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 and six months ended June 30, 2016.

Business highlights of the second quarter of 2016 and recent weeks include:
  • Announced AMNIOEXCEL® is eligible for reimbursement by Medicare Administrative Contractor (MAC) CGS; cost-effective AMNIOEXCEL allograft now covered and reimbursed under six of eight MAC regions
  • Sold a portion of the Company's equity holdings in Comvita Limited for gross proceeds of approximately $7.6 million
  • Completed the acquisition of BioD, LLC., furthering the Company's commitment to being a leading provider of advanced wound care (AWC) and regenerative medicine products, and raised $2.3 million from certain BioD shareholders
  • Strengthened the Company's focus on higher-margin AWC products and bolstered its cash position via the pending sale of its First Aid Division (FAD) for approximately $12.2 million

Financial highlights of the second quarter of 2016 include (all comparisons are with the second quarter of 2015, unless otherwise noted):
  • Operating loss narrowed to $2.0 million compared with $5.6 million
  • AWC net sales were $11.0 million, an increase of 6.6%
  • Traditional Wound Care (TWC) net sales were $11.2 million, a decline of 8.4%
  • Total net sales were $22.2 million, a decline of 1.5%
  • Gross profit was $8.3 million, a decline of 1.3%
  • Gross margin was 37.2%, up slightly from 37.1%
  • Selling, general and administrative expenses declined $3.4 million, or 24.9%
  • AWC segment contribution improved by $3.5 million to a loss of $0.4 million
  • TWC segment contribution was $1.3 million, a decline of $0.8 million
  • Cash, cash equivalents and short-term investments were $44.0 million as of June 30, 2016
  • Sold 925,000 shares of Comvita Limited common stock for gross proceeds of $7.6 million and a realized gain of $4.7 million
  • Net income from continuing operations was $2.0 million, or $0.08 per share, compared with net loss from continuing operations of $5.0 million, or $0.19 per share

Management Commentary

"I am extremely pleased with the direction of our company and with our recent progress," commented Stephen T. Wills, Executive Chairman and Interim Principal Executive Officer of Derma Sciences. "From an operating results perspective we had a very good quarter. Our most important financial metric, operating profit/loss, improved significantly going from a loss of $5.6 million in 2015 to a loss of $2.0 million in 2016. Net sales tracked to plan and guidance. Expenses and other financial metrics were significantly ahead of the expectations we set last year when embarking on initiatives to reduce and realign our U.S.-based sales and marketing, and to reduce expenses in other areas. We budgeted for cash burn for the first half of 2016 to be $7.5 million, but burned only $4.4 million."

"While our TWC business continued to operate profitably, we recorded a significant improvement in our AWC segment contribution, with negative contribution narrowing to $0.4 million from $3.8 million in the second quarter of 2015, and from $0.6 million in the first quarter of 2016. AWC net sales increased 6.6% year-over-year, with continued growth from MEDIHONEY®, TCC-EZ® and AMNIOEXCEL. In particular, MEDIHONEY resumed double-digit growth with increases across all regions."

"Last week we completed our purchase of BioD. This immediately accretive acquisition is a powerful strategic business fit with Derma Sciences, and brings four proprietary product families with gross margin of about 90% and revenue of $22 million for the 12 months ended June 30, 2016. Our scale is now considerably enhanced, we have new cross-selling opportunities and the addition of BioD products are expected to significantly increase our consolidated gross margin percentage."

Mr. Wills continued, "As part of our initiative to enhance shareholder value and expand gross margins, we signed a definitive agreement to sell our FAD last month for approximately $12.2 million, including inventory. The transaction is scheduled to close later this month. The sale removes a lower-margin product line, while providing additional capital to invest in higher-margin AWC opportunities."

"The plan we initiated late last year to match expenses to achievable sales targets, to create sustainable, profitable growth, to reach positive EBITDA and operating cash flow, and to advance our growth strategy to increase our AWC segment revenues, margins and cash flows is working - we are executing."

