Item 1. Financial Statements.
DERMA SCIENCES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
ASSETS
|
|
September 30,
2016
|
|
|
December 31, 2015*
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
25,974,166
|
|
|
$
|
15,814,205
|
|
Short-term investments
|
|
|
15,000,000
|
|
|
|
25,003,990
|
|
Accounts receivable, net of allowances of $3,089,492 and $667,826, respectively
|
|
|
10,697,668
|
|
|
|
6,307,148
|
|
Inventories
|
|
|
14,393,173
|
|
|
|
16,351,013
|
|
Current portion of notes receivable
|
|
|
938,677
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
1,680,343
|
|
|
|
1,406,799
|
|
Current assets of discontinued operations
|
|
|
577,762
|
|
|
|
7,172,095
|
|
Total current assets
|
|
|
69,261,789
|
|
|
|
72,055,250
|
|
Long-term equity investment
|
|
|
15,426,148
|
|
|
|
16,110,178
|
|
Long-term portion of notes receivable
|
|
|
2,086,879
|
|
|
|
-
|
|
Equipment and improvements, net of accumulated depreciation and amortization of $7,838,929 and $7,158,155, respectively
|
|
|
4,474,165
|
|
|
|
4,025,811
|
|
Identifiable intangible assets, net of accumulated amortization of $14,915,522 and $12,805,688, respectively
|
|
|
24,951,604
|
|
|
|
9,441,188
|
|
Goodwill
|
|
|
64,590,456
|
|
|
|
8,778,009
|
|
Other assets
|
|
|
103,820
|
|
|
|
99,385
|
|
Long-term assets of discontinued operations
|
|
|
-
|
|
|
|
5,221,689
|
|
Total assets
|
|
$
|
180,894,861
|
|
|
$
|
115,731,510
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,194,480
|
|
|
$
|
3,283,581
|
|
Accrued expenses and other current liabilities
|
|
|
8,193,998
|
|
|
|
6,297,691
|
|
Current portion of contingent consideration
|
|
|
42,078,758
|
|
|
|
-
|
|
Current liabilities of discontinued operations
|
|
|
120,192
|
|
|
|
4,905,489
|
|
Total current liabilities
|
|
|
53,587,428
|
|
|
|
14,486,761
|
|
Long-term portion of contingent consideration
|
|
|
12,372,775
|
|
|
|
-
|
|
Long-term liabilities
|
|
|
498,055
|
|
|
|
1,014,378
|
|
Deferred tax liability
|
|
|
2,023,906
|
|
|
|
920,879
|
|
Long-term liabilities of discontinued operations
|
|
|
-
|
|
|
|
883,637
|
|
Total liabilities
|
|
|
68,482,164
|
|
|
|
17,305,655
|
|
Commitments and contingencies (Notes 3 and 13)
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $.01 par value; shares authorized 1,468,750; issued and outstanding 73,332 at September 30, 2016
and December 31, 2015 (liquidation preference of $3,222,368 at September 30, 2016)
|
|
|
733
|
|
|
|
733
|
|
Common stock, $.01 par value; shares authorized 50,000,000; issued and outstanding 28,269,225 at September 30, 2016 and 25,876,870 at December 31, 2015
|
|
|
282,692
|
|
|
|
258,769
|
|
Additional paid-in capital
|
|
|
248,140,518
|
|
|
|
234,943,291
|
|
Accumulated other comprehensive income
|
|
|
7,205,384
|
|
|
|
5,272,908
|
|
Accumulated deficit
|
|
|
(143,216,630
|
)
|
|
|
(142,049,846
|
)
|
Total stockholders’ equity
|
|
|
112,412,697
|
|
|
|
98,425,855
|
|
Total liabilities and stockholders’ equity
|
|
$
|
180,894,861
|
|
|
$
|
115,731,510
|
|
* Reclassified for discontinued operations. See note 2.
See accompanying notes to consolidated financial statements.
DERMA SCIENCES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015*
|
|
Net Sales
|
|
$
|
21,809,526
|
|
|
$
|
17,787,527
|
|
Cost of sales
|
|
|
11,103,064
|
|
|
|
10,491,932
|
|
Gross Profit
|
|
|
10,706,462
|
|
|
|
7,295,595
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
13,694,540
|
|
|
|
12,228,883
|
|
Acquisition related
|
|
|
2,734,653
|
|
|
|
-
|
|
Research and development
|
|
|
76,274
|
|
|
|
120,386
|
|
Total operating expenses
|
|
|
16,505,467
|
|
|
|
12,349,269
|
|
Operating loss
|
|
|
(5,799,005
|
)
|
|
|
(5,053,674
|
)
|
Other expense, net
|
|
|
(230,571
|
)
|
|
|
(672,259
|
)
|
Loss from continuing operations before income taxes
|
|
|
(6,029,576
|
)
|
|
|
(5,725,933
|
)
|
Income tax benefit
|
|
|
1,456,277
|
|
|
|
1,051,892
|
|
Net Loss from Continuing Operations
|
|
|
(4,573,299
|
)
|
|
|
(4,674,041
|
)
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
Loss from discontinued DSC 127 program
|
|
|
-
|
|
|
|
(4,851,892
|
)
|
Income from discontinued FAD operations
|
|
|
261,658
|
|
|
|
591,202
|
|
Gain on sale of FAD business
|
|
|
3,755,205
|
|
|
|
-
|
|
Income tax provision
|
|
|
(835,135
|
)
|
|
|
(28,071
|
)
|
Income (Loss) from Discontinued Operations
|
|
|
3,181,728
|
|
|
|
(4,288,761
|
)
|
Net Loss
|
|
$
|
(1,391,571
|
)
|
|
$
|
(8,962,802
|
)
|
Net income (loss) per common share – basic and diluted
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.17
|
)
|
|
$
|
(0.18
|
)
|
Discontinued operations
|
|
|
0.12
|
|
|
|
(0.17
|
)
|
Total net loss per common share – basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.35
|
)
|
Shares used in computing net loss per common share – basic and diluted
|
|
|
27,241,706
|
|
|
|
25,806,549
|
|
* Reclassified for discontinued operations. See Note 2.
See accompanying notes to consolidated financial statements.
DERMA SCIENCES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015*
|
|
Net Sales
|
|
$
|
55,525,732
|
|
|
$
|
51,371,639
|
|
Cost of sales
|
|
|
30,754,229
|
|
|
|
30,310,463
|
|
Gross Profit
|
|
|
24,771,503
|
|
|
|
21,061,176
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
32,726,074
|
|
|
|
38,053,638
|
|
Acquisition related
|
|
|
2,892,713
|
|
|
|
-
|
|
Research and development
|
|
|
76,274
|
|
|
|
703,511
|
|
Total operating expenses
|
|
|
35,695,061
|
|
|
|
38,757,149
|
|
Operating loss
|
|
|
(10,923,558
|
)
|
|
|
(17,695,973
|
)
|
Other income (expense), net
|
|
|
4,572,570
|
|
|
|
(159,533
|
)
|
Loss from continuing operations before income taxes
|
|
|
(6,350,988
|
)
|
|
|
(17,855,506
|
)
|
Income tax benefit
|
|
|
1,394,120
|
|
|
|
755,108
|
|
Net Loss from Continuing Operations
|
|
|
(4,956,868
|
)
|
|
|
(17,100,398
|
)
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
Loss from discontinued DSC 127 program
|
|
|
-
|
|
|
|
(13,231,893
|
)
|
Income from discontinued FAD operations
|
|
|
1,115,583
|
|
|
|
1,558,380
|
|
Gain on sale of FAD assets
|
|
|
3,755,205
|
|
|
|
-
|
|
Income tax provision
|
|
|
(1,080,704
|
)
|
|
|
(84,179
|
)
|
Income (Loss) from Discontinued Operations
|
|
|
3,790,084
|
|
|
|
(11,757,692
|
)
|
Net Loss
|
|
$
|
(1,166,784
|
)
|
|
$
|
(28,858,090
|
)
|
Net income (loss) per common share – basic and diluted
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.19
|
)
|
|
$
|
(0.66
|
)
|
Discontinued operations
|
|
|
0.15
|
|
|
|
(0.46
|
)
|
Total net loss per common share – basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(1.12
|
)
|
Shares used in computing net loss per common share – basic and diluted
|
|
|
26,343,962
|
|
|
|
25,707,314
|
|
* Reclassified for discontinued operations. See Note 2.
See accompanying notes to consolidated financial statements.
DERMA SCIENCES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss (Unaudited)
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net Loss
|
|
$
|
(1,391,571
|
)
|
|
$
|
(8,962,802
|
)
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
29,687
|
|
|
|
(97,663
|
)
|
Unrealized (loss) gain on equity securities, net of taxes of $(131,240) and $1,392,898, respectively
|
|
|
(219,060
|
)
|
|
|
2,154,280
|
|
Total other comprehensive (loss) income
|
|
|
(189,373
|
)
|
|
|
2,056,617
|
|
Comprehensive Loss
|
|
$
|
(1,580,944
|
)
|
|
$
|
(6,906,185
|
)
|
See accompanying notes to consolidated financial statements.
DERMA SCIENCES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net Loss
|
|
$
|
(1,166,784
|
)
|
|
$
|
(28,858,090
|
)
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
575,471
|
|
|
|
(356,126
|
)
|
Unrealized gain on equity securities, net of taxes of $2,595,810 and $1,395,685, respectively
|
|
|
4,332,818
|
|
|
|
2,158,738
|
|
Less: reclassification of realized gain on equity securities included in net loss, net of taxes of $1,782,823
|
|
|
(2,975,813
|
)
|
|
|
-
|
|
Total other comprehensive income
|
|
|
1,932,476
|
|
|
|
1,802,612
|
|
Comprehensive Income (Loss)
|
|
$
|
765,692
|
|
|
$
|
(27,055,478
|
)
|
See accompanying notes to consolidated financial statements.
