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DSCI > SEC Filings for DSCI > Form 10-Q on 9-Nov-2016All Recent SEC Filings

Show all filings for DERMA SCIENCES, INC.

Form 10-Q for DERMA SCIENCES, INC.


9-Nov-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 September 30, 2016 Compared to Three Months Ended September 30, 2015

Overview



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



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



                                 Three Months Ended September 30,                 Variance
                                     2016                  2015
Gross sales                    $      24,699,425       $  20,345,849     $ 4,353,576            21.4 %
Sales adjustments                     (2,889,899 )        (2,558,322 )      (331,577 )          13.0 %
Net sales                             21,809,526          17,787,527       4,021,999            22.6 %
Cost of sales                         11,103,064          10,491,932         611,132             5.8 %
Gross profit                          10,706,462           7,295,595       3,410,867            46.8 %
Selling, general and
administrative expense                13,694,540          12,228,883       1,465,657            12.0 %
Acquisition related expenses           2,734,653                   -       2,734,653               *
Research and development
expense                                   76,274             120,386         (44,112 )         (36.6 %)
Other expense, net                       230,571             672,259        (441,688 )         (65.7 %)
Total                                 16,736,038          13,021,528       3,714,510            28.5 %
Loss from continuing
operations before income
taxes                                 (6,029,576 )        (5,725,933 )      (303,643 )           5.3 %

Income tax benefit                     1,456,277           1,051,892         404,385            38.4 %
Net loss from continuing
operations                            (4,573,299 )        (4,674,041 )       100,742            (2.2 %)
Income (loss) from
discontinued operations, net
of taxes                               3,181,728          (4,288,761 )     7,470,489               *
Net loss                       $      (1,391,571 )     $  (8,962,802 )   $ 7,571,231           (84.5 %)

* - not meaningful

Sales Adjustments



Gross to net sales adjustments comprise the following:



                                       Three Months Ended September 30,
                                           2016                  2015
            Gross sales              $      24,699,425       $  20,345,849
            Trade rebates                   (2,010,798 )        (1,835,141 )
            Distributor fees                  (264,856 )          (234,817 )
            Sales incentives                  (218,657 )          (261,867 )
            Returns and allowances            (184,660 )           (33,880 )
            Cash discounts                    (210,928 )          (192,617 )
            Total adjustments               (2,889,899 )        (2,558,322 )
            Net sales                $      21,809,526       $  17,787,527

Trade rebates increased in 2016 versus 2015 principally due to an increase in sales subject to rebate in the U.S. and Canada coupled with an increase in the Canadian rebate percentage rate due to a sales mix towards higher rebated products. The increase in distributor fees was commensurate with the increase in the Canadian distribution sales upon which it is based and a slight increase in the rate due to product mix. The decrease in sales incentives reflected lower sales subject to incentives in U.S. The increase in returns is due to a slight increase in overall return and allowance activity and timing.

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

US                     $ 19,412,983     $ (1,368,868 )   $ 18,044,115     $ 15,394,076     $ (1,192,440 )   $ 14,201,636
Canada                    4,011,540       (1,518,621 )      2,492,919        3,732,757       (1,362,421 )      2,370,336
International             1,274,902           (2,410 )      1,272,492        1,219,016           (3,461 )      1,215,555

Total                  $ 24,699,425     $ (2,889,899 )   $ 21,809,526     $ 20,345,849     $ (2,558,322 )   $ 17,787,527

U.S. sales adjustments increased due to higher rebatable sales volume and returns, partially offset by lower sales incentives. Rebates in the U.S. increased as a result of an increase in sales subject to rebate. U.S. sales incentives decreased due to decreased sales upon which the fees are based. The increase in Canadian sales adjustments is due to higher sales volume related rebates and distribution fees coupled with a slight increase in the rebate and distribution fee rate due to product mix.

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

Advanced wound care      $ 16,769,844     $   (980,161 )   $ 15,789,683     $ 12,251,346     $   (902,755 )   $ 11,348,591
Traditional wound care      7,929,581       (1,909,738 )      6,019,843        8,094,503       (1,655,567 )      6,438,936

Total                    $ 24,699,425     $ (2,889,899 )   $ 21,809,526     $ 20,345,849     $ (2,558,322 )   $ 17,787,527

Advanced and traditional wound care sales adjustments principally increased due to higher sales. A slight increase in the Canadian rebate and distribution fee percentages due to product mix also contributed to the higher adjustments.