"For many years our balance sheet has been a source of strength for Derma Sciences, and it continues to be so. We had cash, cash equivalents and short-term investments as of June 30, 2016 of $44.0 million, and $15.8 million in marketable securities. Following the sale of the FAD and the purchase of BioD, and a $2.3 million equity investment from BioD stockholders in the third quarter of 2016, our current cash, cash equivalents, short-term investments and marketable securities are expected to be approximately $52.0 million. This provides us with the resources and the flexibility to pursue our goals," Mr. Wills concluded.

Financial Results

Net sales for the second quarter of 2016 were $22.2 million, down 1.5% from $22.6 million for the second quarter of 2015. This included AWC sales of $11.0 million, up 6.6% from $10.3 million in the prior-year quarter, and TWC sales of $11.2 million, down 8.4% from $12.3 million in the prior-year quarter. The AWC sales increase was led by MEDIHONEY, TCC-EZ and AMNIO products in the U.S., and MEDIHONEY in regions outside North America. The decrease in TWC sales was driven by lower FAD sales in the U.S. due to the non-recurrence of a large new retail product stocking order in 2015 and lower sales in Canada due principally to inventory rebalancing by our exclusive distributor.

Gross profit for the second quarter of 2016 was $8.3 million, down 1.3% from $8.4 million in the second quarter of 2015. The slight decrease in gross profit was driven by lower TWC gross profit due to lower sales and a lower gross margin percentage due to unfavorable product sales mix and higher product and manufacturing costs, for the most part offset by higher AWC gross profit driven by higher sales and a higher gross margin percentage due to favorable product sales mix and lower product costs.

Operating expense for the second quarter of 2016 was $10.3 million, down 26.2% compared with $13.9 million for the second quarter of 2015. The decrease was principally due to lower compensation and benefits, professional service, information technology and travel expense reflecting the Company's cost-reduction and restructuring initiatives. The decrease of $3.6 million contributed to a reduction in operating loss from $5.6 million in the second quarter of 2015 to $2.0 million in the second quarter of 2016.

Net income from continuing operations for the second quarter of 2016 was $2.0 million, or $0.08 per share, compared with a net loss from continuing operations for the second quarter of 2015 of $5.0 million, or $0.19 per share. The increase includes the sale of Comvita stock for a realized gain of $4.7 million, before taxes.

Net sales for the six months ended June 30, 2016 were $42.5 million, compared with $42.1 million for the six months ended June 30, 2015. AWC net sales were $21.6 million, up 7.5% from $20.1 million in the prior-year period. TWC net sales were $20.9 million, down 5.1% from $22.0 million in the prior-year period. Operating expense decreased $7.3 million, or 26.5%, to $20.2 million in the first half of 2016 versus $27.5 million in the first half of 2015, in line with the Company's restructuring initiatives. This contributed to the improvement in operating loss to $4.3 million in the first half of 2016 versus $11.6 million in the first half of 2015. The Company reported net income from continuing operations for the six months ended June 30, 2016 of $0.2 million, or $0.01 per share, compared with a net loss from continuing operations of $11.5 million, or $0.45 per share, in the same period in 2015. The net income for the six months ended June 30, 2016 includes the sale of Comvita stock for a realized gain of $4.7 million, before taxes.

As of June 30, 2016, Derma Sciences had cash, cash equivalents and short-term investments of $44.0 million, compared with $40.8 million as of December 31, 2015. In addition, the Company had a $15.8 million investment in equity securities as of June 30, 2016, compared with $16.1 million as of December 31, 2015.

Financial Guidance

Reflecting the acquisition of BioD and the pending sale of its FAD, Derma Sciences is providing the following information and financial guidance for 2016:
  • Pro forma 2016, which presumes BioD was part of Derma Sciences for the full year and excludes FAD sales for entire year (for comparative purposes Derma Sciences is assuming the same for 2015):
    • Total net sales of $97.3 million
      • Representing growth of 13% compared with net sales of $86.4 million for 2015
    • AWC net sales of $71.5 million
      • Representing growth of 18% compared with net sales of $60.4 million for 2015
      • Consisting of $47.2 million for the Company's standalone products (up 13% over 2015) plus $24.3 million for BioD products (up 30% over 2015)
      • Gross margin for the AWC business of approximately 65%
    • TWC net sales of $25.8 million
      • Representing a decline of 0.8% compared with net sales of $26.0 million for 2015
  • GAAP 2016, which reflects purchase accounting and thus includes only those net sales during the period BioD and FAD were actually owned by the Company:
    • AWC net sales of $57.7 million
      • Representing growth of 38% compared with net sales of $41.8 million for 2015
      • Consisting of previously stated guidance of $47.2 million on the Company's standalone products plus $10.5 million of BioD products
    • TWC net sales cannot be calculated until the sale of FAD has closed, which is expected later this month