DERMA SCIENCES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,166,784
|
)
|
|
$
|
(28,858,090
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of equipment and improvements
|
|
|
871,968
|
|
|
|
768,242
|
|
Amortization of identifiable intangible assets
|
|
|
2,636,176
|
|
|
|
2,238,194
|
|
Provision for bad debts
|
|
|
(17,415
|
)
|
|
|
10,718
|
|
Allowance for sales adjustments
|
|
|
1,404,091
|
|
|
|
156,911
|
|
Provision for inventory obsolescence
|
|
|
372,326
|
|
|
|
(110,072
|
)
|
Deferred rent
|
|
|
(63,902
|
)
|
|
|
(62,240
|
)
|
Stock-based compensation
|
|
|
1,795,418
|
|
|
|
4,086,428
|
|
Deferred income taxes
|
|
|
(648,413
|
)
|
|
|
(1,007,843
|
)
|
Change in fair value of contingent consideration
|
|
|
370,000
|
|
|
|
-
|
|
Gain on sale of investment
|
|
|
(4,740,136
|
)
|
|
|
-
|
|
Loss on disposal of equipment
|
|
|
20,476
|
|
|
|
-
|
|
Gain on sale of FAD business
|
|
|
(3,755,205
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(335,077
|
)
|
|
|
(158,845
|
)
|
Notes receivable
|
|
|
23,778
|
|
|
|
-
|
|
Inventories
|
|
|
3,876,456
|
|
|
|
(5,730,986
|
)
|
Prepaid expenses and other assets
|
|
|
(45,783
|
)
|
|
|
1,623,410
|
|
Accounts payable
|
|
|
(876,070
|
)
|
|
|
(310,407
|
)
|
Accrued expenses and other liabilities
|
|
|
(4,307,285
|
)
|
|
|
45,177
|
|
Net cash used in operating activities
|
|
|
(4,585,381
|
)
|
|
|
(27,309,403
|
)
|
Investing Activities
|
|
|
|
|
|
|
|
|
Acquisition of a business, net of cash acquired
|
|
|
(13,523,738
|
)
|
|
|
-
|
|
Proceeds from sale of FAD business, net of transaction costs
|
|
|
9,521,415
|
|
|
|
-
|
|
Proceeds of note receivable
|
|
|
248,000
|
|
|
|
-
|
|
Purchase of investments
|
|
|
(35,008,483
|
)
|
|
|
(45,004,220
|
)
|
Proceeds from sale of investments
|
|
|
52,606,631
|
|
|
|
65,996,230
|
|
Purchase of equipment and improvements
|
|
|
(235,128
|
)
|
|
|
(1,138,895
|
)
|
Net cash provided by investing activities
|
|
|
13,608,697
|
|
|
|
19,853,115
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Line of credit payment
|
|
|
(1,420,254
|
)
|
|
|
-
|
|
Proceeds fro m issuance of common stock, net of
issuance costs
|
|
|
2,245,867
|
|
|
|
1,991,130
|
|
Payment of withholding taxes related to employee stock-based compensation
|
|
|
(18,010
|
)
|
|
|
(67,409
|
)
|
Net cash provided by financing activities
|
|
|
807,603
|
|
|
|
1,923,721
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
329,042
|
|
|
|
567,235
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
10,159,961
|
|
|
|
(4,965,332
|
)
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
15,814,205
|
|
|
|
19,396,845
|
|
End of period
|
|
$
|
25,974,166
|
|
|
$
|
14,431,513
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Non cash portion of business acquisition
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
$
|
9,197,875
|
|
|
|
-
|
|
Incurrence of contingent liabilities
|
|
|
56,761,691
|
|
|
|
-
|
|
Total
|
|
$
|
65,959,566
|
|
|
|
-
|
|
Receipt of note receivable as partial consideration in sale of FAD business
|
|
$
|
2,700,000
|
|
|
|
-
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
445,198
|
|
|
$
|
-
|
|
See accompanying notes to consolidated financial statements.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
|
1.
|
Organization and Summary of Significant Accounting Policies
|
Derma Sciences, Inc. and its subsidiaries
(the “Company”) manufactures, markets, and distributes medical devices and placental tissue products. The Company’s
operations are in two segments of the wound care marketplace: advanced wound care and traditional wound care. The Company markets
its medical device products principally through direct sales representatives in the United States (“U.S.”), Canada
and the United Kingdom (“U.K.”), and through independent distributors within other select international markets. The
Company markets its placental tissue products principally through independent sales representatives. The Company’s U.S. distribution
facilities are located in St. Louis, Missouri and Memphis, Tennessee. The Company utilizes third party distributors for distribution
in Canada, Europe, Latin America, Asia and the Pacific. The Company has manufacturing facilities in Memphis, Tennessee, Toronto,
Canada and Nantong, China.
Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2016. Information included in the consolidated balance sheet
as of December 31, 2015 has been derived from the consolidated financial statements and footnotes thereto for the year ended December
31, 2015, included in the Annual Report on Form 10-K previously filed with the Securities and Exchange Commission. For further
information refer to the Annual Report on Form 10-K for the year ended December 31, 2015.
Principles of Consolidation
–
The consolidated financial statements include the accounts of Derma Sciences, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
– The preparation
of consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these estimates are based on knowledge of current events and actions
which may be undertaken in the future, actual results may ultimately differ from these estimates. Estimates and assumptions are
required in the determination of sales deductions for trade rebates, sales incentives, discounts and allowances. Significant estimates
and assumptions are also required in determining the appropriateness of amortization periods for identifiable intangible assets,
the potential impairment of goodwill and the valuation of inventory as well as determining the assets and liabilities resulting
from the purchase of BioD, LLC (see note 3).
Revenue Recognition
– The Company
sells its products through a combination of direct and independent sales representatives and independent distributors. The Company
recognizes revenue when title to the goods transfers to customers, provided there are no material remaining performance obligations
required of the Company or any matters of customer acceptance and collectability is reasonably assured. In cases where the Company
utilizes distributors or ships product directly to the end user, it recognizes revenue upon shipment provided all other revenue
recognition criteria have been met. A portion of the Company's revenue is generated from inventory maintained at hospitals and
clinics. For these products, revenue is recognized at the time the product has been used. The Company records estimated sales returns,
cash discounts, distribution fees (in Canada), trade rebates and returns and allowances as a reduction of net sales in the same
period revenue is recorded. Freight costs billed to and reimbursed by customers are recorded as a component of net sales. Freight
costs to ship product to customers are recorded as a component of cost of sales.
Acquisitions
- Results of operations
of acquired companies are included in the Company’s results of operations as of their acquisition date. The purchase price
of each acquisition is allocated to the net assets acquired based on estimates of their fair values as of the date of acquisition.
Any purchase price in excess of net assets acquired is recorded as goodwill. The allocation of purchase price in certain cases
may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one
year from the acquisition date.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
Contingent consideration is recognized at
the estimated fair value on the acquisition date. Subsequent changes to the fair value of contingent payments are recognized in
earnings. Contingent payments related to acquisitions consist of regulatory milestones and an earnout based on sales.
Net Income (Loss) per Share
–
Net loss per common share – basic is computed by dividing net loss by the weighted average number of common shares outstanding
for the period. Net loss per common share – diluted reflects the potential dilution of earnings by including the effects
of the assumed exercise, conversion or issuance of potentially issuable shares of common stock (“potentially dilutive securities”),
including those attributable to stock options, warrants, convertible preferred stock and restricted stock units as well as contingently
issuable escrowed shares, in the weighted average number of common shares outstanding for a period, if dilutive. The effects of
convertible preferred stock are determined using the if converted method. The effects of the assumed exercise of warrants and stock
options, and assumed lapse of restrictions on restricted stock awards, are determined using the treasury stock method. Potentially
dilutive securities have not been included in the computation of diluted loss per share for the three and nine months ended September
30, 2016 and 2015 as the effect would be anti-dilutive.
Potentially dilutive securities excluded
as a result of the effects of being anti-dilutive are as follows:
|
|
Three and Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Excluded dilutive shares:
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
73,332
|
|
|
|
73,332
|
|
Additional stock issuable related to conversion of preferred stock
|
|
|
49,782
|
|
|
|
49,782
|
|
Restricted share units
|
|
|
343,050
|
|
|
|
674,500
|
|
Warrants
|
|
|
-
|
|
|
|
1,755,330
|
|
Stock options
|
|
|
2,708,002
|
|
|
|
2,472,491
|
|
Common stock held in escrow
|
|
|
229,919
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total dilutive shares
|
|
|
3,404,085
|
|
|
|
5,025,435
|
|
Recently Issued Accounting Pronouncements
– In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14 which defers the effective
date of ASU No. 2014-09 until fiscal years beginning after December 15, 2017 with early application permitted for fiscal years
beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method.
The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial
reporting. In March 2016, the FASB issued ASU No. 2016-08, which clarifies the implementation guidance provided in ASU 2014-09
on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, which clarifies the implementation guidance
in ASU 2014-09 on licensing and identifying performance obligations. Both ASU 2016-08 and ASU 2016-10 must be adopted concurrently
with ASU 2014-09. We are currently evaluating the transition methods and the impact the adoption of these standards will have on
our consolidated financial statements.
In January 2016, the FASB issued ASU No.
2016-01,
Accounting for Equity Investments and Financial Liabilities
, which changes the income statement impact of equity
investments held by an entity, as well as the recognition of changes in fair value of financial liabilities when the fair value
option is elected. The standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017 for
public business entities. Early adoption is not permitted for the provision related to equity investments. After the Company adopts
this ASU for the year beginning January 1, 2018, any change in the fair value of the Company’s equity investments will be
included in other income, net in the Consolidated Statement of Operations.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842)
, which revises the accounting related to lessee accounting. Under the new guidance, lessees
will be required to recognize a lease liability and a right-of-use asset for all leases. Consistent with current guidance, the
recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification
as a finance or operating lease. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including
interim periods within that reporting period. Early adoption is permitted. The new standard is to be applied using a modified retrospective
approach. The Company is currently evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and
related disclosures.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2016 for public business
entities. Early adoption is permitted. The ASU is expected to have an immaterial effect on the Company’s consolidated financial
position, results of operations and disclosures.
In August 2016, the
FASB issued ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments.
The guidance addresses the classification
of cash flows related to debt repayment or extinguishment costs, settlement of zero-coupon debt instruments or debt instruments
with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration
payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance,
distributions received from equity method investees and beneficial interest in securitization transactions. This update will become
effective for all annual periods and interim reporting periods beginning after December 15, 2017. Early adoption is permitted.
The Company is in the process of evaluating the impact of this standard on its consolidated financial statements and related disclosures.
There are no other
recently issued accounting pronouncements that are expected to have a material effect on the Company's financial position, results
of operations or cash flows.
|
2.
|
Discontinued Operations
|
Termination of DSC 127 Program
Effective November 12, 2015, the Company
approved a plan to terminate its Phase 3 Aclerastide (DSC127) clinical program for diabetic foot ulcer healing. This action was
based on futility determinations emanating out of the planned, pre-specified interim analyses of trial data conducted by the program’s
independent Data Monitoring Committee (“DMC”). The decision to end the studies followed the recommendation by the DMC
to stop the trials. Based on this recommendation, the Company initiated an orderly termination of all its existing pharmaceutical
development activities, comprised of the diabetic foot ulcer healing program and two other programs utilizing the DSC127 compound
for other therapeutic indications. As a result of these actions, the Company’s pharmaceutical development activities have
been reported as discontinued operations in the Company’s Consolidated Financial Statements. Amounts previously reported
in the Pharmaceutical Wound Care segment have been reclassified to conform to this presentation to allow for meaningful comparison
of continuing operations. There were no noncash charges included in the loss from discontinued operations in the consolidated statement
of operations for the three and nine months ended September 30, 2015.
At September 30, 2016 and December 31, 2015,
the Company had $65,126 and $4,371,010, respectively, of unpaid severance, cancellation and closure costs included in liabilities
of discontinued operations in the Consolidated Balance Sheet in connection with the termination of the DSC 127 program.
