10-Q 1 v422763_10q.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, DC 20549

 

 

FORM 10-Q

 

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission file number 1-31070

 

Derma Sciences, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   23-2328753
(State or other jurisdiction of Incorporation)   (IRS employer identification number)

 

214 Carnegie Center, Suite 300

Princeton, NJ 08540

(Address of principal executive offices)

 

(609) 514-4744

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ¨    No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Date:  November 5, 2015 Class: Common Stock, par value $.01 per share
    Shares Outstanding:  25,806,549

 

 

 

  

PART I – FINANCIAL INFORMATION

 

DERMA SCIENCES, INC.

 

FORM 10-Q

 

INDEX

 

Description   Page
     
Part I – Financial Information    
     
Item 1.  Financial Statements    
     
Consolidated Balance Sheets (Unaudited) – September 30, 2015 and December 31, 2014   2
     
Consolidated Statements of Comprehensive Loss (Unaudited) – Three months ended September 30, 2015 and September 30, 2014   3
     
Consolidated Statements of Comprehensive Loss (Unaudited) – Nine months ended September 30, 2015 and September 30, 2014   4
     
Consolidated Statements of Cash Flows (Unaudited) – Nine months ended September 30, 2015 and September 30, 2014   5
     
Notes to Consolidated Financial Statements (Unaudited)   6
     
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations   17
     
Item 3.  Quantitative and Qualitative Disclosures about Market Risk   26
     
Item 4.  Controls and Procedures   26
     
Part II - Other Information    
     
Item 1.  Legal Proceedings   27
     
Item 1A.  Risk Factors   27
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds   29
     
Item 3.  Defaults upon Senior Securities   29
     
Item 4.  Mine Safety Disclosures   29
     
Item 5.  Other Information   29
     
Item 6.  Exhibits   29

 

 1 

 

 

Part I – Financial Information

 

Item 1. Financial Statements.

 

DERMA SCIENCES, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets (Unaudited)

 

ASSETS 

September 30,

2015

   December 31,
2014
 
         
Current Assets          
Cash and cash equivalents  $14,431,513   $19,396,845 
Short-term investments   35,003,990    55,996,000 
Accounts receivable, net of allowances of $2,292,354 and $531,205, respectively   8,726,344    8,758,034 
Inventories   18,292,670    13,280,940 
Prepaid expenses and other current assets   1,597,733    3,411,934 
Total current assets   78,052,250    100,843,753 
Long-term investments   11,977,212    8,422,790 
Equipment and improvements, net of accumulated depreciation and amortization of $7,702,994 and $7,681,863, respectively   3,657,835    3,614,439 
Identifiable intangible assets, net of accumulated amortization of $12,869,566 and $10,631,372, respectively   10,577,310    12,815,504 
Goodwill   13,457,693    13,457,693 
Other assets   149,537    143,733 
Total assets  $117,871,837   $139,297,912 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities          
Accounts payable  $4,530,493   $5,058,892 
Accrued expenses and other current liabilities   6,216,346    6,452,358 
Total current liabilities   10,746,839    11,511,250 
Long-term liabilities   447,857    521,358 
Deferred tax liability   2,157,993    1,700,640 
Total liabilities   13,352,689    13,733,248 
           
Commitments and contingencies (notes 9 and 10)          
           
Stockholders’ Equity          
Convertible preferred stock, $.01 par value; shares authorized 1,468,750; issued and outstanding 73,332 at September 30, 2015 and December 31, 2014  (liquidation preference of $3,222,368 at September 30, 2015)   733    733 
Common stock, $.01 par value; shares authorized 50,000,000; issued and outstanding 25,806,549 at September 30, 2015 and 25,319,203 at December 31, 2014   258,065    253,192 
Additional paid-in capital   234,346,631    228,341,542 
Accumulated other comprehensive income   2,714,175    911,563 
Accumulated deficit   (132,800,456)   (103,942,366)
Total stockholders’ equity   104,519,148    125,564,664 
Total liabilities and stockholders’ equity  $117,871,837   $139,297,912 

 

See accompanying notes to consolidated financial statements.

 

 2 

 

  

DERMA SCIENCES, INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Loss (Unaudited)

 

   Three Months Ended September 30, 
   2015   2014 
Net Sales  $22,168,659   $20,169,129 
Cost of sales   13,732,417    13,809,872 
Gross Profit   8,436,242    6,359,257 
Operating Expenses          
Selling, general and administrative   12,778,336    13,012,520 
Research and development   4,972,278    4,444,368 
Total operating expenses   17,750,614    17,456,888 
Operating loss   (9,314,372)   (11,097,631)
Other expense, net   672,259    164,690 
Loss before income taxes   (9,986,631)   (11,262,321)
Income tax benefit   (1,023,829)   (14,573)
Net Loss   (8,962,802)   (11,247,748)
Other Comprehensive Income (Loss)          
Foreign currency translation adjustment   (97,663)   (100,998)
Unrealized gain (loss) on equity securities, net of taxes   2,154,280    (591,561)
Total other comprehensive income (loss)   2,056,617    (692,559)
Comprehensive Loss  $(6,906,185)  $(11,940,307)
Net loss per common share – basic and diluted  $(0.35)  $(0.45)
Shares used in computing net loss per common share – basic and diluted   25,806,549    25,247,565 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

  

DERMA SCIENCES, INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Loss (Unaudited)

 

   Nine Months Ended September 30, 
   2015   2014 
Net Sales  $64,223,675   $60,872,388 
Cost of sales   39,881,059    39,755,989 
Gross Profit   24,342,616    21,116,399 
Operating Expenses          
Selling, general and administrative   39,776,699    38,693,665 
Research and development   13,935,395    12,993,234 
Total operating expenses   53,712,094    51,686,899 
Operating loss   (29,369,478)   (30,570,500)
Other expense (income), net   159,533    (107,611)
Loss before income taxes   (29,529,011)   (30,462,889)
Income tax benefit   (670,921)   (258,324)
Net Loss   (28,858,090)   (30,204,565)
Other Comprehensive Income (Loss)          
Foreign currency translation adjustment   (356,126)   (185,860)
Unrealized gain (loss) on equity securities, net of taxes   2,158,738    (105,551)
Total other comprehensive income (loss)   1,802,612    (291,411)
Comprehensive Loss  $(27,055,478)  $(30,495,976)
Net loss per common share – basic and diluted  $(1.12)  $(1.24)
Shares used in computing net loss per common share – basic and diluted   25,707,314    24,347,155 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

DERMA SCIENCES, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Unaudited)

 