Rebate Reserve Roll-Forward



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



                                          Three Months Ended September 30,
                                              2016                  2015
        Beginning balance - July 1      $       1,573,760       $   1,876,683
        Rebates paid                           (2,091,098 )        (2,012,770 )
        Rebates accrued                         2,010,798           1,835,141
        Ending balance - September 30   $       1,493,460       $   1,699,054

The $80,300 decrease in the trade rebate reserve balance at September 30, 2016 from July 1, 2016 principally reflected the timing of rebate payments. There was no other significant change in the nature of our business during the three months ended September 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                    $ 18,044,115     $ 14,201,636     $ 3,842,479     $        -     $ 3,842,479          27.1 %          - %        27.1 %
Canada                   2,492,919        2,370,336         110,369         12,214         122,583           4.7          0.5           5.2 %
International            1,272,492        1,215,555         283,252       (226,315 )        56,937          23.3        (18.6 )         4.7 %

Total                 $ 21,809,526     $ 17,787,527     $ 4,236,100     $ (214,101 )   $ 4,021,999          23.8 %       (1.2 )%       22.6 %

The increase in net sales by the U.S. entities was driven by higher advanced wound care sales, partially offset by lower traditional wound care sales. The higher advanced wound care sales was primarily related to the addition of $4.0 million of BioD, LLC ("BioD") sales and $0.5 million of dermal advanced wound care products consisting of higher Total Contact Casting ("TCC"), AMNIO, and MEDIHONEY sales, partially offset by lower ALGICEL and BIOGUARD sales. The decrease in traditional wound care sales was driven by lower demand for traditional and retail private label products. The increase in net sales by the Canadian entity was driven by higher traditional wound care and advanced wound care sales. The traditional wound care sales in Canada increased due to higher demand as well as inventory rebalancing by the Company's distributor. The advanced wound care sales in Canada increased due to higher demand. The increase in international sales was driven by higher advanced and traditional wound care demand.

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

Advanced wound care      $ 15,789,683     $ 11,348,591     $ 4,645,492     $ (204,400 )   $ 4,441,092          40.9 %       (1.8 )%       39.1 %
Traditional wound care      6,019,843        6,438,936        (409,392 )       (9,701 )      (419,093 )        (6.4 )       (0.2 )        (6.5 )

Total                    $ 21,809,526     $ 17,787,527     $ 4,236,100     $ (214,101 )   $ 4,021,999          23.8 %       (1.2 )%       22.6 %

The advanced wound care sales increase was primarily driven by the addition of BioD sales, coupled with higher U.S. and International sales demand. The decrease in traditional wound care sales was driven by lower demand in the U.S. for traditional and retail private label products, partially offset by higher traditional wound care demand in Canada and International.

Gross Profit



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

Advanced wound care      $  9,419,831     $ 5,496,935     $ 4,014,934     $ (92,038 )   $ 3,922,896         73.0 %       (1.7 )%       71.4 %
Traditional wound care      1,286,631       1,798,660        (508,505 )      (3,524 )      (512,029 )      (28.3 )       (0.2 )       (28.5 )

Total                    $ 10,706,462     $ 7,295,595     $ 3,506,429     $ (95,562 )   $ 3,410,867         48.1 %       (1.3 )%       46.8 %

Gross Profit %
Advanced wound care              59.7 %          48.4 %
Traditional wound care           21.4 %          27.9 %

Total                            49.1 %          41.0 %

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 due to the addition of higher margined BioD sales and improved dermal advanced wound care product margins due to favorable 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 product mix and higher product costs.

Selling, General and Administrative Expenses



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



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

Distribution          $    425,546     $    428,515     $    (2,017 )   $    (952 )   $    (2,969 )        (0.5 )%       (0.2 )%       (0.7 %)
Marketing                1,956,285        1,973,046         (14,453 )      (2,308 )       (16,761 )        (0.7 )        (0.1 )        (0.8 )
Sales                    6,909,793        6,026,845         940,146       (57,198 )       882,948          15.6          (0.9 )        14.7
G&A                      4,402,916        3,800,477         604,309        (1,870 )       602,439          15.9             -          15.9

Total                 $ 13,694,540     $ 12,228,883     $ 1,527,985     $ (62,328 )   $ 1,465,657          12.5 %        (0.5 )%       12.0 %

The decrease in distribution expense was related to lower operating costs due to the Company's restructuring and overall expense reduction initiatives, partially offset by the addition of BioD distribution costs.

The decrease in marketing expense reflected lower compensation and benefits, equity-based compensation, and travel expenses associated with the elimination of positions, lower consulting costs, promotional spend, and product development expenses as a result of the Company's restructuring and expense reduction initiatives, partially offset by unexpected severance and the addition of BioD marketing expenses.