Sale of First Aid Division (FAD)
To focus its resources on advanced wound
care and tissue regenerative technology, future growth, and to add capital the Company sold its First Aid Division (“FAD”)
to Dukal Corporation (“Dukal”) for $9,670,995 in cash plus a promissory note in the amount of $2,700,000 effective
September 1, 2016. The sale was consummated pursuant to the terms of an Asset Purchase Agreement dated July 26, 2016. The operating
results of FAD have been reported as discontinued operations in the Company’s Consolidated Financial Statements. Amounts
relating to FAD that were previously reported in the traditional wound care segment have been reclassified to conform to this presentation
to allow for meaningful comparison of continuing operations.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
During the three and nine months ended September
30, 2016, the Company recorded a gain before income taxes of $3,755,205 relating to the sale of FAD assets in the Consolidated
Statement of Operations calculated as follows:
Consideration
|
|
|
|
Cash
|
|
$
|
9,670,995
|
|
Note receivable
|
|
|
2,700,000
|
|
Total consideration received
|
|
|
12,370,995
|
|
|
|
|
|
|
Less:
|
|
|
|
|
Inventory
|
|
|
3,370,995
|
|
Fixed assets
|
|
|
90,309
|
|
Goodwill
|
|
|
4,679,684
|
|
Amortizable intangible assets
|
|
|
340,057
|
|
Deferred rent
|
|
|
(14,835
|
)
|
Transaction costs
|
|
|
149,580
|
|
Net gain on sale before taxes
|
|
$
|
3,755,205
|
|
Discontinued operations
Summarized operating results of FAD discontinued
operations are presented in the following table:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
2,966,753
|
|
|
$
|
4,381,140
|
|
|
$
|
11,701,166
|
|
|
$
|
12,852,036
|
|
Cost of sales
|
|
|
2,265,229
|
|
|
|
3,240,485
|
|
|
|
9,097,311
|
|
|
|
9,570,595
|
|
Gross profit
|
|
|
701,524
|
|
|
|
1,140,655
|
|
|
|
2,603,855
|
|
|
|
3,281,441
|
|
Selling, general and administrative
|
|
|
439,866
|
|
|
|
549,453
|
|
|
|
1,488,272
|
|
|
|
1,723,061
|
|
Income from discontinued operations before income taxes
|
|
|
261,658
|
|
|
|
591,202
|
|
|
|
1,115,583
|
|
|
|
1,558,380
|
|
Non-cash depreciation expenses of $17,780
and $22,255 are included in cost of sales and amortization expenses of $50,000 and $56,250 are included in selling, general and
administrative expense for the nine months ended September 30, 2016 and 2015, respectively.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
Summarized assets and liabilities of FAD
discontinued operations are presented in the following table:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Accounts receivable, net
|
|
$
|
556,614
|
|
|
$
|
1,838,441
|
|
Inventory, net
|
|
|
-
|
|
|
|
4,339,692
|
|
Prepaid expenses
|
|
|
21,148
|
|
|
|
993,962
|
|
Total current assets
|
|
|
577,762
|
|
|
|
7,172,095
|
|
Equipment and improvements, net
|
|
|
-
|
|
|
|
103,396
|
|
Identifiable intangible assets, net
|
|
|
-
|
|
|
|
390,057
|
|
Goodwill
|
|
|
-
|
|
|
|
4,679,684
|
|
Other assets
|
|
|
-
|
|
|
|
48,552
|
|
Total non-current assets
|
|
|
-
|
|
|
|
5,221,689
|
|
Accounts payable
|
|
|
1,528
|
|
|
|
140,831
|
|
Accrued expenses
|
|
|
53,538
|
|
|
|
393,648
|
|
Total current liabilities
|
|
|
55,066
|
|
|
|
534,479
|
|
Deferred tax liability
|
|
|
-
|
|
|
|
883,637
|
|
Total long-term liabilities
|
|
$
|
-
|
|
|
$
|
883,637
|
|
Effective September 1, 2016 the Company
began providing transition services to Dukal under a transition services agreement. Under the agreement, the Company shall perform
corporate overhead and accounting transition services to assist in the transition of the business to Dukal through December 31,
2016. The Company shall receive monthly compensation of $25,000. Dukal may terminate the agreement at any time.
|
3.
|
Acquisition of BioD, LLC
|
On August 5, 2016, the Company
through a wholly owned subsidiary, acquired all of the membership interests in BioD, LLC (“BioD”) pursuant to the terms
of the Agreement and Plan of Merger (the “Merger Agreement”) dated July 27, 2016. Initial consideration of $23,094,987
was funded by the Company with cash of $13,897,112 and the issuance of 1,751,183 net shares of common stock with a fair value of
$9,197,875 based on the Company stock price on the date of the acquisition. Under the terms of the Merger Agreement, the Company
may become obligated to pay additional consideration up to $56,761,691 based on the achievement of regulatory milestones (see below)
and year over year increases in BioD’s net sales from July 1, 2016 through June 30, 2018. The Company expects to incur transaction
and transition related costs totaling $3,107,535 related to the purchase. Through September 30, 2016, $2,892,713 of these costs
have been incurred and charged to acquisition related expense.
BioD is a vertically integrated company
engaged in the development and commercialization of products derived from human placental tissues sold to surgeons, facilities
and distributors serving the surgical, spine, orthopaedic, ocular and urological sectors of the healthcare marketplace. The Company
has distributed certain of BioD’s products for dermal application in North America since January 2014 under a license, market
development and commercialization agreement. This acquisition complemented the Company’s growth strategy aimed at expanding
its portfolio of advanced wound care solutions and tissue regenerative technologies and enables the Company to sell directly into
additional sectors of the healthcare marketplace.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
The transaction was accounted for as
a purchase of the net assets of BioD. Accordingly, the results of operations of BioD have been included in the consolidated financial
statements commencing August 5, 2016. A preliminary allocation of the purchase price to the estimated fair values of the assets
acquired and the liabilities assumed is outlined below:
Assets acquired
|
|
|
|
Accounts receivable
|
|
$
|
4,266,588
|
|
Inventory
|
|
|
979,713
|
|
Notes receivable
|
|
|
597,334
|
|
Prepaid expenses and other assets
|
|
|
158,198
|
|
Equipment and improvements
|
|
|
932,940
|
|
Acquired identifiable intangible assets
|
|
|
19,000,000
|
|
Goodwill
|
|
|
55,812,447
|
|
Total assets acquired
|
|
|
81,747,220
|
|
Current liabilities assumed
|
|
|
|
|
Line of credit
|
|
|
1,420,254
|
|
Accounts payable
|
|
|
702,887
|
|
Accrued liabilities
|
|
|
1,917,525
|
|
Total liabilities assumed
|
|
|
4,040,666
|
|
Net assets acquired
|
|
$
|
77,706,554
|
|
|
|
|
|
|
Detail of total consideration
|
|
|
|
|
|
|
|
|
|
Initial cash consideration (1)
|
|
$
|
13,897,112
|
|
Initial common stock consideration (1)
|
|
|
9,197,875
|
|
Settlement of pre-existing relationship (2)
|
|
|
903,408
|
|
Less BioD cash acquired
|
|
|
(373,374
|
)
|
Net initial consideration
|
|
|
23,625,021
|
|
Contingent consideration (3)
|
|
|
54,081,533
|
|
Total consideration
|
|
$
|
77,706,554
|
|
|
(1)
|
Initial consideration includes $2,000,000 held in escrow
to secure BioD payment obligations for working capital adjustments and any indemnification claims and $1,178,846 held in escrow
pending the collection of two separate classes of accounts receivable. Amounts equal to the collected receivables through August
5, 2017 will be released to the sellers from the accounts receivable escrows with the remainder returned to the Company by September
4, 2017. In September 2016, the Company received $440,054 for working capital adjustments from these reserves.
|
|
(2)
|
Reflects settlement of pre-existing relationship between
the Company and BioD.
|
|
(3)
|
Includes the estimated
fair value of potential product regulatory milestone payments in the aggregate estimated amount of up to $29,699,691 and net sales
growth earnouts for the trailing twelve months ending June 30, 2017 and 2018 of up to $26,500,000 based on a multiple of incremental
net sales, which is payable in cash or at the Company’s discretion, up to 35% in Company common stock (up to an additional
2,863,948 shares), and additional consideration of $562,000. Differences in the contingent consideration recognized (including
changes in fair value estimated at each reporting date) and the final amounts paid will be recorded in future Company results
of operations.
|
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
The following represents preliminary details
of the fair value of acquired identifiable intangible assets purchased as part of the acquisition:
Description
|
|
Estimated
Useful Lives
(in Years)
|
|
|
|
Customer relationships
|
|
5
|
|
$
|
10,000,000
|
|
Developed technology
|
|
10
|
|
|
6,000,000
|
|
Trade names
|
|
10
|
|
|
2,000,000
|
|
Non-compete agreements
|
|
3
|
|
|
1,000,000
|
|
Total acquired identifiable intangible assets
|
|
|
|
$
|
19,000,000
|
|
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
Determination of this preliminary allocation
of the purchase price required management of the Company to make estimates and assumptions. The Company has engaged an independent
valuation specialist to conduct an analysis to assist management in determining the estimated fair value of the acquired tangible
and intangible assets, liabilities assumed, pre-existing relationships and contingent consideration. The work performed by the
independent valuation specialist, while not complete, has been considered in management’s estimate of the fair values reflected
above. The final purchase price allocation to reflect the fair values of the assets acquired and liabilities assumed will be based
on completion of the Company’s valuation study, which is expected to be completed in the fourth quarter 2016. Finalization
of the valuation analysis may result in fair values that differ materially from the preliminary estimates.
The excess
of the purchase price over the identifiable intangible and net tangible assets was allocated to goodwill. Goodwill recognized was
primarily attributable to assets that do not qualify for separate recognition. The purchase price allocation is preliminary, pending
the final determination of the fair value of certain assumed assets and liabilities, pre-existing relationships and contingent
consideration. As these issues are identified, modified or resolved, resulting increases or decreases to the preliminary values
are offset by a change to goodwill. Adjustments to these estimates will be included in the final allocation of the purchase price.
All of the assets acquired, including goodwill, and liabilities assumed are included in the Advanced Wound Care Segment. Goodwill
and identifiable intangible assets resulting from the acquisition are deductible for income tax purposes.
The unaudited pro forma information below
presents combined results of operations as if the acquisition had occurred at the beginning of the periods presented instead of
August 5, 2016. The pro forma information is based on historical results adjusted for the effect of acquisition accounting and
is not necessarily indicative of the results of operations of the combined entity had the acquisition occurred at the beginning
of the periods presented, nor is it necessarily indicative of future results.