   Nine Months Ended September 30, 
   2015   2014 
Operating Activities          
Net loss  $(28,858,090)  $(30,204,565)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization of equipment and improvements   768,242    656,887 
Amortization of identifiable intangible assets   2,238,194    2,237,074 
Provision for bad debts   10,718    16,480 
Allowance for sales adjustments   156,911    13,035 
Provision for inventory obsolescence   (110,072)   152,373 
Deferred rent   (62,240)   (20,947)
Stock-based compensation   4,086,428    4,887,438 
Deferred income taxes   (923,656)   (78,347)
Changes in operating assets and liabilities:          
Accounts receivable   (158,845)   (214,614)
Inventories   (5,730,986)   1,029,782 
Prepaid expenses and other current assets   1,634,998    592,980 
Other assets   (11,588)   (8,232)
Accounts payable   (310,407)   1,426,546 
Accrued expenses and other current liabilities   (39,010)   589,228 
Net cash used in operating activities   (27,309,403)   (18,924,882)
Investing Activities          
Purchase of investments   (45,004,220)   (60,000,000)
Proceeds from sale of investments   65,996,230    35,229,000 
Purchase of equipment and improvements   (1,138,895)   (1,108,859)
Purchase of intangible assets   -    (1,250,000)
Net cash provided by (used in) investing activities   19,853,115    (27,129,859)
Financing Activities          
Proceeds from the sale of common stock, net of costs   -    80,616,032 
Proceeds from exercise of stock options and warrants   1,991,130    2,245,966 
Payment of withholding taxes related to employee stock-based compensation   (67,409)   (121,618)
Net cash provided by financing activities   1,923,721    82,740,380 
Effect of exchange rate changes on cash and cash equivalents   567,235    77,173 
Net (decrease) increase in cash and cash equivalents   (4,965,332)   36,762,812 
Cash and cash equivalents          
Beginning of period   19,396,845    6,501,586 
End of period  $14,431,513   $43,264,398 
Supplemental disclosures of cash flow information:          
Issuance of a warrant in connection with a licensing agreement  $-   $129,750 
           
Cash paid during the period for:          
Interest  $119   $7,785 

 

See accompanying notes to consolidated financial statements.

 

 5 

 

 

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”) is a tissue regeneration company focused on three segments of the wound care marketplace: advanced wound care, traditional wound care and pharmaceutical wound care products. The Company has one drug candidate that initiated its Phase 3 study during the first quarter of 2013. The Company markets its 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’s U.S. distribution facilities are located in St. Louis, Missouri and Houston, Texas. The Company utilizes third party distributors for distribution in Canada, Europe, Latin America, Asia and the Pacific. The Company has manufacturing facilities in 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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Information included in the consolidated balance sheet as of December 31, 2014 has been derived from the consolidated financial statements and footnotes thereto for the year ended December 31, 2014, 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, 2014.

 

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.

 

Revenue Recognition – Sales are recorded when product is shipped or title passes to customers and collectability is reasonably assured. Gross sales are adjusted for cash discounts, returns and allowances, trade rebates, distribution fees (in Canada) and other sales deductions in the same period that the related sales are recorded. Freight costs billed to and reimbursed by customers are recorded as a component of revenue. Freight costs to ship product to customers are recorded as a component of cost of sales.

 

Net 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, in the weighted average number of common shares outstanding for a period, if dilutive. The effects of the assumed exercise of warrants and stock options 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, 2015 and 2014 as the effect would be anti-dilutive.

 

 6 

 

 

DERMA SCIENCES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)

 

Potentially dilutive securities excluded as a result of the effects of being anti-dilutive are as follows:

 

   Three and Nine Months Ended
September 30,
 
   2015   2014 
         
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   674,500    744,850 
Warrants   1,755,330    2,143,584 
Stock options   2,472,491    2,268,730 
           
Total dilutive shares   5,025,435    5,280,278 

 

 

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 April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides criteria for customers in a cloud computing arrangement to use to determine whether the arrangement includes a license of software. The standard is effective for annual and interim periods in fiscal years beginning after December 15, 2015 for public business entities. Early adoption is permitted. The Company is evaluating the effect that ASU 2015-05 may have on its consolidated financial statements and related disclosures.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires an entity that uses the first in first out method for inventory to report inventory cost at the lower of cost or net realizable value versus the current measurement principle of lower of cost or market. The ASU requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the effect that ASU 2015-11 may have on its consolidated financial statements and related disclosures.

 

2.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 includes 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.

 

 7 

 

 

DERMA SCIENCES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)

 

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 conjunction with this investment, the Company’s chairman and chief executive officer was named to Comvita’s board of directors. At September 30, 2015, the 2,802,277 shares of Comvita common stock owned by the Company represented 7.1% 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 and any dividends received recorded in other income. The investment is classified as a long term asset. As of September 30, 2015, the fair value of the Comvita common stock was $11,977,212 as determined by the quoted market price of the outstanding stock on the New Zealand stock exchange. The cumulative increase in fair value from cost of $3,493,519 has been recorded in accumulated other comprehensive income, net of taxes.

 

Cash and cash equivalents and investments at September 30, 2015 and December 31, 2014 consisted of the following:

 

   September 30, 2015   December 31, 2014 
         
Cash  $14,401,827   $7,665,958 
Money market mutual funds   29,686    11,730,887 
           
Cash and cash equivalents   14,431,513    19,396,845 
           
Investments in debt securities   35,003,990    55,996,000 
Investment in equity securities   11,977,212    8,422,790 
           
Total investments   46,981,202    64,418,790 
           
Total cash and cash equivalents and investments  $61,412,715   $83,815,635 

 

The following table provides fair value information as of September 30, 2015:

 

       Fair Value Measurements, Using 
   Total carrying
value as of
September 30, 2015
  

Quoted prices
in active
markets
(Level 1)

  

Significant other
observable
inputs
(Level 2)

  

Significant
unobservable
inputs
(Level 3)

 
                 
Cash and cash equivalents  $14,431,513   $14,431,513   $-   $- 
Investments in debt securities   35,003,990    35,003,990    -    - 
Investment in equity securities   11,977,212    11,977,212    -    - 
                     
Total investments   46,981,202    46,981,202    -    - 
                     
Total  $61,412,715   $61,412,715   $-   $- 

 

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.

 

 8 

 

 

DERMA SCIENCES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)

 

3.Inventories

 

Inventories are valued at the lower of cost or market determined based on the first in first out method and include the following:

 

   September 30, 2015   December 31, 2014 
         
Finished goods  $13,549,321   $8,386,356 
Work in process   334,463    838,679 
Packaging materials   1,334,882    1,343,927 
Raw materials   3,074,004    2,711,978 
           
Total inventory  $18,292,670   $13,280,940 

 

4.Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities include the following:

 

   September 30, 2015   December 31, 2014 
         
Accrued compensation and related taxes  $2,208,264   $2,930,525 
Accrued Canadian sales rebate, net   -    633,162 
Accrued royalties   556,823    463,823 
Accrued sales incentives and other fees   556,244    557,918 
Accrued research and development   1,624,810    844,230 
Other   1,270,205    1,022,700 
           
Total accrued expenses and other current liabilities  $6,216,346   $6,452,358 

 

5.Stockholders’ Equity

 

Preferred Stock

 

Subsequent to the issuances of the preferred stock, the Company has undertaken a number of common stock offerings that impact the preferred stock conversion ratios. As of September 30, 2015, 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.

 

The 49,782 incremental shares associated with the conversion ratio adjustments will be recorded to common stock upon conversion 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, 2015, the Company issued 487,346 shares of common stock consisting of: 403,687 shares upon the exercise of stock purchase warrants and options for which the Company received $1,991,130; and 83,659 shares in connection with the vesting of 90,850 restricted share units.

 

 9 

 

 

DERMA SCIENCES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)

 

Stock Purchase Warrants

 

At September 30, 2015, the Company had warrants outstanding to purchase shares of the Company’s common stock consisting of the following:

 

Series  Number of Warrants   Exercise Price   Expiration Date
            
R   1,705,330   $9.90   June 22, 2016
S   50,000   $11.81   January 14, 2019
              
Total   1,755,330         

 

During the nine months ended September 30, 2015, a total of 326,933 warrants were exercised on a for cash basis consisting of 133,333 Series Q, 100,000 Series N, and 93,600 Series O warrants. A total of 326,933 shares of common stock were issued in connection with the warrant exercises. During the nine months ended September 30, 2015, a total of 6,821 warrants were forfeited consisting of 4,634 Series O warrants and 2,187 Series P warrants.

