Derma Sciences, Inc. (Nasdaq:DSCI), a tissue regeneration company focused on advanced wound and burn care, today reported financial and operating results for the three months ended March 31, 2016.

Financial highlights of the first quarter of 2016 include (all comparisons are with the first quarter of 2015 unless otherwise noted):
  • Advanced Wound Care (AWC) net sales were $10.6 million, an increase of 8.5%
  • Traditional Wound Care (TWC) net sales were $9.6 million, a decline of 0.9%
  • Total net sales were $20.2 million, an increase of 3.8%, (up 5.5% on a constant-currency basis)
  • Gross profit was $7.7 million, up 2.3%
  • Gross margin was 38.1%, down 50 basis points principally due to unfavorable TWC product mix and higher TWC product costs
  • Selling, general and administrative expenses were down $3.3 million, or 24.9%
  • AWC segment contribution improved by $2.9 million to a loss of $0.6 million from a loss of $3.5 million
  • TWC segment contribution was unchanged at $1.3 million
  • Value of equity investment in Comvita Limited was $19.3 million as of March 31, 2016, up $3.2 million during the quarter
  • Cash, cash equivalents and short-term investments were $36.8 million as of March 31, 2016
  • Net loss from continuing operations was $1.8 million, or $0.07 per share, compared with net loss from continuing operations of $6.5 million, or $0.25 per share

Other highlights of the first quarter of 2016 and recent weeks include:
  • Two Medicare Administrative Contractors (MACs), WPS Government Health Services and CGS Administrators, issued local coverage determinations to allow payment coverage for AMNIOEXCEL ®; six of eight MACs now have positive local coverage determinations
  • The Company's randomized, controlled, multicenter study showing the superiority with statistical significance of AMNIOEXCEL ® plus standard-of-care over standard-of-care alone in closing diabetic foot ulcers was published in the peer-reviewed journal WOUNDS

Management Commentary

"We are pleased to report that first quarter net sales, expenses and other financial measures are tracking to plan," commented Stephen T. Wills, Interim Executive Chairman and Principal Executive Officer of Derma Sciences. "We undertook a number of initiatives in the fourth quarter of 2015 to reduce and realign our U.S.-based marketing and sales operations, along with reductions in other areas of our business. Our first quarter results provide encouraging evidence of our ability to grow AWC sales both year-over-year and sequentially, while providing considerably improved operating results. We are comfortable we will achieve our 2016 financial goals, including positive EBITDA of $1.0 million for the second half of the year.

"The first quarter and recent weeks brought a great deal of good news, which we expect will have a positive impact on our business," Mr. Wills continued. "WPS Government Health Administrators, a MAC serving states primarily in the Midwest, and CGS Administrators, a MAC serving Kentucky and Ohio, are now permitting coverage of AMNIOEXCEL ®. This brings our national coverage to 86% of Medicare Part B beneficiaries and should help accelerate sales of this important wound care product.

"Also during the quarter positive data from our randomized, controlled, multicenter trial with AMNIOEXCEL ® plus standard-of-care versus standard-of-care alone for the closure of non-healing diabetic foot ulcers was published in the peer-reviewed journal WOUNDS. Our sales reps have been actively reviewing this data with clinical and purchasing decision makers, and we have submitted this Level 1 published evidence to the remaining two MACs to support additional coverage.

"Our strong balance sheet with $36.8 million in cash, cash equivalents and short-term investments, $19.3 million of marketable securities and no debt allows us to evaluate accretive opportunities to leverage our AWC competencies and infrastructure. In addition, we are evaluating a number of options with respect to our TWC business to enhance shareholder value and expand gross margins going forward," Mr. Wills concluded.

Commenting on the AWC product portfolio, Barry Wolfenson, Group President, Advanced Wound Care, said, "We were pleased with the 8.5% growth in AWC net sales for the quarter. Importantly, our segment contribution improved with an increase in gross margin and a significant reduction in direct expenses. The AWC segment contribution improved by $2.9 million to a loss of $0.6 million.

"TCC-EZ ® sales grew at double digits in the U.S. Our proprietary total contact casting system has become an important anchor product for Derma Sciences in the four years since we acquired the technology, and our sales continue to be helped by the Journal of the American Podiatric Medical Association recommendation of total contact casting as the preferred method for off-loading diabetic plantar foot ulcers. There have been several case series reported with TCC-EZ ® in combination with AMNIOEXCEL ® and there is one ongoing study in diabetic foot ulcers. Our work suggests this combination holds promise for healing efficacy. Given the data we have generated, along with the improved reimbursement landscape, we expect increased use of both products, together and alone in the coming years," Mr. Wolfenson concluded.