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
23,776,960
|
|
|
$
|
22,131,402
|
|
|
$
|
69,048,342
|
|
|
$
|
63,074,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(1,982,531
|
)
|
|
$
|
(4,653,899
|
)
|
|
$
|
(2,507,632
|
)
|
|
$
|
(17,044,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations per common share: basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares: basic and diluted
|
|
|
27,826,807
|
|
|
|
27,327,813
|
|
|
|
27,554,311
|
|
|
|
27,228,578
|
|
The nine months ended September 30, 2016
supplemental pro forma earnings were adjusted to exclude $2,892,713 of acquisition-related investment banking fees, legal, audit
and other costs and include $1,866,667 of amortization costs related to recorded identifiable intangible assets. The nine months
ended September 30, 2015 supplemental pro forma earnings were adjusted to include $2,400,000 of amortization costs related to recorded
identifiable intangible assets. The number of shares outstanding used in calculating the income per share for 2016 and 2015 was
adjusted to include 1,751,183 shares issued as part of the purchase price and assumed to have been issued on January 1, 2015 net
of 229,919 shares held in the BioD working capital and indemnification escrows prior to assumed release.
The Company recorded net sales of $3,985,643
for BioD for the three and nine months ended September 30, 2016 and incurred an operating loss of $3,641,513 (including the acquisition
related costs of $2,892,713 and change in fair value of contingent consideration of $370,000) which is included in the consolidated
statements of operations.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
Untitled Letter
On June 22, 2015, the U.S. Food and Drug
Administration (“FDA”) issued an Untitled Letter alleging that BioD’s morselized amniotic membrane based products
do not meet the criteria for regulation as human cellular tissue-based products (“HCT/Ps”) solely under Section 361
of the Public Health Service Act and that, as a result, BioD would need a biologics license to lawfully market those morselized
products. Since the issuance of the Untitled Letter, BioD and more recently the Company have been in discussions with the FDA to
communicate their disagreement with the FDA’s assertion that certain products are more than minimally manipulated. To date,
the FDA has not changed its position that certain of the BioD acquired products are not eligible for marketing solely under Section
361 of the Public Health Service Act, but discussions are continuing. The Company continues to market these products but has also
submitted a Request for Designation to determine if one of the morselized products should be regulated as a medical device or a
biologic through the Biologics License Application (“BLA”) process. The Company also intends to pursue a BLA for another
of the morselized products.
On December 22, 2014, the FDA issued for
comment “Draft Guidance for Industry and FDA Staff: Minimal Manipulation of Human Cells, Tissues, and Cellular and Tissue-Based
Products.” On October 28, 2015, the FDA issued for comment, "Draft Guidance for Industry and FDA Staff: Homologous
Use of Human Cells, Tissues, and Cellular and Tissue-Based Products." The FDA held a public hearing on September 12 and 13,
2016 to obtain input on the Homologous Use draft guidance and the Minimal Manipulation draft guidance, as well as other recently
issued guidance documents on HCT/Ps.
If the FDA does allow the Company to continue
to market its morselized products without a 510(k) clearance or biologics license either prior to or after finalization of the
draft guidance documents, it may impose conditions on marketing, such as labeling restrictions and compliance with cGMP. Compliance
with these conditions would require significant additional time and cost investments by the Company. It is also possible that the
FDA will not allow the Company to market any form of a morselized product without a 510(k) clearance or biologics license even
prior to finalization of the draft guidance documents, and could even require the Company to recall its morselized products. Net
sales of the Company’s morselized products for the nine months ended September 30, 2016 and 2015 were approximately 13% and
12% of the pro forma net sales, respectively.
In accordance with the Merger Agreement,
BioD’s former members are entitled to receive additional consideration payable in cash and Company common stock of up to
35% of the additional consideration, at the Company’s discretion, to a maximum of $29,699,691 based on a multiple of morselized
product sales for the previous twelve months if:
|
i)
|
specific FDA enforcement action is not received by the Company by May 5, 2017; or
|
|
ii)
|
specific FDA enforcement action is received by the Company prior to May 5, 2017 which does not require the Company to remove
the morselized products from the market within 270 days of receipt of the FDA enforcement action; or
|
|
iii)
|
the Company is allowed to continue to market the morselized products while it fulfills FDA imposed requirements which were
received prior to May 5, 2017 in lieu of the FDA exercising its enforcement discretion.
|
In January 2014, the Company entered into
a license, market development and commercialization agreement with BioD which granted to the Company an exclusive, perpetual, royalty-bearing
license to use and sell BioD’s human placental based products for dermal applications. Royalties were payable to BioD under
the agreement based upon a low double digit percentage of net sales. During 2016 the Company incurred royalties of $211,429 through
August 5, 2016 and $199,395 for the nine months ended September 30, 2015. Effective with the Company’s August 5, 2016 acquisition
of BioD, the agreement was terminated. In connection with the acquisition, the Company recognized $903,408 as additional purchase
consideration reflecting the settlement of the pre-existing relationship.
|
4.
|
Restructuring and Other Charges
|
During the fourth quarter of 2015, the Company
implemented a plan to reduce its cost structure in consideration of prospective market expectations for the business, coupled with
the decision to move the business towards positive cash flow and profitability as soon as feasibly possible. The restructuring
plan included the elimination of 39 positions and certain other non-employee discretionary costs.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
Effective December 21, 2015, the Company’s
Chairman of the Board, President and Chief Executive Officer (“CEO”) departed from the Company. On February 26, 2016,
the former CEO resigned from the Company’s Board of Directors. While a national recruiting search for a permanent CEO is
in process, the former lead director of the Company has assumed the role of Executive Chairman and Interim CEO.
A summary of the Company’s restructuring
activity for the nine months ended September 30, 2016 is as follows:
|
|
CEO
|
|
|
Other Employees
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
$
|
1,252,105
|
|
|
$
|
826,932
|
|
|
$
|
2,079,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges during period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Payments during period
|
|
|
(506,366
|
)
|
|
|
(816,544
|
)
|
|
|
(1,322,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016
|
|
$
|
745,739
|
|
|
$
|
10,388
|
|
|
$
|
756,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(599,008
|
)
|
|
|
(10,388
|
)
|
|
|
(609,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term portion
|
|
$
|
146,731
|
|
|
$
|
-
|
|
|
$
|
146,731
|
|
|
5.
|
Cash and Cash Equivalents and Investments
|
Cash and Cash Equivalents
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. The Company maintains cash and cash equivalents and money market mutual funds with various domestic and foreign
financial institutions within the ordinary course of business, which at times may exceed jurisdictional insurance limits. Money
market mutual funds consist of funds deposited into mutual funds investing in U.S. government and non-government obligations.
Investments in Debt Securities
Investments in debt securities include certificates
of deposit purchased with an original maturity greater than three months which are deposited in various U.S. financial institutions
and are fully insured by the Federal Deposit Insurance Corporation. The Company intends to hold the certificates of deposit to
maturity and accordingly these investments are carried at amortized cost. Investments in debt securities with maturities greater
than one year from the balance sheet date are classified as a long-term asset.
Investment in Equity Securities
In 2013 and 2014, the Company purchased
an aggregate 2,802,277 shares of Comvita Limited (“Comvita”) common stock for $8,483,693. In May of 2016, the Company
received net proceeds of $7,594,158 from the sale of 925,000 shares of Comvita stock resulting in a gain of $4,740,136 which is
included in other income in the consolidated statement of operations. The Company utilized the specific identification method to
determine the cost basis of the shares of Comvita stock that were sold. At September 30, 2016, the remaining 1,877,277 shares of
Comvita common stock owned by the Company represented approximately 5.0% of Comvita’s outstanding shares.
The investment in Comvita common stock is
classified as an available-for-sale investment carried at fair value, with any unrealized gains and losses associated with the
investment included in accumulated other comprehensive income (loss) and any dividends received recorded in other income, net in
the Consolidated Statements of Operations. The investment is classified as a long term asset. As of September 30, 2016, the fair
value of the Comvita common stock was $15,426,148 as determined by the quoted market price of the outstanding stock on the New
Zealand stock exchange. The cumulative increase in fair value of $9,796,477 has been recorded in accumulated other comprehensive
income, net of taxes.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
Cash and cash equivalents and
investments at September 30, 2016 and December 31, 2015 consisted of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
20,974,166
|
|
|
$
|
10,784,522
|
|
Cash equivalents
|
|
|
5.000.000
|
|
|
|
5,029,683
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
25,974,166
|
|
|
|
15,814,205
|
|
|
|
|
|
|
|
|
|
|
Investments in debt securities
|
|
|
15,000,000
|
|
|
|
25,003,990
|
|
Investment in equity securities
|
|
|
15,426,148
|
|
|
|
16,110,178
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
30,426,148
|
|
|
|
41,114,168
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and investments
|
|
$
|
56,400,314
|
|
|
$
|
56,928,373
|
|
The following table provides fair
value information as of September 30, 2016:
|
|
|
|
|
Fair Value Measurements, Using
|
|
|
|
Total
carrying
value as of
September 30, 2016
|
|
|
Quoted prices
in active
markets
(Level 1)
|
|
|
Significant other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
25,974,166
|
|
|
$
|
25,974,166
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in debt securities
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
|
-
|
|
|
|
-
|
|
Investment in equity securities
|
|
|
15,426,148
|
|
|
|
15,426,148
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
30,426,148
|
|
|
|
30,426,148
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,400,314
|
|
|
$
|
56,400,314
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table provides fair value
information as of December 31, 2015:
|
|
|
|
|
Fair Value Measurements, Using
|
|
|
|
Total carrying
value as of
December 31, 2015
|
|
|
Quoted prices
in active
markets
(Level 1)
|
|
|
Significant other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,814,205
|
|
|
$
|
15,814,205
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in debt securities
|
|
|
25,003,990
|
|
|
|
25,003,990
|
|
|
|
-
|
|
|
|
-
|
|
Investment in equity securities
|
|
|
16,110,178
|
|
|
|
16,110,178
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
41,114,168
|
|
|
|
41,114,168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,928,373
|
|
|
$
|
56,928,373
|
|
|
$
|
-
|
|
|
$
|
-
|
|
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
Level 1 inputs are quoted prices (unadjusted)
in active markets for identical assets. Level 2 inputs are quoted prices for similar assets in active markets or inputs that are
observable for the asset, either directly or indirectly through market corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets at fair value.
A financial asset’s classification is determined based on the lowest level input that is significant to the fair value measurement.