 

Equity Based Compensation

 

Under the 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, 2015, options to purchase 2,472,491 shares and 674,500 restricted share units were issued and outstanding under the EIP Plan and 1,822,455 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.

 

For the three and nine months ended September 30, 2015 and 2014, 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,
 
   2015   2014   2015   2014 
                 
Risk-free interest rate   1.85%   2.01%   1.61%   1.79%
Volatility factor   45.4%   61.0%   45.7%   63.2%
Dividend yield   0%   0%   0%   0%
Expected option life (years)   6.25    6.25    5.70    5.79 

 

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.

 

 10 

 

 

DERMA SCIENCES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)

 

A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2015 is as follows:

 

   Options   Weighted Average
Exercise Price
 
         
Outstanding – January 1, 2015   2,166,959   $9.03 
Granted   591,240   $8.67 
Forfeited   (126,144)  $10.32 
Exercised   (128,518)  $4.19 
Expired   (31,046)  $9.88 
           
Outstanding – September 30, 2015   2,472,491   $9.12 
           
Expected to vest – September 30, 2015   2,447,766   $9.12 
           
Exercisable at September 30, 2015   1,774,954   $8.60 

 

During the nine months ended September 30, 2015, the Company granted 433,240 service based options and 158,000 performance based options to Company employees and consultants. The weighted average fair value per share of options granted during the nine months ended September 30, 2015 was $3.85.

 

During the nine months ended September 30, 2015, 128,518 stock options were exercised on a for-cash and cashless basis. A total of 76,754 shares of common stock were issued in connection with the stock option exercises. The intrinsic value of options exercised in 2015 was $518,884.

 

During the three and nine months ended September 30, 2015 and 2014, stock option compensation expense was recorded as follows:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2015   2014   2015   2014 
                 
Cost of sales  $32,499   $28,453   $142,100   $137,757 
Selling, general and administrative expenses   523,403    620,560    1,848,049    2,456,718 
Research and development   9,432    20,518    53,616    132,431 
                     
Total stock option compensation  expense  $565,334   $669,531   $2,043,765   $2,726,906 

 

As of September 30, 2015, there was $2,529,937 of unrecognized compensation cost related to nonvested service based awards and $153,270 related to nonvested performance based awards. These costs are expected to be recognized over the options’ remaining weighted average vesting period of 1.77 years and 0.25 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 model.

 

 11 

 

  

DERMA SCIENCES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)

 

The following table summarizes the restricted share unit activity for the period:

 

   Number of
Units
   Weighted Average
Fair Value
 
Unvested – January 1, 2015   651,883   $8.47 
           
Granted   124,500    7.39 
Vested   (90,850)   10.22 
Forfeited   (11,033)   9.28 
           
Unvested – September 30, 2015   674,500   $8.03 

 

In connection with the vesting of restricted share unit awards during the nine months ended September 30, 2015, 7,191 common stock shares with a fair value of $67,409 were withheld in satisfaction of employee tax withholding obligations.

 

During the three months ended September 30, 2015 and 2014, restricted share unit compensation expense was $652,286 and $721,963, respectively, and for the nine months ended September 30, 2015 and 2014, restricted share unit compensation expense was $1,971,993 and $2,111,996, respectively, and included in selling, general and administrative expense.

 

As of September 30, 2015, there was $1,657,174 of unrecognized compensation cost related to unvested restricted share units. These costs are expected to be recognized over the restricted shares units’ remaining weighted average vesting period of 0.35 years.

 

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 was recognized during the nine months ended September 30, 2015 and included in selling, general and administrative expense in connection with the retirement.

 

During 2014, in consideration of a retiring director’s prior service to the Company, the Company accelerated the vesting of his unvested stock options and restricted share units scheduled to vest in 2014, and extended the expiration date of his vested stock options from 90 days from his retirement date to 24 months from his retirement date. An additional $48,536 of stock based compensation expense was recognized during the nine months ended September 30, 2014 and included in selling, general and administrative expense in connection with the retirement.

 

Shares Reserved for Future Issuance

 

At September 30, 2015, 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   2,472,491 
Common stock warrants outstanding   1,755,330 
Restricted share units outstanding   674,500 
Common stock equivalents available for grant   1,822,455 
      
Total common stock shares reserved   6,847,890 

 

 12 

 

 

DERMA SCIENCES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)

 

6.Accumulated Other Comprehensive Income

 

The Company’s accumulated other comprehensive income as of September 30, 2015 was as follows:

 

  

Foreign
Currency
Translation

Adjustments

   Unrealized
(Loss) Gain
on Equity
Securities
   Total 
             
Balance at January 1, 2015  $1,001,298   $(89,735)  $911,563 
                
Current period - other comprehensive (loss) income   (356,126)   2,158,738    1,802,612 
                
Balance at September 30, 2015  $645,172   $2,069,003   $2,714,175 

 

7.Operating Segments

 

The Company operates in three segments: advanced wound care, traditional wound care and pharmaceutical wound care products. 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 dressings, devices and skin substitutes designed to promote wound healing and/or prevent infection. Traditional wound care products principally consist of commodity related dressings, ointments, gauze bandages, adhesive bandages, wound closure strips, catheter fasteners and skin care products. The pharmaceutical wound care segment is focused solely on Aclerastide (formerly referred to as DSC127), a novel, first in class angiotensin peptide currently involved in a Phase III clinical trial for the treatment of diabetic foot ulcers.

 

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 sales are sold directly to care providers and through retail. The advanced and traditional wound care products are both manufactured internally and 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 limited support. The Company utilizes direct sales representatives, distributor relationships and contractual relationships with buying groups and wound care service providers to sell its products. Direct sales representatives are used solely in support of advanced wound care sales in the U.S. and the U.K. and for both advanced and traditional wound care products in Canada.

 

The pharmaceutical wound care segment is presently limited to the development of Aclerastide for diabetic foot ulcers and pre-clinical work on scar prevention.

 

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 and intangible amortization expenses. Expenses are allocated directly by segment to the extent possible. Expenses common to all three operating segments are allocated consistently using activity based assumptions. The aggregation or allocation of indirect expenses by segment is not practical.

 

 13 

 

 

DERMA SCIENCES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)

 

Operating segment sales, gross profit, segment contribution and other related information for 2015 and 2014 were as follows:

 

Three Months Ended September 30, 2015

 

   Advanced
Wound Care
   Traditional
Wound Care
   Pharmaceutical
Wound Care
   Other  

Total

Company

 
                     
Net sales  $11,348,591   $10,820,068   $-   $-   $22,168,659 
Gross profit   5,496,935    2,939,307    -    -    8,436,242 
Direct expense   (7,957,642)   (1,315,603)   (4,851,893)   -    (14,125,138)
Segment contribution  $(2,460,707)  $1,623,704   $(4,851,893)   -    (5,688,896)
Indirect expenses                 $(3,273,906)   (3,273,906)
                          
Net loss                      $(8,962,802)

 

Three Months Ended September 30, 2014

 

Net sales  $9,473,023   $10,696,106   $-   $-   $20,169,129 
Gross profit   3,830,878    2,528,379    -    -    6,359,257 
Direct expense   (7,594,811)   (1,321,202)   (4,361,081)   -    (13,277,094)
Segment contribution  $(3,763,933)  $1,207,177   $(4,361,081)   -    (6,917,837)
Indirect expenses                 $(4,329,911)   (4,329,911)
                          