Financial Results

Net sales for the first quarter of 2016 were $20.2 million, up 3.8% from $19.5 million for the first quarter of 2015. This included AWC sales of $10.6 million, up 8.5% from $9.8 million in the prior-year quarter, and TWC sales of $9.6 million, down 0.9% from $9.7 million in the prior-year quarter. The increase in AWC net sales was due to growth in TCC-EZ, AMNIOEXCEL and MEDIHONEY, partially offset by lower XTRASORB ® and ALGICEL ® sales. The decrease in TWC net sales reflected the loss of a significant customer in 2015 due to industry consolidation, partially offset by increased Canada sales and U.S. first-aid sales.

Gross profit for the first quarter of 2016 was $7.7 million, up 2.3% from $7.5 million in the first quarter of 2015. The gross profit increase was adversely impacted by a decline in the Company's overall gross profit margin percentage to 38.1% from 38.6% in the prior-year quarter. The decline in gross profit margin percentage was attributable to a lower TWC segment margin percentage of 24.1% versus 27.1% due principally to unfavorable product mix and higher product costs, partially offset by a higher AWC segment margin percentage of 50.8% versus 50.2% due principally to favorable product mix.

Selling, general and administrative expense for the first quarter of 2016 was $10.0 million, down 24.9% compared with $13.3 million for the first quarter of 2015. The decrease was principally due to lower compensation and benefits, professional service, information technology and travel expense due principally to the Company's cost-reduction and restructuring initiatives.

The net loss from continuing operations for the first quarter of 2016 was $1.8 million, or $0.07 per share, compared with the net loss from continuing operations for the first quarter of 2015 of $6.5 million, or $0.25 per share. The decrease was principally due to higher gross profit and lower operating expenses following the completion of cost-reduction and restructuring initiatives in the fourth quarter of 2015. The net loss for the first quarter of 2016 was $1.8 million, or $0.07 per share, compared to the net loss for the first quarter of 2015 of $10.6 million, or $0.41 per share. There was no profit or loss from discontinued operations in the first quarter of 2016, versus a loss of $4.2 million in 2015.

As of March 31, 2016, Derma Sciences had cash, cash equivalents and short-term investments of $36.8 million, compared with $40.8 million as of December 31, 2015. In addition, the Company had a $19.3 million investment in equity securities as of March 31, 2016, compared with $16.1 million as of December 31, 2015.

Financial Guidance

Derma Sciences affirms financial guidance for 2016, as follows:
  • Net sales are expected to be approximately $89.1 million, representing growth of 5.4% compared with 2015. Net sales of AWC products are expected to be $47.2 million in 2016, representing growth of 13%, and net sales of TWC products are expected to be $41.9 million in 2016, representing a decline of 2%.
  • Net sales are expected to increase as the year progresses, but quarterly sales will be impacted by ordering patterns and by delivery dates, particularly in the TWC business.
  • Cash burn for the first half of 2016 is expected to be approximately $7.5 million; the Company expects positive EBITDA for the second half of 2016 of approximately $1.0 million.

Conference Call and Webcast

Derma Sciences management will host a conference call at 11:00 a.m. Eastern time today to discuss first quarter financial results and answer questions. In addition, management will provide a business update and discuss recent and upcoming milestones.

To access the conference call, U.S.-based listeners should dial (888) 563-6275 and international listeners should dial (706) 634-7417. All listeners should provide passcode 2741618. Individuals interested in listening to the live conference call via the Internet may do so by logging on to the Company's website at www.dermasciences.com.

Following the conclusion of the conference call, a telephone replay will be available through May 17, 2016 and can be accessed by dialing (855) 859-2056 from within the U.S. or (404) 537-3406 from outside the U.S. All listeners should provide passcode 2741618. The webcast will be available for 30 days.

About Derma Sciences, Inc.