The increase in sales expense reflected the addition of BioD sales expenses, higher volume driven group purchasing organization fees and unexpected severance expenses, partially offset by lower compensation and benefits, commissions, equity-based compensation, operating costs, travel expenses, samples expense and trade show and meeting costs in connection with the restructuring and expense reduction initiatives.

The increase in general and administrative expense reflected the fair value adjustment of BioD contingent consideration as well as the addition of BioD general and administrative expenses, partially offset by lower compensation and benefits, 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.

                                                                       $ Variance                                 % Variance
                          2016             2015           Non FX           FX            Total         Non FX         FX          Total
By Entity Location
US                    $ 12,522,294     $ 10,880,016     $ 1,642,278     $       -     $ 1,642,278         15.1 %          - %        15.1 %
Canada                     811,115          874,624         (66,183 )       2,674         (63,509 )       (7.6 )        0.3          (7.3 )
International              361,131          474,243         (48,110 )     (65,002 )      (113,112 )      (10.1 )      (13.7 )       (23.9 )

Total                 $ 13,694,540     $ 12,228,883     $ 1,527,985     $ (62,328 )   $ 1,465,657         12.5 %       (0.5 %)       12.0 %

The increase in expenses in the U.S. in 2016 reflected the addition of BioD expenses of $4.0 million, and unexpected severance due to the elimination of one manufacturing, two marketing and one sales position, partially offset by lower restructuring and expense reduction related cost reductions. The decrease in expenses in Canada and International reflected the Company's expense reduction initiatives.

                                                                          $ Variance                                 % Variance
                             2016             2015           Non FX           FX            Total         Non FX         FX          Total
By Segment
Advanced wound care      $  9,933,595     $  7,837,255     $ 2,155,673     $ (59,333 )   $ 2,096,340         27.5 %       (0.8 )%       26.7 %
Traditional wound care        425,253          766,150        (339,770 )      (1,127 )      (340,897 )      (44.3 )       (0.1 )       (44.5 )
Other                       3,335,692        3,625,478        (287,918 )      (1,868 )      (289,786 )       (7.9 )       (0.1 )        (8.0 )

Total                    $ 13,694,540     $ 12,228,883     $ 1,527,985     $ (62,328 )   $ 1,465,657         12.5 %       (0.5 %)       12.0 %

Acquisition Related Expenses

During the three months ended September 30, 2016, the Company incurred acquisition related transaction and transition expenses of $2,734,653 related to the BioD acquisition.

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, partially offset by ongoing BioD research and development projects.

Other Expense, net

Other expense, net decreased $441,688 to $230,571 in 2016 from $672,259 in 2015 due principally to foreign exchange.

Income Tax Benefit

Income tax benefit increased $404,385 to $1,456,277 in 2016 from $1,051,892 in 2015 due principally to the tax impact of the loss generated from continuing operations partially offset by the unrealized loss on equity securities from accumulated other comprehensive income and the tax treatment of goodwill net of amortization for financial reporting but not for tax purposes of acquired identified intangible assets. Income taxes on income recognized by the Canadian operations and taxes paid on dividend income from our Comvita equity investment also contributed.

Net Loss from Continuing Operations

For the three months ended September 30, 2016, we generated a net loss from continuing operations of $4,573,299, or $0.17 per share (basic and diluted), compared to a net loss from continuing operations of $4,674,041, or $0.18 per share (basic and diluted), in 2015.

Net Income (Loss) from Discontinued Operations

In November 2015, management approved a plan to terminate the Company's Phase 3 (DSC127) clinical program for diabetic foot ulcer healing. In September 2016 the Company sold its First Aid Division ("FAD"). The operating results of the pharmaceutical development program and FAD have been reported as discontinued operations in the Company's Consolidated Financial Statements.

For the three months ended September 30, 2016, we generated net income from discontinued FAD operations of $3,181,728, or $0.12 per share (basic and diluted), which included a gain of $3,755,205 on the sale of the FAD business. For the three months ended September 30, 2015 we generated a net loss of $4,288,761, or $0.17 per share (basic and diluted) from discontinued operations comprised of a $4,851,892 loss from the DSC127 program and net income from FAD of $563,131.