Net loss                      $(11,247,748)

 

Nine Months Ended September 30, 2015

 

   Advanced
Wound Care
   Traditional
Wound Care
   Pharmaceutical
Wound Care
   Other   Total
Company
 
                     
Net sales  $31,411,631   $32,812,044   $-   $-   $64,223,675 
Gross profit   15,260,095    9,082,521    -    -    24,342,616 
Direct expense   (25,086,764)   (4,062,276)   (13,270,116)   -    (42,419,156)
Segment contribution  $(9,826,669)  $5,020,245   $(13,270,116)   -    (18,076,540)
Indirect expenses                 $(10,781,550)   (10,781,550)
                          
Net loss                      $(28,858,090)

 

Nine Months Ended September 30, 2014

 

Net sales  $26,637,772   $34,234,616   $-   $-   $60,872,388 
Gross profit   12,203,928    8,912,471    -    -    21,116,399 
Direct expense   (22,904,674)   (3,992,260)   (12,901,805)   -    (39,798,739)
Segment contribution  $(10,700,746)  $4,920,211   $(12,901,805)   -    (18,682,340)
Indirect expenses                 $(11,522,225)   (11,522,225)
                          
Net loss                      $(30,204,565)

 

The following table presents net sales by geographic region:

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2015   2014   2015   2014 
                 
United States   84%   82%   84%   80%
Canada   11%   13%   11%   15%
Other   5%   5%   5%   5%

 

 14 

 

 

DERMA SCIENCES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)

 

For the three months ended September 30, 2015 and 2014, the Company had a major Canadian customer comprising 11% and 13%, respectively, of consolidated net sales. For the nine months ended September 30, 2015 and 2014, the same customer comprised 11% and 15%, respectively, of consolidated net sales. At September 30, 2015 and December 31, 2014 the Company was in a net asset position and a net liability position, respectively, to this customer due to the timing of receivables and related rebate obligations.

 

8.Income Taxes

 

The following table summarizes the income tax benefit and effective tax rate for the three and nine months ended September 30, 2015 and 2014:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2015   2014   2015   2014 
                 
Current tax expense (benefit)  $170,082   $(155,738)  $252,735   $(179,977)
Deferred tax (benefit) expense   (1,193,911)   141,165    (923,656)   (78,347)
Income tax benefit  $(1,023,829)  $(14,573)  $(670,921)  $(258,324)
                     
Effective tax rate   (10.3)%   (0.1)%   (2.3)%   (0.8)%

 

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.

 

For the three and nine months ended September 30, 2014, the Company recognized an income tax benefit consisting of a foreign income tax benefit and a U.S. income tax expense. The foreign income tax benefit relates to an income tax benefit recognized as a result of the net loss incurred by the Canadian operations, partially offset by taxes paid on a dividend from the Comvita investment. The U.S. income tax expense relates to an increase in the Company’s U.S. valuation allowance to offset the tax impact of the unrealized loss on equity securities in accumulated other comprehensive income.

  

9.Comvita and BioDLogics License Agreements

 

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.

 

Comvita is a stockholder of the Company and its Chief Executive Officer serves on the Company’s Board of Directors. The Company purchased $2,626,705 and $1,332,800 of medical grade honey from Comvita in the nine months ended September 30, 2015 and 2014, respectively. In addition, the Company incurred MEDIHONEY royalties of $1,086,392 and $990,421 in the nine months ended September 30, 2015 and 2014, respectively. Amounts due to Comvita for raw material purchases and royalties totaled $660,585 and $625,947 at September 30, 2015 and December 31, 2014, respectively.

 

BioDLogics, LLC License Agreement

 

On January 14, 2014, the Company entered into a license, market development and commercialization agreement (the “Agreement”) with BioDLogics, LLC (“BioD”) relating to BioD’s human placental based products (the “Licensed Products”) and intellectual property related thereto.

 

 15 

 

 

DERMA SCIENCES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)

 

Under the Agreement, BioD granted to the Company an exclusive, perpetual, royalty-bearing license to use, offer for sale and sell, the Licensed Products in North America (the “Territory”), including the rights to sublicense solely as provided in the Agreement, for a broad range of dermal applications (the “Field”). During the term of the Agreement, the Company will be responsible for the sale and marketing of the Licensed Products in the Field throughout the Territory. As part of its commercialization efforts, the Company is required to fund clinical studies up to $2,000,000 in support of the Field pursuant to the Agreement. Through September 30, 2015, the Company has funded $1,143,755 as part of these commercialization efforts.

 

The Company paid BioD an initial license fee of $1,250,000 and granted BioD a warrant to purchase 100,000 shares of the Company’s common stock. One quarter (25%) of the warrant was exercisable immediately at a price of $11.81 per share, while the remaining 75% of the warrant becomes exercisable, if at all, upon the achievement of certain milestones. The warrant expires in January 2019 (note 5). The warrant was valued at $129,750 using the Black-Scholes option pricing model. Total consideration paid to BioD of $1,379,750 was recorded as an intangible asset in 2014 and is being amortized to cost of sales over an estimated useful life of seven years. In addition to the initial license fee and warrant, royalties are payable to BioD based upon a sliding scale of the Company’s net sales of Licensed Products within the Territory and declining as net sales increase. Royalty rates range from the low double digits and decline to the mid-single digits. The Company incurred BioD royalties of $227,662 and $26,444 in the nine months ended September 30, 2015 and 2014, respectively. The Agreement also requires the Company to make milestone payments to BioD of up to $19,750,000 based upon the achievement of certain development events and annual net sales levels.

 

The Agreement may be terminated as follows: (i) upon mutual agreement of the parties; (ii) by BioD if the Company challenges certain BioD patents or trade secrets; (iii) by BioD if the Company fails to meet the annual minimum net sales requirement under the Agreement, unless the Company pays the difference between the amount of royalties that would have been due had the minimum annual net sales for such year been achieved and royalty payments made by the Company with respect to net sales during such year plus any milestone payments payable; or (iv) by either party in the event of a material breach or certain events of bankruptcy. The annual minimum net sales requirement commenced in 2015, and is $2,000,000 for the contract year of April 1, 2015 through March 31, 2016.

 

10.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.

 

 16 

 

 

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, 2014 filed on March 11, 2015 (the “2014 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.

 

 17 

 

 

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

 

Overview

 

Operating Results of Three Months Ended September 30, 2015 and 2014

 

The following table highlights the operating results for the three months ended September 30, 2015 and 2014:

 

   Three Months Ended September 30,   Variance 
   2015   2014         
Gross sales  $24,966,719   $22,722,495   $2,244,224    9.9%
Sales adjustments   (2,798,060)   (2,553,366)   (244,694)   9.6%
Net sales   22,168,659    20,169,129    1,999,530    9.9%
Cost of sales   13,732,417    13,809,872    (77,455)   (0.6)%
Gross profit   8,436,242    6,359,257    2,076,985    32.7%
                     
Selling, general and administrative expense   12,778,336    13,012,520    (234,184)   (1.8)%
Research and development expense   4,972,278    4,444,368    527,910    11.9%
Other expense, net   672,259    164,690    507,569    * 
Total expenses   18,422,873    17,621,578    801,295    4.5%
                     
Loss before income taxes   (9,986,631)   (11,262,321)   1,275,690    (11.3)%
Income tax benefit   (1,023,829)   (14,573)   (1,009,256)   * 
Net loss  $(8,962,802)  $(11,247,748)  $2,284,946    (20.3)%

 

* – not meaningful

 

Sales Adjustments

 

Gross to net sales adjustments comprise the following:

 

   Three Months Ended September 30, 
   2015   2014 
Gross sales  $24,966,719   $22,722,495 
Trade rebates   (1,924,414)   (1,673,448)
Distributor fees   (234,817)   (249,354)
Sales incentives   (345,298)   (317,043)
Returns and allowances   (75,041)   (139,502)
Cash discounts   (218,490)   (174,019)
Total adjustments   (2,798,060)   (2,553,366)
Net sales  $22,168,659   $20,169,129 

 

Trade rebates increased in 2015 versus 2014 principally due to increases in sales subject to rebate in the U.S. and the rebate percentage as a result of changes in product mix towards higher rebated products in the U.S. and Canada, partially offset by lower sales in Canada subject to rebate. The decrease in distributor fees was commensurate with the decrease in Canadian sales upon which the fees were based. The increase in sales incentives reflected higher sales subject to incentives. The increase in cash discounts reflects an increase in sales of which receipt of payment resulted in a discount.

