%
Research and development expense                   -           583,124          (583,124 )            *
Other income, net                         (4,803,141 )        (512,726 )      (4,290,415 )            *
Total                                     15,434,859        27,030,531       (11,595,672 )        (42.9 )%

Income (loss) from continuing
operations before income taxes               532,510       (11,124,157 )      11,656,667              *

Income tax provision                         307,727           352,908           (45,181 )            *
Net income (loss) from continuing
operations                                   224,783       (11,477,065 )      11,701,848              *
Loss from discontinued operations,
net of taxes                                       -        (8,418,223 )      (8,418,223 )            *
Net income (loss)                       $    224,783     $ (19,895,288 )   $  20,120,071              *

* - not meaningful

Sales Adjustments



Gross to net sales adjustments comprise the following:



                                          Six Months Ended June 30,
                                            2016              2015
               Gross sales              $  47,950,142     $ 47,533,696
               Trade rebates               (3,823,533 )     (3,754,965 )
               Distributor fees              (501,222 )       (427,976 )
               Sales incentives              (567,326 )       (659,869 )
               Returns and allowances        (245,965 )       (267,757 )
               Cash discounts                (361,478 )       (368,113 )
               Total adjustments           (5,499,524 )     (5,478,680 )
               Net sales                $  42,450,618     $ 42,055,016

Trade rebates increased in 2016 versus 2015 principally due to increases in sales subject to rebate, and the rebate percentage as a result of changes in product mix towards higher rebated products in Canada. The increase in distributor fees was commensurate with the increase in Canadian sales upon which the fees were based and a higher percentage rate driven by the change in the sales mix of products for which it is based. The decrease in sales incentives reflected lower sales subject to incentives.

                                                      2016                                               2015
                                 Gross Sales       Sales Adj.       Net Sales       Gross Sales       Sales Adj.       Net Sales
By Entity Location

US                               $ 37,757,803     $ (2,670,955 )   $ 35,086,848     $ 37,886,703     $ (2,809,233 )   $ 35,077,470
Canada                              7,599,865       (2,825,066 )      4,774,799        7,466,687       (2,669,429 )      4,797,258
International                       2,592,474           (3,503 )      2,588,971        2,180,306              (18 )      2,180,288

Total                            $ 47,950,142     $ (5,499,524 )   $ 42,450,618     $ 47,533,696     $ (5,478,680 )   $ 42,055,016

U.S. sales adjustments decreased principally due to lower sales incentives reflecting decreased sales upon which the fees are based. Sales adjustments in Canada were higher in 2016 than 2015 due to higher trade rebates and distribution fees. The increase in Canadian sales rebates and distributor fees was commensurate with the increase in Canadian sales upon which the fees are based. The Canadian rebate percentage also increased due to increased sales of higher rebated products. The Canadian distribution fees was also negatively impacted by a higher percentage rate.

                                                      2016                                               2015
                                 Gross Sales       Sales Adj.       Net Sales       Gross Sales       Sales Adj.       Net Sales
By Segment

Advanced wound care              $ 23,054,849     $ (1,480,408 )   $ 21,574,441     $ 21,980,559     $ (1,917,519 )   $ 20,063,040
Traditional wound care             24,895,293       (4,019,116 )     20,876,177       25,553,137       (3,561,161 )     21,991,976

Total                            $ 47,950,142     $ (5,499,524 )   $ 42,450,618     $ 47,533,696     $ (5,478,680 )   $ 42,055,016

Advanced wound care sales adjustments decreased due to lower trade rebates and sales incentives. Advanced wound care rebates and sales incentives decreased due to a decrease in sales upon which the fees are based, including a decrease in Medicare part B rebates, partially offset by a higher rebate percentage as a result of increased sales of higher rebated products. Traditional wound care sales adjustments increased in 2016 versus 2015 due to higher trade rebates and distribution fees due principally to an increase in sales upon which the fees are based in Canada. The traditional wound care rebate percentage also increased due to increased sales of higher rebated products. The higher distribution fee percentage also unfavorably impacted the traditional wound care segment.

. . .

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