Inventories include the following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Finished goods and available tissue for distribution
|
|
$
|
8,302,804
|
|
|
$
|
11,039,877
|
|
Goods and tissue in process
|
|
|
974,061
|
|
|
|
346,233
|
|
Packaging materials
|
|
|
1,489,483
|
|
|
|
1,152,993
|
|
Raw materials
|
|
|
3,626,825
|
|
|
|
3,811,910
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
14,393,173
|
|
|
$
|
16,351,013
|
|
Notes receivable include the following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
10% interest bearing note receivable in monthly installments of $87,121 through September 2019 received in connection with FAD divestiture
|
|
$
|
2,700,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing notes receivable in monthly installments of $10,556 through June 2019 assumed in connection with the BioD acquisition
|
|
|
325,556
|
|
|
|
-
|
|
|
|
$
|
3,025,556
|
|
|
|
-
|
|
Less current portion
|
|
|
(938,677
|
)
|
|
|
-
|
|
|
|
$
|
2,086,879
|
|
|
$
|
-
|
|
|
8.
|
Accrued Expenses and Other Liabilities
|
Accrued expenses and other liabilities include
the following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Accrued compensation and related taxes
|
|
$
|
3,964,908
|
|
|
$
|
2,298,080
|
|
Liabilities related to restructuring (Note 4)
|
|
|
756,127
|
|
|
|
2,079,037
|
|
Accrued sales incentives and other fees
|
|
|
574,620
|
|
|
|
385,573
|
|
Accrued royalties
|
|
|
482,025
|
|
|
|
510,901
|
|
Other
|
|
|
2,914,373
|
|
|
|
2,038,478
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other liabilities
|
|
$
|
8,692,053
|
|
|
$
|
7,312,069
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(8,193,998
|
)
|
|
|
(6,297,691
|
)
|
|
|
|
|
|
|
|
|
|
Long term liabilities
|
|
$
|
498,055
|
|
|
$
|
1,014,378
|
|
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
Preferred Stock
Subsequent to the issuances
of its preferred stock, the Company has undertaken a number of common stock offerings that impact the preferred stock conversion
ratios. As of September 30, 2016, current Series A and B preferred stockholders holding 73,332 preferred shares are entitled to
receive an aggregate of 123,114 shares (49,782 additional shares) of common stock upon conversion of their holdings, as a result
of the conversion ratio adjustments. The number of shares issuable upon conversion is subject to further adjustment should the
Company in the future undertake one or more offerings of its common stock at less than the prevailing market price.
Upon conversion, the
49,782 incremental shares associated with the conversion ratio adjustments will be recorded to common stock at par with the offset
to additional paid in capital as all of the convertible preferred stock was issued prior to the November 16, 2000 effective date
of certain provisions of Accounting Standards Codification 470 (formerly Emerging Issues Task Force Issue No. 00-27
Application
of Issue No. 98-5 to Certain Convertible Instruments)
.
Common Stock
During the nine months ended September 30,
2016, the Company issued 2,392,355 shares of common stock consisting of: 1,751,183 shares issued in conjunction with the acquisition
of BioD, 551,665 in connection with a private placement, 84,874 shares of common stock in connection with the vesting of 90,450
restricted share units, and 4,633 shares upon the exercise of stock options for which the Company received $12,300.
On August 5, 2016, the Company received
net cash proceeds of $2,233,567 (net of $66,433 for expenses) from the private placement of 551,665 shares of common stock to former
members of BioD and one BioD employee. The Company will use the net proceeds for general corporate purposes.
Stock Purchase Warrants
At September 30, 2016, there were no warrants
outstanding. During the nine months ended September 30, 2016 no warrants were exercised, 1,705,330 warrants were forfeited and
50,000 warrants granted to BioD in connection with the signing of a license agreement (see note 3) were cancelled in connection
with the BioD acquisition.
Equity Based Compensation
Under the Derma Sciences, Inc. 2012 Equity
Incentive Plan (the “EIP Plan”) the Company is authorized to issue 6,000,000 shares of common stock. The EIP Plan authorizes
the Company to grant equity-based and cash-based incentive compensation in the form of stock options, stock appreciation rights,
restricted shares, restricted share units, other share-based awards and cash-based awards, for the purpose of providing the Company’s
employees, non-employee directors and consultants with incentives and rewards for performance. At September 30, 2016, options to
purchase 2,708,002 shares and 343,050 restricted share units were issued and outstanding under the EIP Plan and 1,725,781 shares
were available for grant.
Stock Options
The EIP Plan permits
the granting of both incentive and nonqualified stock options to employees and nonqualified stock options to non-employee directors
and consultants of the Company. The option exercise price may not be less than the fair market value of the stock on the date of
the grant of the option. The duration of each option may not exceed 10 years from the date of grant.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
For the three and nine
months ended September 30, 2016 and 2015, the fair value of each option award was estimated at the date of grant using the Black-Scholes
option-pricing model. The weighted-average assumptions used were as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.34
|
%
|
|
|
1.85
|
%
|
|
|
1.41
|
%
|
|
|
1.61
|
%
|
Volatility factor
|
|
|
43.8
|
%
|
|
|
45.4
|
%
|
|
|
43.9
|
%
|
|
|
45.7
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected option life (years)
|
|
|
3.69
|
|
|
|
6.25
|
|
|
|
5.10
|
|
|
|
5.70
|
|
The risk-free rate utilized represents the
U.S. treasury yield curve rate for the expected option life at the time of grant. The volatility factor was calculated based on
the Company’s historical stock price volatility equal to the expected life of the option at the grant date. The dividend
yield is 0% since the Company does not anticipate paying dividends in the near future. The simplified expected option life method
is used to determine the expected option life for Company employees and directors while the contractual option life period is utilized
for consultants.
Based on the Company’s historical
experience of options that were forfeited before becoming fully vested, the Company has assumed an annualized forfeiture rate of
1.0% for all options. The Company will record additional expense if the actual forfeiture rate is lower than estimated, and will
record a recovery of prior expense if the actual forfeiture rate is higher than estimated.
A summary of the Company’s stock option
activity and related information for the nine months ended September 30, 2016 is as follows:
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding – January 1, 2016
|
|
|
2,301,760
|
|
|
$
|
9.04
|
|
Granted
|
|
|
813,660
|
|
|
$
|
3.86
|
|
Forfeited
|
|
|
(130,862
|
)
|
|
$
|
5.87
|
|
Exercised
|
|
|
(7,475
|
)
|
|
$
|
3.23
|
|
Expired
|
|
|
(269,081
|
)
|
|
$
|
9.26
|
|
|
|
|
|
|
|
|
|
|
Outstanding – September 30, 2016
|
|
|
2,708,002
|
|
|
$
|
7.63
|
|
|
|
|
|
|
|
|
|
|
Expected to vest – September 30, 2016
|
|
|
2,680,922
|
|
|
$
|
7.63
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2016
|
|
|
1,967,556
|
|
|
$
|
8.42
|
|
During the nine months ended September 30,
2016, the Company granted 611,260 service based options and 202,400 performance based options to Company employees. The weighted
average fair value per share of options granted during the nine months ended September 30, 2016 was $1.60.
During the nine months ended September 30,
2016, 7,475 stock options were exercised on a for-cash and cashless basis. A total of 4,633 shares of common stock were issued
in connection with the stock option exercises. The intrinsic value of options exercised in 2016 was $5,755.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
During the three and nine months ended September
30, 2016 and 2015, stock option compensation expense was recorded as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
26,406
|
|
|
$
|
23,740
|
|
|
$
|
87,170
|
|
|
$
|
109,047
|
|
Selling, general and administrative expenses
|
|
|
117,094
|
|
|
|
518,336
|
|
|
|
810,831
|
|
|
|
1,828,480
|
|
Discontinued operations
|
|
|
(28,333
|
)
|
|
|
23,258
|
|
|
|
(7,940
|
)
|
|
|
106,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock option compensation expense
|
|
$
|
115,167
|
|
|
$
|
565,334
|
|
|
$
|
890,061
|
|
|
$
|
2,043,765
|
|
As of September 30, 2016, there was $1,034,531
of unrecognized compensation cost related to nonvested service based awards and $158,868 related to nonvested performance based
awards. These costs are expected to be recognized over the options’ remaining weighted average vesting period of 2.0 years
and 1.6 years for the service and performance based awards, respectively.
Restricted Share Units
The Company has issued service, performance
and market-based restricted share units to employees, consultants and directors of the Company. Expense for restricted share awards
is amortized on a straight-line basis over the awards’ vesting period. The fair value of service and performance awards are
determined using the quoted market price of the Company’s common stock on the date of grant, while market based performance
awards are valued using a binomial/lattice pricing mode.
The following table summarizes the restricted
share unit activity for the period:
|
|
Number of
Units
|
|
|
Weighted Average
Fair Value
|
|
Unvested – January 1, 2016
|
|
|
152,750
|
|
|
$
|
8.59
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
301,800
|
|
|
$
|
4.63
|
|
Vested
|
|
|
(90,450
|
)
|
|
$
|
7.50
|
|
Cancelled
|
|
|
(21,050
|
)
|
|
$
|
7.00
|
|
Unvested – September 30, 2016
|
|
|
343,050
|
|
|
$
|
5.49
|
|
In connection with the vesting of restricted
share unit awards during the nine months ended September 30, 2016, 5,576 common stock shares with a fair value of $18,010 were
withheld in satisfaction of employee tax withholding obligations.
During the three months ended September
30, 2016 and 2015, restricted share unit compensation expense was $257,833 and $652,286, respectively, and for the nine months
ended September 30, 2016 and 2015 restricted share unit compensation expense was $807,589 and $1,971,993, respectively, and included
in selling, general and administrative expense.
As of September 30, 2016, the intrinsic
value of the non-vested awards was $1,602,044 and there was $1,213,469 of unrecognized compensation cost related to unvested restricted
share unit awards. These costs are expected to be recognized over the restricted shares units’ remaining weighted average
vesting period of 1.7 years.
In July of 2016, in consideration of prior
service to the Company, the Company accelerated the vesting of all unvested stock options of a departing executive. An additional
$49,035 of stock based compensation expense was recognized during the three and nine months ended September 30, 2016 as a result
of the departure.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
In May of 2016, in consideration of prior
service to the Company, the Company granted two retiring directors 30,000 stock options, and accelerated the vesting of any of
their unvested stock options and restricted share units, and extended the expiration date of their vested stock options from 90
days from the date of their separation from the Company to the earlier of (i) 36 months from the separation date or (ii) the awards’
original expiration date. An additional $48,733 of stock based compensation expense was recognized during the nine months ended
September 30, 2016 and included in selling, general and administrative expense in connection with the retirements.
In May of 2015, in consideration of prior
service to the Company, the Company granted a retiring director 15,000 stock options, accelerated the vesting of his unvested stock
options and restricted share units, and extended the expiration date of his vested stock options from 90 days from his retirement
date to the earlier of (i) 36 months from his retirement date or (ii) the awards’ original expiration date. An additional
$70,670 of stock based compensation expense was recognized during the nine months ended September 30, 2015 and included in selling,
general and administrative expense in connection with the retirement.