 

 18 

 

 

Rebate Reserve Roll-Forward

 

A roll-forward of the trade rebate reserves for the three months ended September 30, 2015 and 2014 were as follows:

 

   Three Months Ended September 30, 
   2015   2014 
Beginning balance – July 1  $1,890,707   $2,089,275 
Rebates paid   (2,077,353)   (1,861,316)
Rebates accrued   1,924,414    1,673,448 
Ending balance – September 30  $1,737,768   $1,901,407 

 

The $152,939 decrease in the trade rebate reserve balance at September 30, 2015 from July 1, 2015 principally reflected the timing of rebate payments, partially offset by increases in sales subject to rebate and the rebate percentage. There was no other significant change in the nature of our business during the three months ended September 30, 2015 as it relates to the accrual and subsequent payment of rebates.

 

Net Sales and Gross Margin

 

The following table highlights the net sales and gross margin for the three months ended September 30, 2015 versus 2014:

 

   Three Months Ended September 30,   Variance 
   2015   2014         
Net Sales  $22,168,659   $20,169,129   $1,999,530    9.9%
Cost of Sales   13,732,417    13,809,872    (77,455)   (0.6)%
Gross Profit  $8,436,242   $6,359,257   $2,076,985    32.7%
Gross Profit %   38.1%   31.5%          

 

Net sales increased $1,999,530, or 9.9% (increase of 12.6% adjusted for exchange) in 2015 versus 2014. Advanced wound care sales increased $1,875,568, or 19.8%, to $11,348,591 in 2015 from $9,473,023 in 2014. Traditional wound care sales increased $123,962, or 1.2%, to $10,820,068 in 2015 from $10,696,106 in 2014.

 

Net sales in the U.S. increased $2,126,682, or 12.9%, to $18,582,768 in 2015 from $16,456,086 in 2014. The increase was driven by higher advanced wound care sales of $1,756,787, or 21.4%, and higher traditional wound care sales of $369,905, or 7.4%. The U.S. advanced wound care sales increase was led by our Total Contact Casting (“TCC”), Amnio products, Medihoney, Bioguard, Xtrasorb and Dermagran, partially offset by lower sales of Algicel Ag. Medihoney sales exhibited modest growth despite the adverse impact of a change in its Medicare Part B reimbursement codes. The traditional wound care sales increase was driven principally by higher first aid division (“FAD”) sales, partially offset by lower private label sales. The 2015 first aid product sales were favorably impacted by sales to a new large U.S. retail pharmacy chain customer of approximately $550,000. The 2015 private label sales were unfavorably impacted by the loss of two distributor relationships due to industry consolidation. Net sales in Canada decreased $296,418, or 11.1% (growth of 5.9% adjusted for exchange), to $2,370,336 in 2015 from $2,666,754 in 2014. This decrease was driven principally by unfavorable foreign exchange of $454,248, partially offset by increased demand of $157,830. Net sales to the rest of the world increased $169,267, or 16.2% (23.7% increase adjusted for exchange), to $1,215,555 in 2015 from $1,046,288 in 2014. The increase was primarily driven by favorable demand, partially offset by unfavorable exchange.

 

Gross profit increased $2,076,985, or 32.7%, in 2015 versus 2014. Advanced wound care gross profit increased $1,666,057, or 43.5%, to $5,496,935 in 2015 from $3,830,878 in 2014. Traditional wound care gross profit increased $410,928, or 16.3%, to $2,939,307 in 2015 from $2,528,379 in 2014. The overall gross profit margin percentage increased to 38.1% in 2015 from 31.5% in 2014. The increase in gross profit dollars principally reflected an increase in U.S. sales and higher gross margin percentage. The increase in gross margin percentage principally reflected lower manufacturing costs due to improved manufacturing operational performance in 2015 and quality related inventory write-offs in the third quarter of 2014. The gross margin percentage was also impacted by favorable product mix and unfavorable foreign exchange.

 

 19 

 

 

 

Selling, General and Administrative Expenses

 

The following table highlights selling, general and administrative expenses by type for the three months ended September 30, 2015 versus 2014:

 

   Three Months Ended September 30,   Variance 
   2015   2014     
Distribution  $675,752   $641,607   $34,145    5.3%
Marketing   1,973,046    2,057,907    (84,861)   (4.1)%
Sales   6,310,311    5,939,320    370,991    6.2%
General and administrative   3,819,227    4,373,686    (554,459)   (12.7)%
Total  $12,778,336   $13,012,520   $(234,184)   (1.8)%

 

Selling, general and administrative expenses decreased $234,184, or 1.8%, in 2015 versus 2014.

 

Distribution expense increased $34,145, or 5.3% (8.7% adjusted for exchange), in 2015 versus 2014. The increase reflected higher operating costs related to higher unit volume and product mix.

 

Marketing expense decreased $84,861, or 4.1%, in 2015 versus 2014. The decrease was attributable to lower consulting and product development costs, partially offset by customer outreach costs principally in support of our advanced wound care products that were not incurred in 2014.

 

Sales expense increased $370,991, or 6.2% (6.9% adjusted for exchange), in 2015 versus 2014. The increase was principally attributable to incremental costs consisting of compensation and benefits, commissions, samples, product development costs and administrative fees associated with the expansion of our group purchasing program enrollment, partially offset by lower equity based compensation, and travel costs.

 

General and administrative expenses decreased $554,549, or 12.7% (11.3% adjusted for exchange), in 2015 versus 2014. The decrease was primarily related to due diligence fees incurred in 2014 that were not incurred in 2015, lower consulting costs and equity based compensation, partially offset by higher legal fees associated with issues surrounding Medicare reimbursement for Medihoney.

 

Research and Development Expense

 

Research and development expense increased $527,910 to $4,972,278 in 2015 from $4,444,368 in 2014. The increase principally reflected the ongoing Aclerastide Phase 3 related expenses, together with incremental pre-clinical DSC 127 scar prevention and Amnio post-marketing clinical studies.

 

Other Expense, net

 

Other expense, net increased $507,569 to $672,259 in 2015 from $164,690 in 2014 due principally to foreign exchange.

 

Income Tax Benefit

 

Income tax benefit increased $1,009,256 to $1,023,829 in 2015 from $14,573 in 2014 due principally to a U.S. deferred income tax benefit related to a reduction in the Company’s U.S. valuation allowance due to the tax impact of the unrealized gain on the Company’s investment in Comvita included in accumulated other comprehensive income, partially offset by tax expense incurred by the Company’s Canadian operations.