Total Net Loss

For the three months ended September 30, 2016, we generated a net loss of $1,391,571, or $0.05 per share (basic and diluted), compared to a net loss of $8,962,802, or $0.35 per share (basic and diluted), in 2015.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Overview



Operating Results of Nine Months Ended September 30, 2016 and 2015



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



                                 Nine Months Ended September 30,                  Variance
                                     2016                 2015
Gross sales                    $     63,377,352       $  59,116,233     $  4,261,119             7.2 %
Sales adjustments                    (7,851,620 )        (7,744,594 )       (107,026 )           1.4 %
Net sales                            55,525,732          51,371,639        4,154,093             8.1 %
Cost of sales                        30,754,229          30,310,463          443,766             1.5 %
Gross profit                         24,771,503          21,061,176        3,710,327            17.6 %
Selling, general and
administrative expense               32,726,074          38,053,638       (5,327,564 )         (14.0 %)
Acquisition related expenses          2,892,713                   -        2,892,713               *
Research and development
expense                                  76,274             703,511         (627,237 )             *
Other (income) expense, net          (4,572,570 )           159,533       (4,732,103 )             *
Total                                31,122,491          38,916,682       (7,794,191 )         (20.0 %)
Loss from continuing
operations before income
taxes                                (6,350,988 )       (17,855,506 )     11,504,518           (64.4 %)
Income tax benefit                    1,394,120             755,108          639,012           (84.6 %)
Net loss from continuing
operations                           (4,956,868 )       (17,100,398 )     12,143,530           (71.0 %)
Income (loss) from
discontinued operations, net
of taxes                              3,790,084         (11,757,692 )     15,547,776               *
Net loss                       $     (1,166,784 )     $ (28,858,090 )   $ 27,969,306               *

* - not meaningful

Sales Adjustments



Gross to net sales adjustments comprise the following:



                                       Nine Months Ended September 30,
                                           2016                 2015
            Gross sales              $     63,377,352       $  59,116,233
            Trade rebates                  (5,525,652 )        (5,499,989 )
            Distributor fees                 (766,077 )          (662,794 )
            Sales incentives                 (659,163 )          (792,425 )
            Returns and allowances           (360,457 )          (261,351 )
            Cash discounts                   (540,271 )          (528,035 )
            Total adjustments              (7,851,620 )        (7,744,594 )
            Net sales                $     55,525,732       $  51,371,639

Trade rebates increased slightly in 2016 versus 2015 principally due to a modest increase in sales subject to rebate and the rebate percentage due to mix in Canada, partially offset by lower rebates in the U.S. The increase in distributor fees was commensurate with the increase in Canadian sales upon which the fee is based and a higher percentage rate driven by the change in the sales mix of products upon 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                     $ 47,898,570     $ (3,502,021 )   $ 44,396,549     $ 44,517,468     $ (3,709,265 )   $ 40,808,203
Canada                   11,611,405       (4,343,685 )      7,267,720       11,199,444       (4,031,851 )      7,167,593
International             3,867,377           (5,914 )      3,861,463        3,399,321           (3,478 )      3,395,843

Total                  $ 63,377,352     $ (7,851,620 )   $ 55,525,732     $ 59,116,233     $ (7,744,594 )   $ 51,371,639

U.S. sales adjustments decreased principally due to lower rebates associated with the non-recurrence of a special rebate program initiated in the first half of 2015 to protect against the adverse impact on sales of U.S. Medicare reimbursement code changes in the prior year, partially offset by higher sales subject to rebate. Sales adjustments in Canada increased due to higher sales and slightly higher trade rebate and distribution fee rates due to product mix.

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

Advanced wound care      $ 39,824,693     $ (2,460,569 )   $ 37,364,124     $ 34,231,916     $ (2,820,285 )   $ 31,411,631
Traditional wound care     23,552,659       (5,391,051 )     18,161,608       24,884,317       (4,924,309 )     19,960,008

Total                    $ 63,377,352     $ (7,851,620 )   $ 55,525,732     $ 59,116,233     $ (7,744,594 )   $ 51,371,639

Advanced wound care sales adjustments decreased due to lower trade rebates and sales incentives. Rebates were lower due to the discontinuance of the 2015 special rebate program, partially offset by higher sales subject to rebate. Sales incentives decreased due to a decrease in sales upon which the fees are based. Traditional wound care sales adjustments increased due to higher trade rebates and distribution fees due principally to an increase in sales upon which the fees are based in Canada, coupled with an increase in the rebate and distribution fee percentage due to product mix.

Rebate Reserve Roll-Forward



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



                                           Nine Months Ended September 30,
                                               2016                 2015
         Beginning balance - January 1   $      1,515,700       $   1,861,050
         Rebates paid                          (5,547,892 )        (5,661,983 )
         Rebates accrued                        5,525,652           5,499,989
         Ending balance - September 30   $      1,493,460       $   1,699,056

. . .

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