Shares Reserved for Future Issuance
At September 30, 2016, the Company had reserved
the following shares of common stock for future issuance:
Convertible preferred stock (series A – B)
|
|
|
73,332
|
|
Additional stock issuable related to conversion of preferred stock (series A – B)
|
|
|
49,782
|
|
Common stock options outstanding
|
|
|
2,708,002
|
|
Restricted share units outstanding
|
|
|
343,050
|
|
Common stock equivalents available for grant
|
|
|
1,725,781
|
|
|
|
|
|
|
Total common stock shares reserved
|
|
|
4,899,947
|
|
|
10.
|
Accumulated Other Comprehensive Income
|
The Company’s accumulated
other comprehensive income as of September 30, 2016 was as follows:
|
|
Foreign Currency Translation
Adjustments
|
|
|
Unrealized Gain on Equity Securities, Net of Taxes
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2016
|
|
$
|
555,938
|
|
|
$
|
4,716,970
|
|
|
$
|
5,272,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassification
|
|
|
575,471
|
|
|
|
4,332,818
|
|
|
|
4,908,289
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
(2,975,813
|
)
|
|
|
(2,975,813
|
)
|
Balance at September 30, 2016
|
|
$
|
1,131,409
|
|
|
$
|
6,073,975
|
|
|
$
|
7,205,384
|
|
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
|
|
Amount reclassified from accumulated other comprehensive income for the nine months ended
September 30, 2016
|
|
|
Affected line item in the consolidated statements
of operations
|
Unrealized gain on equity securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on equity securities
|
|
$
|
(4,758,636
|
)
|
|
Other income, net
|
Income tax provision
|
|
|
1,782,823
|
|
|
Income tax provision
|
Total reclassification
|
|
$
|
(2,975,813
|
)
|
|
|
The Company operates in two segments: advanced
wound care and traditional wound care. They are managed separately as each segment requires different technology, marketing and
sales strategies. Advanced wound care products principally consist of both novel and otherwise differentiated human placental based
products, dressings, and other medical devices designed to promote wound healing and/or prevent infection. Traditional wound care
products principally consist of commodity dressings, ointments, gauze bandages, adhesive bandages, wound closure strips and catheter
fasteners.
Advanced and traditional wound care products
are marketed globally to acute care, extended care, home health care, wound and burn care clinics and physician offices. The Company
utilizes a broad network of well-established distributors to deploy the majority of its products to end users. A smaller portion
of the Company’s products are sold directly to care providers and through retail. The advanced and traditional wound care products
are either manufactured internally or sourced from third party suppliers. The majority of marketing expenses are deployed in support
of advanced wound care products with traditional wound care products requiring more limited support. The Company utilizes direct
and independent sales representatives, distributor relationships and contractual relationships with buying groups and wound care
service providers to sell its products. The Company uses direct sales representatives for medical device sales, and independent
sales representatives for sales of placental tissue products in the U.S. In Canada and the U.K., the Company relies on direct sales
representatives for both advanced and traditional wound care products.
Each operating segment is managed at the
segment contribution level consisting of gross profit minus direct expense consisting of distribution, marketing, sales, research
and development, intangible amortization expenses, change in fair value of contingent consideration, and acquisition related expenses.
The advanced wound care segment consists of two reporting units, while the traditional wound care segment consists of one reporting
unit. Expenses are allocated directly by reporting unit to the extent possible. Expenses common to operating segments/reporting
units are allocated consistently using activity based assumptions. The aggregation or allocation of indirect expenses by segment/reporting
unit is not practical.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
Operating segment sales, gross profit, segment
contribution and other related information for 2016 and 2015 from continuing operations were as follows:
Three Months Ended September 30, 2016
|
|
|
Advanced
Wound Care
|
|
|
Traditional
Wound Care
|
|
|
Other
|
|
|
Total
Company
|
|
Net sales
|
|
$
|
15,789,683
|
|
|
$
|
6,019,843
|
|
|
$
|
-
|
|
|
$
|
21,809,526
|
|
Gross profit
|
|
|
9,419,831
|
|
|
|
1,286,631
|
|
|
|
-
|
|
|
|
10,706,462
|
|
Direct expense (1)
|
|
|
(12,744,522
|
)
|
|
|
(425,253
|
)
|
|
|
-
|
|
|
|
(13,169,775
|
)
|
Segment contribution
|
|
$
|
(3,324,691
|
)
|
|
$
|
861,378
|
|
|
|
-
|
|
|
|
(2,463,313
|
)
|
Indirect expenses, net
|
|
|
|
|
|
|
|
|
|
$
|
(2,109,986
|
)
|
|
|
(2,109,986
|
)
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,573,299
|
)
|
Three Months Ended September 30, 2015
|
Net sales
|
|
$
|
11,348,591
|
|
|
$
|
6,438,936
|
|
|
$
|
-
|
|
|
$
|
17,787,527
|
|
Gross profit
|
|
|
5,496,935
|
|
|
|
1,798,660
|
|
|
|
-
|
|
|
|
7,295,595
|
|
Direct expense
|
|
|
(7,957,641
|
)
|
|
|
(766,150
|
)
|
|
|
-
|
|
|
|
(8,723,791
|
)
|
Segment contribution
|
|
$
|
(2,460,706
|
)
|
|
$
|
1,032,510
|
|
|
|
-
|
|
|
|
(1,428,196
|
)
|
Indirect expenses, net
|
|
|
|
|
|
|
|
|
|
$
|
(3,245,845
|
)
|
|
|
(3,245,845
|
)
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,674,041
|
)
|
Nine Months Ended September 30, 2016
|
|
|
Advanced
Wound Care
|
|
|
Traditional
Wound Care
|
|
|
Other
|
|
|
Total
Company
|
|
Net sales
|
|
$
|
37,364,124
|
|
|
$
|
18,161,608
|
|
|
$
|
-
|
|
|
$
|
55,525,732
|
|
Gross profit
|
|
|
20,655,523
|
|
|
|
4,115,980
|
|
|
|
-
|
|
|
|
24,771,503
|
|
Direct expense (1)
|
|
|
(24,987,258
|
)
|
|
|
(1,483,895
|
)
|
|
|
-
|
|
|
|
(26,471,153
|
)
|
Segment contribution
|
|
$
|
(4,331,735
|
)
|
|
$
|
2,632,085
|
|
|
|
-
|
|
|
|
(1,699,650
|
)
|
Indirect expenses, net
|
|
|
|
|
|
|
|
|
|
$
|
(3,257,218
|
)
|
|
|
(3,257,218
|
)
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,956,868
|
)
|
Nine Months Ended September 30, 2015
|
Net sales
|
|
$
|
31,411,631
|
|
|
$
|
19,960,008
|
|
|
$
|
-
|
|
|
$
|
51,371,639
|
|
Gross profit
|
|
|
15,260,095
|
|
|
|
5,801,081
|
|
|
|
-
|
|
|
|
21,061,176
|
|
Direct expense
|
|
|
(25,173,533
|
)
|
|
|
(2,290,675
|
)
|
|
|
-
|
|
|
|
(27,464,208
|
)
|
Segment contribution
|
|
$
|
(9,913,438
|
)
|
|
$
|
3,510,406
|
|
|
|
-
|
|
|
|
(6,403,032
|
)
|
Indirect expenses, net
|
|
|
|
|
|
|
|
|
|
$
|
(10,697,366
|
)
|
|
|
(10,697,366
|
)
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(17,100,398
|
)
|
(1)
The advanced wound care segment includes acquisition related costs of $2,734,653 and $2,892,713
and changes in fair value of contingent consideration of $370,000 and $370,000 for the three and nine months ended September 30,
2016, respectively.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
The following table presents net sales by location of entity:
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
|
2015
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
83
|
%
|
|
|
84
|
%
|
|
United States
|
|
|
80
|
%
|
|
|
84
|
%
|
Canada
|
|
|
11
|
%
|
|
|
11
|
%
|
|
Canada
|
|
|
13
|
%
|
|
|
11
|
%
|
Rest of World
|
|
|
6
|
%
|
|
|
5
|
%
|
|
Rest of World
|
|
|
7
|
%
|
|
|
5
|
%
|
For the three months ended September 30,
2016 and 2015, the Company had a major Canadian customer comprising 11% and 11%, respectively, of consolidated net sales. For the
nine months ended September 30, 2016 and 2015, this same customer comprised 13% and 11%, respectively, of consolidated net sales.
At September 30, 2016 and December 31, 2015 the Company was in a net asset and net liability position, respectively, to this customer
due to the timing of receivables and related rebate obligations.
The following table summarizes the
income tax provision and effective tax rate for continuing operations for the three and nine months ended September 30, 2016
and 2015:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
$
|
(31,315
|
)
|
|
$
|
(170,082
|
)
|
|
$
|
(260,190
|
)
|
|
$
|
(252,735
|
)
|
Deferred tax benefit
|
|
|
1,487,592
|
|
|
|
1,221,974
|
|
|
|
1,654,310
|
|
|
|
1,007,843
|
|
Income tax benefit (expense)
|
|
$
|
1,456,277
|
|
|
$
|
1,051,892
|
|
|
$
|
1,394,120
|
|
|
$
|
755,108
|
|
Effective tax rate
|
|
|
(24.2
|
%)
|
|
|
(18.4
|
%)
|
|
|
(22.0
|
%)
|
|
|
(4.2
|
%)
|
For the three months ended September 30,
2016, the Company recognized an income tax benefit consisting of a U.S. and foreign income tax benefit. For the nine months ended
September 30, 2016, the Company recognized income tax expense consisting of a U.S. tax benefit and foreign income tax expense.
The U.S. income tax benefit relates to the tax impact of the loss generated from continuing operations and the unrealized gain
on equity securities from accumulated other comprehensive income partially offset by the tax treatment of goodwill net of amortization
for financial reporting but not tax purposes of acquired identified intangible assets. The foreign income tax expense relates to
income taxes recognized as a result of income recognized by the Canadian operations and taxes paid on a dividend from the Comvita
investment.
For the three and nine months ended September
30, 2015, the Company recognized an income tax benefit consisting of a U.S. income tax benefit and a foreign income tax expense.
The U.S. income tax benefit relates to a reduction in the Company’s U.S. valuation allowance due to the tax impact of the
unrealized gain on equity securities included in accumulated other comprehensive income. The foreign income tax expense relates
to income taxes recognized as a result of income recognized by the Canadian operations and taxes paid on a dividend from the Comvita
investment.
|
13.
|
Commitments and Contingencies
|
Comvita Licensing Agreement
In February 2010, the Company entered into
a new agreement with Comvita (the “Comvita Agreement”) under which the Company received perpetual and exclusive worldwide
licensing rights for Manuka Honey based MEDIHONEY wound and skin care products for all markets outside of the consumer market.
The Comvita Agreement also provides that Comvita will serve as the Company’s supplier for Manuka Honey and will not provide
Manuka Honey to any other entities for use in the professional medical-surgical marketplace. The Comvita Agreement calls for graduated
royalty payments based on sales and milestone payments. The license rights may be terminated or rendered non-exclusive by Comvita
if the Company fails to meet certain minimum royalty requirements.
DERMA SCIENCES, INC. AND SUBSIDIARIES
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
Comvita is a stockholder of the Company.