 

Net Loss

 

For the three months ended September 30, 2015, we generated a net loss of $8,962,802, or $0.35 per share (basic and diluted) in 2015, compared to a net loss of $11,247,748, or $0.45 per share (basic and diluted), in 2014.

 

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Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

 

Overview

 

Operating Results of Nine Months Ended September 30, 2015 and 2014

 

The following table highlights the operating results for the nine months ended September 30, 2015 and 2014:

 

   Nine Months Ended September 30,   Variance 
   2015   2014     
Gross sales  $72,500,415   $68,531,867   $3,968,548    5.8%
Sales adjustments   (8,276,740)   (7,659,479)   (617,261)   8.1%
Net sales   64,223,675    60,872,388    3,351,287    5.5%
Cost of sales   39,881,059    39,755,989    125,070    0.3%
Gross profit   24,342,616    21,116,399    3,226,217    15.3%
                     
Selling, general and administrative expense   39,776,699    38,693,665    1,083,034    2.8%
Research and development expense   13,935,395    12,993,234    942,161    7.3%
Other expense (income), net   159,533    (107,611)   267,144    * 
Total expenses   53,871,627    51,579,288    2,292,339    4.4%
                     
Loss before income taxes   (29,529,011)   (30,462,889)   933,878    (3.1)%
                     
 Income tax benefit   (670,921)   (258,324)   (412,597)    * 
Net loss  $(28,858,090)  $(30,204,565)  $1,346,475    (4.5)%

* – not meaningful

 

Sales Adjustments

 

Gross to net sales adjustments comprise the following:

 

   Nine Months Ended September 30, 
   2015   2014 
Gross sales  $72,500,415   $68,531,867 
Trade rebates   (5,679,379)   (5,269,469)
Distributor fees   (662,794)   (843,489)
Sales incentives   (1,005,167)   (707,415)
Returns and allowances   (342,797)   (350,270)
Cash discounts   (586,603)   (488,836)
Total adjustments   (8,276,740)   (7,659,479)
Net sales  $64,223,675   $60,872,388 

 

Trade rebates increased in 2015 versus 2014 principally due to increases in sales subject to rebate in the U.S. and the rebate percentage as a result of changes in product mix towards higher rebated products in the U.S. and Canada, partially offset by lower sales in Canada subject to rebate. The decrease in distributor fees was commensurate with the decrease in Canadian sales upon which the fees were based. The increase in sales incentives reflected higher U.S. sales subject to incentives. The increase in cash discounts reflects an increase in sales of which receipt of payment resulted in a discount.

 

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Rebate Reserve Roll-Forward

 

A roll-forward of the trade rebate reserves for the nine months ended September 30, 2015 and 2014 were as follows:

 

   Nine Months Ended September 30, 
   2015   2014 
Beginning balance – January 1  $1,880,525   $1,746,993 
Rebates paid   (5,822,136)   (5,115,055)
Rebates accrued   5,679,379    5,269,469 
Ending balance – September 30  $1,737,768   $1,901,407 

 

The $142,757 decrease in the trade rebate reserve balance at September 30, 2015 from January 1, 2015 principally reflected the timing of rebate payments, partially offset by increases in U.S. sales subject to rebate and the rebate percentage in the U.S. There was no other significant change in the nature of our business during the nine months ended September 30, 2015 as it relates to the accrual and subsequent payment of rebates.

 

Net Sales and Gross Margin

 

The following table highlights the net sales and gross margin for the nine months ended September 30, 2015 versus 2014:

 

   Nine Months Ended September 30,   Variance 
   2015   2014         
Net Sales  $64,223,675   $60,872,388   $3,351,287    5.5%
Cost of Sales  $39,881,059   $39,755,989   $125,070    0.3%
Gross Profit  $24,342,616   $21,116,399   $3,226,217    15.3%
Gross Profit %   37.9%   34.7%          

 

Net sales increased $3,351,287, or 5.5% (increase of 7.9% adjusted for exchange) in 2015 versus 2014. Advanced wound care sales increased $4,773,859, or 17.9%, to $31,411,631 in 2015 from $26,637,772 in 2014. Traditional wound care sales decreased $1,422,572, or 4.2%, to $32,812,044 in 2015 from $34,234,616 in 2014.

 

Net sales in the U.S. increased $4,988,035, or 10.2%, to $53,660,248 in 2015 from $48,672,213 in 2014. The increase was driven by higher advanced wound care sales of $4,649,301, or 19.6%, and higher traditional wound care sales of $338,734, or 0.2%. The U.S. advanced wound care sales increase was led by higher TCC, Amnio products, Medihoney, Xtrasorb and Bioguard sales, partially offset by lower Algicel Ag sales. Medihoney sales exhibited modest growth despite the adverse impact of a change in its Medicare Part B reimbursement codes. The traditional wound care sales increase was driven principally by higher FAD sales partially offset by lower private label sales. The first aid product sales were favorably impacted by sales to a new large U.S. retail pharmacy chain customer of approximately $2,150,000, including an initial stocking order of approximately $1,600,000. The 2015 private label sales were unfavorably impacted by the loss of two distributor relationships due to industry consolidation. Net sales in Canada decreased $1,900,058, or 21.0% (7.8% adjusted for exchange), to $7,167,593 in 2015 from $9,067,651 in 2014. This decrease was driven by a decrease in sales to our exclusive distributor of $705,732 along with unfavorable foreign exchange of $1,194,326. The lower sales to our exclusive distributor were unfavorably impacted by the distributor’s inventory rebalancing efforts. Net sales to the rest of the world increased $263,320, or 8.4% (16.8% adjusted for exchange), to $3,395,843 in 2015 from $3,132,523 in 2014. The increase was primarily driven by higher demand partially offset by unfavorable foreign exchange.

 

Gross profit increased $3,226,217, or 15.3%, in 2015 versus 2014. Advanced wound care gross profit increased $3,056,148, or 25.0%, to $15,260,076 in 2015 from $12,203,928 in 2014. Traditional wound care gross profit increased $170,069, or 1.9%, to $9,082,540 in 2015 from $8,912,471 in 2014. The overall gross profit margin percentage increased to 37.9% in 2015 from 34.7% in 2014. The increase in gross profit dollars principally reflected increased U.S. sales and higher gross profit percentage. The increase in gross profit percentage principally reflected lower manufacturing costs due to improved manufacturing operational performance and quality related inventory write-offs in 2014. The gross margin percentage was also impacted by favorable product mix and unfavorable foreign exchange.

 

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Selling, General and Administrative Expenses

 

The following table highlights selling, general and administrative expenses by type for the nine months ended September 30, 2015 versus 2014:

 

   Nine Months Ended September 30,   Variance 
   2015   2014     
Distribution  $2,025,351   $1,867,048   $158,303    8.5%
Marketing   6,836,924    6,360,476    476,448    7.5%
Sales   19,040,233    17,996,594    1,043,639    5.8%
General and administrative   11,874,191    12,469,547    (595,356)   (4.8)%
Total  $39,776,699   $38,693,665   $1,083,034    2.8%

 

Selling, general and administrative expenses increased $1,083,034, or 2.8%, in 2015 versus 2014.

 

Distribution expense increased $158,303, or 8.5% (11.1% adjusted for exchange), in 2015 versus 2014. The increase reflected higher operating costs related to higher unit volume and product mix.