Derma Sciences is a tissue regeneration company focused on advanced wound and burn care. It offers a line of products with patented technologies to help better manage chronic and hard-to-heal wounds, many of which result from diabetes and poor vascular functioning. The Company sells AMNIOEXCEL ® amniotic allograft membrane and AMNIOMATRIX ® amniotic allograft suspension into the $500 million market for skin substitute products. TCC-EZ ® is a gold-standard total contact casting system for diabetic foot ulcers. Derma Sciences' MEDIHONEY ® product line is the leading brand of honey-based dressings for the management of wounds and burns. The product has been shown in clinical studies to be effective in a variety of indications. Other novel products introduced into the $14 billion global wound care market include XTRASORB ® for better management of wound exudate, and BIOGUARD ® for barrier protection against microbes and other contaminants. The Company also offers a full product line of traditional dressings. For more information please visit www.dermasciences.com.

Forward-Looking Statements

Statements contained in this news release that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate" or "continue" are intended to identify forward-looking statements. Readers are cautioned that certain important factors may affect the Company's actual results and could cause such results to differ materially from any forward-looking statements that may be made in this news release or that are otherwise made by or on behalf of the Company. Factors that may affect the Company's results include, but are not limited to product demand, market acceptance, impact of competitive products and prices, product development, completion of an acquisition, the success or failure of negotiations and trade, legal, social and economic risks. Additional factors that could cause or contribute to differences between the Company's actual results and forward-looking statements include but are not limited to, those discussed in the Company's filings with the U.S. Securities and Exchange Commission.

(Tables to follow)

 
DERMA SCIENCES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
             
        Three Months Ended
March 31,
            2016   2015*
Net Sales $ 20,242,557 $ 19,498,652
Cost of sales           12,535,034     11,963,526  
Gross Profit           7,707,523     7,535,126  
Operating Expenses
Selling, general and administrative 9,953,114 13,258,405
Research and development           -     352,183  
Total operating expenses           9,953,114     13,610,588  
Operating loss (2,245,591 ) (6,075,462 )
Other (income) expense, net           (268,040 )   367,788  
Loss from continuing operations before income taxes (1,977,551 ) (6,443,250 )
Income tax (benefit) provision           (219,798 )   8,051  
Net Loss from Continuing Operations (1,757,753 ) (6,451,301 )
Discontinued Operations
Loss from discontinued operations, net of taxes           -     (4,158,276 )
Net Loss         $ (1,757,753 ) $ (10,609,577 )
Net loss per common share- basic and diluted
Continuing operations $ (0.07 ) $ (0.25 )
Discontinued operations           -     (0.16 )
Total net loss per common share - basic and diluted         $ (0.07 ) $ (0.41 )
Shares used in computing net loss per common share - basic and diluted           25,879,618     25,552,762  
* Reclassified for discontinued operations
 
       
DERMA SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
   
March 31, December 31,
ASSETS   2016     2015  
Current Assets
Cash and cash equivalents $ 11,778,942 $ 15,814,205
Short-term investments 25,000,000 25,003,990
Accounts receivable, net of allowances of $598,993 and $704,527,
respectively 8,215,995 8,145,589
Inventories 21,354,855 20,690,706
Prepaid expenses and other current assets   1,444,842     1,449,407  
Total current assets 67,794,634 71,103,897

Long-term equity investment
19,261,451 16,110,178
Equipment and improvements, net of accumulated depreciation and
amortization of $8,114,297 and $7,634,541, respectively 4,162,660 4,129,208
Identifiable intangible assets, net of accumulated amortization of
$14,361,696 and $13,615,631, respectively 9,085,180 9,831,245
Goodwill 13,457,693 13,457,693
Other assets   150,510     147,934  
Total Assets $ 113,912,128   $ 114,780,155  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,548,115 $ 2,473,056
Accrued expenses and other current liabilities 4,827,309 6,691,340
Liabilities of discontinued operations   3,207,951     4,371,010  
Total current liabilities 10,583,375 13,535,406
Long-term liabilities 998,981 1,014,378
Deferred tax liability   2,642,586     1,804,516  
Total Liabilities   14,224,942     16,354,300  
Stockholders' Equity
Convertible preferred stock, $.01 par value; 1,468,750 shares authorized;
issued and outstanding 73,332 at March 31, 2016 and
December 31, 2015 (liquidation preference of $3,222,368
at March 31, 2016) 733 733
Common stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding 25,885,494 at March 31, 2016 and
25,876,870 at December 31, 2015 258,855 258,769
Additional paid-in capital 235,671,075 234,943,291
Accumulated other comprehensive income 7,564,122 5,272,908
Accumulated deficit   (143,807,599 )   (142,049,846 )
Total Stockholders' Equity   99,687,186     98,425,855  
Total Liabilities and Stockholders' Equity $ 113,912,128   $ 114,780,155  
 

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