The Company purchased $1,879,332 and $2,626,705 of medical grade honey from Comvita in the nine months ended September 30, 2016
and 2015, respectively. In addition, the Company incurred MEDIHONEY royalties of $1,136,498 and $1,086,392 in the nine months ended
September 30, 2016 and 2015, respectively. Amounts due to Comvita for raw material purchases and royalties totaled $973,156 and
$506,795 at September 30, 2016 and December 31, 2015, respectively.
Canadian Distribution Agreement
In May 2005, the Company entered into a
distribution agreement with a Canadian company to serve as the exclusive distributor of its products in Canada. The agreement also
appoints the distributor as the Company’s Canadian servicing agent to fulfill supply contracts held directly by the Company.
The agreement was amended to extend the term from September 1, 2016 through August 31, 2019. As part of the amendment, the Canadian
company became a non-exclusive distributor of the Company’s products.
The Company recognizes revenue under the
agreement when title and risk of loss pass to the distributor and collectability is reasonably assured, which is at the time product
is shipped to the distributor. Payment terms from the distributor are 0.9% 30 days, net 45 days. Either party has the right to
terminate the agreement when an event of default (as defined) has occurred with respect to the other party. The distributor is
entitled to continue to sell or otherwise dispose of all inventory owned by it from and after the date of contract expiration or
termination. If termination of the agreement is not occasioned by breach by the distributor, the distributor will be entitled on
notice to the Company to return saleable inventory (as defined) to the Company. At September 30, 2016, the distributor’s
inventory of Company products was approximately $2,050,000. Estimated returns are reserved at the time of sale. Since the inception
of the agreement, sales returns have been minimal.
Employment Agreement
In July 2016 the Company recognized compensation
expense included in selling, general and administrative expenses of $483,669 for a departed Company executive consisting of cash
based compensation of $434,634 payable through July 2017 and equity based compensation of $49,035.
Contingencies
On occasion, the Company is involved in
claims and other legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition
of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations,
or liquidity.
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
|
|
The $22,240 decrease in the trade rebate
reserve balance at September 30, 2016 from January 1, 2016 principally reflects the timing of rebate payments. There was no other
significant change in the nature of our business during the nine 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
|
|
$
|
44,396,549
|
|
|
$
|
40,808,203
|
|
|
$
|
3,588,346
|
|
|
$
|
-
|
|
|
$
|
3,588,346
|
|
|
|
8.8
|
%
|
|
|
-
|
%
|
|
|
8.8
|
%
|
Canada
|
|
|
7,267,720
|
|
|
|
7,167,593
|
|
|
|
472,583
|
|
|
|
(372,456
|
)
|
|
|
100,127
|
|
|
|
6.6
|
|
|
|
(5.2
|
)
|
|
|
1.4
|
%
|
International
|
|
|
3,861,463
|
|
|
|
3,395,843
|
|
|
|
858,689
|
|
|
|
(393,069
|
)
|
|
|
465,620
|
|
|
|
25.3
|
|
|
|
(11.6
|
)
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,525,732
|
|
|
$
|
51,371,639
|
|
|
$
|
4,919,618
|
|
|
$
|
(765,525
|
)
|
|
$
|
4,154,093
|
|
|
|
9.6
|
%
|
|
|
(1.5
|
)%
|
|
|
8.1
|
%
|
The increase in net sales by the U.S. entity
was driven by higher advanced wound care sales of $5.6 million, partially offset by a $2.0 million decrease in traditional wound
care sales. The increase in advanced wound care sales was due to the addition of $4.0 million BioD sales, with a $1.6 million or
5.9% increase in dermal advance wound care sales of TCC, AMNIO, and MEDIHONEY products, partially offset by lower ALGICEL and BIOGUARD
sales. The traditional wound care sales decrease in the U.S. was due to lower private label sales due to the loss of a significant
customer in 2015 as a result of industry consolidation and lower retail private label sales due to the non-recurrence of a significant
new product stocking order in 2015. The increase in net sales by the Canadian entity was driven by higher traditional wound care
sales partially offset by lower advanced wound care sales. Canadian entity traditional wound care sales were favorably impacted
by our non-exclusive distributor’s inventory rebalancing efforts. 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
|
|
$
|
37,364,124
|
|
|
$
|
31,411,631
|
|
|
$
|
6,334,990
|
|
|
$
|
(382,497
|
)
|
|
$
|
5,952,493
|
|
|
|
20.2
|
%
|
|
|
(1.2
|
)%
|
|
|
18.9
|
%
|
Traditional wound care
|
|
|
18,161,608
|
|
|
|
19,960,008
|
|
|
|
(1,415,372
|
)
|
|
|
(383,028
|
)
|
|
|
(1,798,400
|
)
|
|
|
(7.1
|
)
|
|
|
(1.9
|
)
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,525,732
|
|
|
$
|
51,371,639
|
|
|
$
|
4,919,618
|
|
|
$
|
(765,525
|
)
|
|
$
|
4,154,093
|
|
|
|
9.6
|
%
|
|
|
(1.5
|
)%
|
|
|
8.1
|
%
|
The advanced wound care sales increase was
due to the addition of BioD sales coupled with higher dermal advanced wound care sales of $2.0 million or 6.3% in the U.S., and
international. The decrease in traditional wound care sales was driven by lower U.S. private label and retail private label demand.
Gross Profit
|
|
|
|
|
|
|
|
$ Variance
|
|
|
% Variance
|
|
|
|
2016
|
|
|
2015
|
|
|
Non FX
|
|
|
FX
|
|
|
Total
|
|
|
Non FX
|
|
|
FX
|
|
|
Total
|
|
By Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced wound care
|
|
$
|
20,655,523
|
|
|
$
|
15,260,095
|
|
|
$
|
5,633,407
|
|
|
$
|
(237,979
|
)
|
|
$
|
5,395,428
|
|
|
|
36.9
|
%
|
|
|
(1.5
|
)%
|
|
|
35.4
|
%
|
Traditional wound care
|
|
|
4,115,980
|
|
|
|
5,801,081
|
|
|
|
(1,597,865
|
)
|
|
|
(87,236
|
)
|
|
|
(1,685,101
|
)
|
|
|
(27.5
|
)
|
|
|
(1.5
|
)
|
|
|
(29.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,771,503
|
|
|
$
|
21,061,176
|
|
|
$
|
4,035,542
|
|
|
$
|
(325,215
|
)
|
|
$
|
3,710,327
|
|
|
|
19.2
|
%
|
|
|
(1.5
|
)%
|
|
|
17.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced wound care
|
|
|
55.3
|
%
|
|
|
48.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional wound care
|
|
|
22.7
|
%
|
|
|
29.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
44.6
|
%
|
|
|
41.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in gross profit dollars for
the advanced wound care segment was driven by the addition of high margined BioD sales coupled with higher dermal advanced wound
care sales and margins. The increase in gross profit percentage for the advanced wound care segment was driven by sales mix and
higher dermal advanced wound care margins due to 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 unfavorable product mix, coupled with higher product and manufacturing costs.
Selling, General and Administrative Expenses
The following table highlights selling,
general and administrative expenses by function for the nine months ended September 30, 2016 versus 2015:
|
|
|
|
|
|
|
|
$ Variance
|
|
|
% Variance
|
|
|
|
2016
|
|
|
2015
|
|
|
Non FX
|
|
|
FX
|
|
|
Total
|
|
|
Non FX
|
|
|
FX
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
1,218,817
|
|
|
$
|
1,277,744
|
|
|
$
|
(44,758
|
)
|
|
$
|
(14,169
|
)
|
|
$
|
(58,927
|
)
|
|
|
(3.5
|
)%
|
|
|
(1.1
|
)%
|
|
|
(4.6
|
%)
|
Marketing
|
|
|
4,983,728
|
|
|
|
6,836,925
|
|
|
|
(1,841,774
|
)
|
|
|
(11,423
|
)
|
|
|
(1,853,197
|
)
|
|
|
(26.9
|
)
|
|
|
(0.2
|
)
|
|
|
(27.1
|
)
|
Sales
|
|
|
16,065,458
|
|
|
|
18,121,029
|
|
|
|
(1,916,885
|
)
|
|
|
(138,686
|
)
|
|
|
(2,055,571
|
)
|
|
|
(10.6
|
)
|
|
|
(0.8
|
)
|
|
|
(11.3
|
)
|
G&A
|
|
|
10,458,071
|
|
|
|
11,817,940
|
|
|
|
(1,271,129
|
)
|
|
|
(88,740
|
)
|
|
|
(1,359,869
|
)
|
|
|
(10.8
|
)
|
|
|
(0.8
|
)
|
|
|
(11.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,726,074
|
|
|
$
|
38,053,638
|
|
|
$
|
(5,074,546
|
)
|
|
$
|
(253,018
|
)
|
|
$
|
(5,327,564
|
)
|
|
|
(13.3
|
)%
|
|
|
(0.7
|
)%
|
|
|
(14.0
|
%)
|
The decrease in distribution expense was
related to lower operating costs due to the Company’s restructuring and overall expense reduction initiatives implemented
in the fourth quarter of 2015, partially offset by the addition of BioD distribution expenses.
The decrease in marketing expense reflected
lower compensation and benefits, equity-based compensation, travel expenses, consulting costs, promotional, product development,
and show costs, as a result of the Company’s restructuring and expense reduction initiatives, partially offset by unexpected
severance expense, and the addition of BioD marketing expenses.
The decrease in sales expense reflected
lower compensation and benefits, commissions, equity-based compensation, operating costs and travel expenses as a result of the
Company’s U.S. salesforce reduction, as well as lower samples, trade show, and meetings costs in connection with expense
reduction initiatives, partially offset by the addition of BioD sales expenses, higher volume driven group purchasing organization
fees and unexpected severance.