 

Marketing expense increased $476,448, or 7.5% (7.8% adjusted for exchange), in 2015 versus 2014. The increase was attributable to higher compensation expense associated with the addition of three marketing, two clinical and one product development positions added in the first quarter of 2014, coupled with higher associated travel expenses, trade show, promotional and customer outreach costs principally in support of our advanced wound care products, partially offset by lower recruiting, meeting costs, and equity based compensation.

 

Sales expense increased $1,043,639, or 5.8% (6.9% adjusted for exchange), in 2015 versus 2014. The increase was principally attributable to incremental costs consisting of compensation and benefits, commissions, trade show, promotional and samples expenses to support the expansion of the advanced wound care sales force in the U.S., administrative fees associated with the expansion of our group purchasing program enrollment and product development costs, partially offset by lower equity based compensation and recruiting costs.

 

General and administrative expenses decreased $595,356, or 4.8% (2.3% adjusted for exchange), in 2015 versus 2014. The decrease was primarily related to favorable equity based compensation, investor relations and consulting expenses, partially offset by higher legal fees associated with issues surrounding Medicare reimbursement of Medihoney, and accounting fees.

 

Research and Development Expense

 

Research and development expense increased $942,161 to $13,935,395 in 2015 from $12,993,234 in 2014. The increase principally reflected the ongoing Aclerastide Phase 3 related expenses, together with incremental pre-clinical DSC 127 scar prevention and Amnio post-marketing clinical studies.

 

Other Expense (Income), net

 

Other expense (income), net increased $267,144 to an expense of $159,533 in 2015 from income of $107,611 in 2014 due principally to foreign exchange.

 

Income Tax Benefit

 

Income tax benefit increased $412,597 to $670,921 in 2015 from $258,324 in 2014 due principally to a U.S. deferred income tax benefit related to a reduction in the Company’s U.S. valuation allowance due to the tax impact of the unrealized gain on the Company’s investment in Comvita included in accumulated other comprehensive income, partially offset by tax expense incurred by the Canadian operations.

 

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Net Loss

 

For the nine months ended September 30, 2015, we generated a net loss of $28,858,090, or $1.12 per share (basic and diluted) in 2015, compared to a net loss of $30,204,565, or $1.24 per share (basic and diluted), in 2014.

 

Liquidity and Capital Resources

 

Cash Flow and Working Capital

 

At September 30, 2015 and December 31, 2014, we had cash and cash equivalents of $14,431,513 and $19,396,845, respectively. The $4,965,332 decrease in cash and cash equivalents reflected net cash used in operating activities of $27,309,403, partially offset by cash provided by investing activities of $19,853,115, cash provided by financing activities of $1,923,721, and the exchange rate effect on cash and cash equivalents which increased cash and cash equivalents by $567,235.

 

Net cash used in operating activities of $27,309,403 resulted from $22,693,565 cash used in operations (net loss plus non-cash items) together with $4,615,838 cash used in the change in operating assets and liabilities. Higher inventory and accounts receivable, and lower accrued expenses and accounts payable, partially offset by lower prepaid expenses, were the main drivers behind the net cash used in the change in operating assets and liabilities. The increase in inventory reflected new U.S. retail pharmacy business in 2015, build-up of FAD inventory, higher TCC stock levels to support anticipated growth, and higher Medihoney inventory due to sales shortfalls related to Medicare reimbursement changes.

 

Net cash provided by investing activities of $19,853,115 included cash provided by the net sale of investments of $20,992,010, partially offset by capital expenditures of $1,138,895. The majority of the capital expenditures are being made to upgrade and expand our manufacturing capabilities and purchase computer equipment in connection with the upgrade of the U.S. and Canadian computer systems.

 

Net cash provided by financing activities of $1,923,721 included net proceeds of $1,991,130 from the exercise of warrants and stock options partially offset by the payment of payroll withholding taxes related to stock-based compensation of $67,409 in connection with net share settlements.

 

Working capital decreased $22,027,092 at September 30, 2015 to $67,305,411 from $89,332,503 at December 31, 2014. This decrease principally reflected the net cash outflows from research and development and operating activities.

 

Prospective Assessment

 

Our strategic objective is to build the Company by both continuing to progress Aclerastide, with an initial indication for the treatment of diabetic foot ulcers, as well as in-licensing, acquiring, developing and launching novel higher margin advanced wound care products while utilizing our cash on-hand and cash flow provided by our traditional wound care business (to the extent possible) to fund this objective. In addition, we will continue to evaluate external opportunities to leverage our core capabilities for growth, and additional development programs on new indications for DSC 127. To the extent we determine that we cannot finance our growth initiatives internally, additional sources of funding may be available to us through the sale of equity, issuance of debt, the sale of licensing rights of Aclerastide and/or other DSC 127 indications, jointly developing products with third parties and/or selling a portion of our existing business.

 

The launch of a number of advanced wound product line extensions in recent years, the growth of the TCC line of products and the licensing of the Amnio human placental products in January 2014 bodes well for the future of our higher-margined advanced wound care products both domestically and abroad.

 

 24 

 

 

Our strategy for growth is:

 

·Assuming the existing resources in place are generating the expected return, we will continue to expand our worldwide investment in sales and marketing resources in support of our higher-margined advanced wound care products. Additional sales and marketing resources will continue to be prudently added as needed to support the continued growth of this segment of our business. We have an established presence in Europe, the Middle East, and Africa (“EMEA”) through a direct sales organization in the U.K. and through distributors in a number of other countries. We are building our presence in Asia, the Pacific, and Latin America (“APLA”) employing the distribution model. We plan to expand our sales and marketing in this and other areas of the world employing a direct sales force or distributor model as the basis for conducting business, as circumstances dictate.

 

·While the potential commercial launch of Aclerastide is estimated to be three years away (pending the acceptance of a New Drug Application (“NDA”) by the U.S. FDA), we believe the market potential of this product for diabetic foot ulcers and DSC127 for other indications that we have the rights to are significant. For Aclerastide, our toxicology and chemistry, manufacturing and control programs are proceeding as planned. All aspects of the clinical program are in place. Since the start-up of the clinical trials during the first quarter of 2013, we continue to make progress initiating and activating sites and enrolling patients. We are working closely with the clinical research organization managing the trials and others to ensure the trials are progressing. The cost of the preparation and execution of the Phase 3 program up to the point of NDA submission is presently estimated to be approximately $62.5 to $67.5 million. This includes the costs for the clinical, manufacturing and the toxicology (nonclinical) programs. Beyond the initial indication of the treatment of diabetic foot ulcers, we have initiated pre-clinical activities for scar prevention, and anticipate having initial data in the near future to help determine whether or not to progress towards an Investigational New Drug application.

 

·We will continue to nurture our traditional wound care business in an effort to sustain it and grow it where possible, utilizing the appropriate amount of human and financial resources to achieve our objectives. While this area of our business presently represents a significant (albeit diminishing) percentage of our sales and realizes lower gross profit margins, it generates positive cash flow as it does not require extensive sales and marketing resources to sustain it. Maintenance and growth of this business is important to us as we utilize this cash flow to help support our advanced wound care and pharmaceutical wound care growth initiatives.

 

With the cash on hand, cash equivalents and short-term investments as of September 30, 2015, we anticipate having sufficient liquidity to meet our existing operating and product development needs for at least the next twelve months. Further, if needed, we believe the continued success of our advanced wound care business and the development of Aclerastide will serve to improve our ability to raise equity or generate capital from the sale of licensing rights going forward to fund prospective growth initiatives.

 

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, 2015, 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 changes in critical accounting policies from those disclosed in the 2014 Form 10-K.

 

 25 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Interest Rate Risk

 

We have investments in certificates of deposit with maturities of up to one year. It is our intention to hold these investments to maturity and therefore we have no exposure to fluctuations in interest rates.

 

Equity Investment Risk

 

We presently have a long term investment in a foreign public company, with whom we have a business relationship, which is subject to foreign market and exchange risk. This investment is classified as an available-for-sale investment carried at fair value, with the resulting unrealized gains and/or losses included in accumulated other comprehensive income in our Consolidated Balance Sheet. We presently do not foresee the need or the desire to liquidate this investment.

 

Foreign Currency Exchange Risk

 

During the nine months ended September 30, 2015, we generated approximately 84 percent of our net sales inside the United States. We have wholly owned foreign subsidiaries in Canada and the United Kingdom. Our Canadian subsidiary has a wholly owned Chinese subsidiary. Each of these subsidiaries has its own functional currency. Each may conduct business with each other, third parties and/or the Company in other than its functional currency, within the normal course of business. Where possible, we manage foreign currency exposures on a consolidated basis, which allows us to take advantage of any natural offsets; therefore, weakness in one currency might be offset by strengths in other currencies over time. Fluctuations in exchange rates affect the reporting of our financial position, results of operations, and cash flows. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in the results of operations as unrealized (based on period-end exchange rates) or realized upon settlement of the transactions. We currently do not hedge our exposure to fluctuations in exchange rates.

 

Assets and liabilities of foreign subsidiaries for which the functional currency is the local currency are translated into U.S. Dollars at period-end exchange rates, and the results of operations are translated at the average exchange rate for the period. Exchange rate fluctuations on translating foreign currency financial statements into U.S. Dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded in accumulated other comprehensive income as a separate component of stockholders’ equity and the current period impact is recorded in other comprehensive loss. Cash flows from operations in foreign countries are translated at the average rate for the period.

 

Commodity Price Risk

 

A significant portion of our business is exposed to the price of cotton and directly and indirectly to the price of oil. Fluctuations in the price of these commodities affect our results of operations, financial position and cash flows. We monitor our commodity price risk on an ongoing basis. Steps have been, and will continue to be, taken to manage the impact of price changes on our business relative to the market. We currently do not hedge commodity price risk.

 

At present, we do not believe our operations are subject to significant market risks for interest rates, equity investment, foreign currency exchange, commodity prices or other relevant market price risks of a material nature.

 

Item 4.Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2015. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Exchange Act, within the time periods specified in the Commission’s rules and forms, and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. However, a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

During the three months ended September 30, 2015, there was no change in the Company’s internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 26 

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

The following risk factors update the related risk factors set forth in the 2014 Form 10-K:

 

We have a history of losses and can offer no assurance of future profitability.

 

We incurred losses of $28,858,090 in the nine months ended September 30, 2015 (unaudited), $39,771,555 for the year ended December 31, 2014, and additional losses in previous years. At September 30, 2015, we had an accumulated deficit of $132,800,456 (unaudited). We expect to incur losses for the next several years as we continue to develop Aclerastide, and cannot offer any assurance that we will be able to generate sustained or significant future earnings.

 

The potential increase in common shares due to the conversion, exercise or vesting of outstanding dilutive securities may have a depressive effect upon the market value of our shares.

 

As of September 30, 2015, up to 5,025,435 shares of our common stock are potentially issuable upon the conversion, exercise or vesting of outstanding convertible preferred stock, warrants, options and restricted stock units (“dilutive securities”). The shares of common stock potentially issuable upon conversion, exercise or vesting of dilutive securities are substantial compared to the 25,806,549 shares of common stock outstanding as of September 30, 2015.

 

Earnings per share of common stock may be substantially diluted by the existence of these dilutive securities regardless of whether they are converted, exercised or issued. This dilution of earnings per share could have a depressive effect upon the market value of our common stock.

 

The results of preclinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidate may not have favorable results in later studies or trials.

 

Preclinical studies and Phase 1 and Phase 2 clinical trials are not primarily designed to test the efficacy of a drug candidate, but rather to test safety, to study pharmacokinetics and pharmacodynamics, and to understand the drug candidate’s side effects at various doses and schedules. Favorable results in early studies or trials may not be repeated in later studies or trials, including continuing preclinical studies and large-scale Phase 3 clinical trials, and our drug candidate in later-stage trials may fail to show desired safety and efficacy despite having progressed through earlier-stage trials. Unfavorable results from ongoing preclinical studies or clinical trials could result in delays, modifications or abandonment of ongoing or future clinical trials, or abandonment of a clinical program. Preclinical and clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals or commercialization. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be delayed, repeated or terminated, or a clinical program to be abandoned.

 

We rely on third parties to conduct our clinical trials and many of our preclinical studies. If those parties do not successfully carry out their contractual duties or meet expected deadlines, our drug candidates may not advance in a timely manner or at all.

 

In the course of our preclinical testing and clinical trials, we rely on third parties, including laboratories, investigators, clinical contract research organizations (“CROs”), and manufacturers, to perform critical services for us. For example, we rely on third parties to conduct our clinical trials and many of our preclinical studies. CROs are responsible for many aspects of the trials, including finding and enrolling subjects for testing and administering the trials. Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and foreign regulatory authorities require us to comply with regulations and standards, commonly referred to as good clinical practices (“GCPs”), for conducting, monitoring, recording, and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these responsibilities and requirements. These third parties may not be available when we need them or, if they are available, may not comply with all regulatory and contractual requirements or may not otherwise perform their services in a timely or acceptable manner, and we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated. These independent third parties may also have relationships with other commercial entities, some of which may compete with us. In addition, if such third parties fail to perform their obligations in compliance with our GCPs, our clinical trials may not meet regulatory requirements or may need to be repeated. As a result of our dependence on third parties, we may face delays or failures outside of our direct control. These risks also apply to the development activities of collaborators, and we do not control their research and development, clinical trial or regulatory activities.

 

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Our stock price has been volatile and this volatility is likely to continue.

 

Historically, the market price of our common stock has been volatile. The high and low stock prices for the years 2010 through 2014 and the first nine months of 2015 are set forth in the table below:

 

Derma Sciences, Inc.
Trading Range – Common Stock

 

Year  Low   High 
2010  $4.40   $9.00 
2011  $4.50   $12.72 
2012  $6.94   $11.89 
2013  $9.93   $15.45 
2014  $7.88   $15.51 
2015*  $4.57   $9.89 

 

(*) January 1 through September 30.

 

Events that may affect our common stock price include:

 

Results from further development of Aclerastide;
Quarter to quarter variations in our operating results;
Changes in earnings estimates by securities analysts;
Changes in interest rates, exchange rates or other general economic conditions;
Changes in market conditions in the wound care industry;
Fluctuations in stock market prices and trading volumes of similar companies;
Discussion of us or our stock price by the financial and scientific press and in online investor communities;
Additions or departures of key personnel;
Changes in third party reimbursement policies;
The introduction of new products either by us or by our competitors; and
The loss of a major customer.

 

Although all publicly traded securities are subject to price and volume fluctuations, it is likely that our common stock will experience these fluctuations to a greater degree than the securities of more established and better capitalized organizations.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit

  Description
   
31.1   Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2   Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Document
     
101.LAB   XBRL Taxonomy Extension Labels Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 29 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

DERMA SCIENCES, INC.

 

Dated: November 6, 2015 By: /s/ John E. Yetter
    John E. Yetter, CPA
    Chief Financial Officer

 

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