The decrease in general and administrative
expense reflected lower compensation and benefits, equity-based compensation, operating costs, travel expenses, accounting, legal,
and consulting fees, 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 additional BioD operating expenses, the fair value adjustment
of BioD contingent consideration and higher recruiting fees in connection with the search for a new CEO.
|
|
|
|
|
|
|
|
$ Variance
|
|
|
% Variance
|
|
|
|
2016
|
|
|
2015
|
|
|
Non FX
|
|
|
FX
|
|
|
Total
|
|
|
Non FX
|
|
|
FX
|
|
|
Total
|
|
By Entity Location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
$
|
28,867,979
|
|
|
$
|
33,378,153
|
|
|
$
|
(4,510,174
|
)
|
|
$
|
-
|
|
|
$
|
(4,510,174
|
)
|
|
|
(13.5
|
)%
|
|
|
-
|
%
|
|
|
(13.5
|
%)
|
Canada
|
|
|
2,520,712
|
|
|
|
3,160,091
|
|
|
|
(513,478
|
)
|
|
|
(125,901
|
)
|
|
|
(639,379
|
)
|
|
|
(16.2
|
)
|
|
|
(4.0
|
)
|
|
|
(20.2
|
)
|
International
|
|
|
1,337,383
|
|
|
|
1,515,394
|
|
|
|
(50,894
|
)
|
|
|
(127,117
|
)
|
|
|
(178,011
|
)
|
|
|
(3.4
|
)
|
|
|
(8.4
|
)
|
|
|
(11.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,726,074
|
|
|
$
|
38,053,638
|
|
|
$
|
(5,074,546
|
)
|
|
$
|
(253,018
|
)
|
|
$
|
(5,327,564
|
)
|
|
|
(13.3
|
)%
|
|
|
(0.7
|
)%
|
|
|
(14.0
|
%)
|
The decrease in expenses in the U.S. in
2016 reflected restructuring and expense reduction savings, partially offset by additional BioD operating expenses, unexpected
severance expense, the fair value adjustment for BioD contingent consideration and recruiting fees. The decrease in expenses in
Canada and International reflected restructuring and expense reduction savings.
|
|
|
|
|
|
|
|
$ Variance
|
|
|
% Variance
|
|
|
|
2016
|
|
|
2015
|
|
|
Non FX
|
|
|
FX
|
|
|
Total
|
|
|
Non FX
|
|
|
FX
|
|
|
Total
|
|
By Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced wound care
|
|
$
|
22,018,274
|
|
|
$
|
24,470,021
|
|
|
$
|
(2,307,526
|
)
|
|
$
|
(144,221
|
)
|
|
$
|
(2,451,747
|
)
|
|
|
(9.4
|
)%
|
|
|
(0.6
|
)%
|
|
|
(10.0
|
%)
|
Traditional wound care
|
|
|
1,483,895
|
|
|
|
2,290,675
|
|
|
|
(786,724
|
)
|
|
|
(20,056
|
)
|
|
|
(806,780
|
)
|
|
|
(34.3
|
)
|
|
|
(0.9
|
)
|
|
|
(35.2
|
)
|
Other
|
|
|
9,223,905
|
|
|
|
11,292,942
|
|
|
|
(1,980,296
|
)
|
|
|
(88,741
|
)
|
|
|
(2,069,037
|
)
|
|
|
(17.5
|
)
|
|
|
(0.8
|
)
|
|
|
(18.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,726,074
|
|
|
$
|
38,053,638
|
|
|
$
|
(5,074,546
|
)
|
|
$
|
(253,018
|
)
|
|
$
|
(5,327,564
|
)
|
|
|
(13.3
|
)%
|
|
|
(0.7
|
)%
|
|
|
(14.0
|
%)
|
Acquisition Related Expenses
During the nine months ended September
30, 2016, the Company incurred acquisition related transaction and transition expenses of $2,892,713 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 (Income) Expense, net
Other (income) expense, net increased
to income of $4,572,570 in 2016 from an expense of $159,533 in 2015 due principally to a $4,740,136 gain on the sale of Comvita
stock.
Income Tax Benefit
Income tax benefit increased $639,012
to $1,394,120 in 2016 from $755,108 in 2015 due principally to the tax impact of the loss generated from continuing operations
and the unrealized gain on equity securities from accumulated other comprehensive income partially offset by 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 nine months ended September
30, 2016, we generated a net loss from continuing operations of $4,956,868, or $0.19 per share (basic and diluted), compared to
a net loss from continuing operations of $17,100,398, or $0.66 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 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 nine months ended September
30, 2016, we generated net income from discontinued operations of $3,790,084, or $0.15 per share (basic and diluted), which included
a gain of $3,755,205 on the sale of the FAD business. For the nine months ended September 30, 2015 we generated a net loss of $11,757,692,
or $0.46 per share (basic and diluted) from discontinued operations comprised of a $13,231,893 loss from the DSC127 program and
a net income from FAD of $1,474,201.
Total Net Loss
For the nine months ended September
30, 2016, we generated a net loss of $1,166,784, or $0.04 per share (basic and diluted), compared to a net loss of $28,858,090,
or $1.12 per share (basic and diluted), in 2015.
Liquidity and Capital Resources
Cash Flow and Working Capital
At September 30, 2016 and December
31, 2015, we had cash and cash equivalents of $25,974,166 and $15,814,205, respectively. The $10,159,961 increase in cash and cash
equivalents reflected net cash provided by investing activities of $13,608,697, net cash provided by financing activities of $807,603
and the exchange rate effect on cash and cash equivalents which increased cash and cash equivalents by $329,042, partially offset
by cash used in operating activities of $4,585,381.
Net cash provided by investing
activities of $13,608,697 during the nine months ended September 30, 2016 included net cash provided from the sale and purchase
of investments of $17,598,148 (including $7,594,158 related to the sale of Comvita stock), net cash provided from the sale of the
FAD business of $9,521,415, and net cash provided from the proceeds of a note receivable of $248,000 partially offset by cash used
in the acquisition of BioD of $13,523,738 and capital expenditures of $235,128.
Net cash provided by financing
activities of $807,603 during the nine months ended September 30, 2016 reflected net cash provided by the net proceeds from the
issuance of common stock of $2,245,867, partially offset by net cash used in the payment of a line of credit assumed in the BioD
acquisition of $1,420,254 and net cash used in the payment of payroll withholding taxes related to stock-based compensation in
connection with net share settlements of $18,010.
Net cash used in operating activities
of $4,585,381 during the nine months ended September 30, 2016 resulted from $2,921,400 cash used in operations (net income plus
non-cash items) together with $1,663,981 cash used in the change in operating assets and liabilities. Higher accrued expenses and
accounts payable, partially offset by lower inventories led to the net cash used in the change in operating assets and liabilities.
Working capital decreased $41,894,128
at September 30, 2016 to $15,674,361 from $57,568,489 at December 31, 2015. This decrease principally reflected the current portion
of contingent consideration in connection with the BioD acquisition.
Prospective Assessment
Our strategy for building the
business is to continue to grow our higher margined AWC business segment while moving it to segment contribution profitability.
Our objective for the TWC business segment is to hold sales and segment contribution profitability steady. We continue to work
on our product pipeline to identify new products and product line extensions that are capable of contributing to future sales growth.
The objective of our Operations team is to find ways to maintain or reduce the cost of our products while optimizing the efficiency
and reliability of our global supply chain. Our goal is to hold selling, general and administrative expenses in proper balance
with our growth and financial objectives. We will continue to evaluate accretive external opportunities to leverage our core capabilities
for growth.
On August 5, 2016 we completed
the purchase of BioD, LLC a privately held high growth and high margin company engaged in the development and commercialization
of novel proprietary regenerative products derived from placental/birth tissues for use in a broad range of clinical applications.
Terms of the agreement called for the payment of initial consideration of $23,094,987 which was funded by cash of $13,897,112 and
stock valued at $9,197,875. The Company may become obligated to pay additional consideration of up to $56,761,691 based on the
achievement of regulatory milestones and year over year increases in BioD sales through June 30, 2018.
On September 1, 2016 we completed
the sale of our First Aid Division (“FAD”) for $9,670,995 in cash, plus a promissory note for $2,700,000 payable with
principal and interest over 36 months. The FAD had sales of approximately $16,700,000 in 2015. The sale removes a component from
our lower growth and lower margined TWC segment and provides us with capital to pursue our strategic objective of building our
higher growth, higher margin advanced wound care business.
Our AWC product business segment,
as a result of our acquisition of BioD in August 2016 now consisting of the legacy AWC products and BioD, has historically been
the beneficiary of most of our sales and marketing growth investment. In 2015, due to an assessment of existing and prospective
operating performance, it was decided that the legacy AWC business model was not sustainable in its present form. While our legacy
AWC sales continue to grow at above average market rates, our underlying operating cost base was too high. In the fourth quarter
of 2015, we restructured the AWC business with the objective of reducing the cost base in a manner designed to minimize its prospective
impact on the business. Going forward, we feel as a result of this restructuring we have achieved a better balance between projected
sales growth and the cost base required to support it, thus putting us in a better position to leverage prospective sales growth.
Our plan is to perpetuate this model going forward as we integrate the high growth and high margin BioD business into the Company.
We will continue to nurture our
TWC business segment utilizing the appropriate amount of personnel and financial resources to sustain it. Maintenance of this mostly
commodity product oriented business segment represents a challenge for us as we compete in a very competitive marketplace. While
this segment of our business represents a significant, albeit decreasing percentage of our overall sales and realizes lower gross
profit margins, it generates positive segment product contribution margin and cash flow. In September 2016, consistent with our
strategy to focus on our AWC business, we sold the FAD business which represented a significant portion of the TWC segment. The
remaining TWC segment will continue to contribute as it has in the past albeit on a smaller scale. Our goal is to retain the sales
and positive segment contribution to the extent possible going forward. If we have an opportunity to sell the business or a portion
thereof (similar to what happened with the FAD business), we will objectively evaluate it and act accordingly.
We believe we have sufficient
cash, cash equivalents and short-term investments on hand to meet our objectives going forward. Principally through continued AWC
segment growth and a stable TWC segment base, we expect the Company to be cash flow positive from operations commencing in the
fourth quarter of 2016, with continued improving financial performance thereafter. At September 30, 2016 we had $40,974,166 of
cash, cash equivalents and short-term investments on our balance sheet. In addition, we have a long-term equity investment worth
$15,426,148 at September 30, 2016 with one of our major suppliers, which represents an additional source of capital for the Company.
We believe that our working capital is sufficient to meet our ongoing operating requirements and to make the potential $56,761,691
of BioD contingent consideration payments. Furthermore, the Company has the option at its discretion to pay a portion of the contingent
consideration with stock valued at approximately $8,200,000 to $16,000,000 assuming a nine month 2016 stock trading range of $2.85
to $5.58. No significant capital expenditures are required over the foreseeable future. Significant discretionary capital spending,
if any, will be evaluated based on its return on investment and the availability of funds. Should we achieve our prospective sales
growth objectives, product license related milestone payments of up to $3,000,000 in total are anticipated in the next two to four
years. We have no debt and we anticipate only modest inflation related increases in our annual lease obligations going forward.
Should the need for capital arise, sources of capital may be available to us through asset based lending using our receivables
and inventory as collateral, through the sale of equity, or through the sale of a portion of our business.
Our overall objective is to build
a profitable business by continuing to progress the growth of our higher margined AWC business and holding our TWC business steady.
As needed, we will invest in our infrastructure to ensure we can continue to provide cost effective, quality products on time.
In addition, we will continue to evaluate accretive external opportunities to leverage our core competencies and capabilities for
growth. Our plan is to use cash on hand and cash flow provided from operations to fund this objective.
With the cash on hand, cash equivalents
and short-term investments as of September 30, 2016, we anticipate having sufficient liquidity to meet our existing operating and
product development needs for at least the next twelve months.
Our common stock is traded on
the NASDAQ Capital Market under the symbol “DSCI.” We have paid no cash dividends in respect of our common stock and
do not intend to pay cash dividends in the near future.
Additional Financial Information
Off-Balance Sheet Arrangements
As of September 30, 2016, except
for operating leases entered into in the normal course of business, we had no off-balance sheet arrangements.
Critical Accounting Policies
There have been no significant
changes in critical accounting policies from those disclosed in the 2015 Form 10-K.