Conference Call and Webcast

Derma Sciences management will host a conference call at 11:00 a.m. Eastern time today to discuss second 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 50506163. 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 August 15, 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 50506163. 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 is engaged in the development and commercialization of novel proprietary regenerative products derived from placental/birth tissues for use in a broad range of clinical applications including the treatment of complex chronic wounds, acute wounds and localized areas of injury or inflammation, in addition to filling soft tissue defects or voids. The Company also markets TCC-EZ ®, 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.
DERMA SCIENCES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
         
  Three Months Ended
June 30,
      2016   2015*
Net Sales $ 22,208,061   $ 22,556,364
Cost of sales     13,948,215     14,185,116
Gross Profit     8,259,846     8,371,248
Operating Expenses
Selling, general and administrative 10,284,886 13,701,728
Research and development     -     230,942
Total operating expenses     10,284,886     13,932,670
Operating loss (2,025,040) (5,561,422)
Other income, net     4,535,101     880,514
Income (loss) from continuing operations before income taxes 2,510,061 (4,680,908)
Income tax provision     527,525     344,857
Net Income (Loss) from Continuing Operations 1,982,536 (5,025,765)
Discontinued Operations
Loss from discontinued operations, net of taxes     -     (4,259,946)
Net Income (Loss)   $ 1,982,536   $ (9,285,711)
Net income (loss) per common share- basic
Continuing operations $ 0.08 $ (0.19)
Discontinued operations     -     (0.17)
Total net income (loss) per common share - basic   $ 0.08   $ (0.36)
Net income (loss) per common share- diluted
Continuing operations $ 0.08 $ (0.19)
Discontinued operations     -     (0.17)
Total net income (loss) per common share - diluted   $ 0.08   $ (0.36)
Shares used in computing net income (loss) per common share - basic     25,915,065     25,759,843
Shares used in computing net income (loss) per common share - diluted     26,058,893     25,759,843
* Reclassified for discontinued operations
 
         
Six Months Ended
June 30,
      2016   2015*
Net Sales $ 42,450,618 $ 42,055,016
Cost of sales     26,483,249     26,148,642
Gross Profit     15,967,369     15,906,374
Operating Expenses
Selling, general and administrative 20,238,000 26,960,133
Research and development     -     583,124
Total operating expenses     20,238,000     27,543,257
Operating loss (4,270,631) (11,636,883)
Other income, net     4,803,141     512,726
Income (loss) from continuing operations before income taxes 532,510 (11,124,157)
Income tax provision     307,727     352,908
Net Income (Loss) from Continuing Operations 224,783 (11,477,065)
Discontinued Operations
Loss from discontinued operations, net of taxes     -     (8,418,223)
Net Income (Loss)   $ 224,783   $ (19,895,288)
Net income (loss) per common share- basic
Continuing operations $ 0.01 $ (0.45)
Discontinued operations     -     (0.33)
Total net income (loss) per common share - basic   $ 0.01   $ (0.78)
Net income (loss) per common share- diluted
Continuing operations $ 0.01 $ (0.45)
Discontinued operations     -     (0.33)
Total net income (loss) per common share - diluted   $ 0.01   $ (0.78)
Shares used in computing net income (loss) per common share - basic     25,897,179     25,656,875
Shares used in computing net income (loss) per common share - diluted     26,036,047     25,656,875
* Reclassified for discontinued operations
 
 
DERMA SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
   
     
June 30, December 31,
ASSETS   2016     2015
Current Assets
Cash and cash equivalents $ 18,998,616 $ 15,814,205
Short-term investments 25,000,000 25,003,990
Accounts receivable, net of allowances of $606,218 and $704,527,
respectively 9,332,223 8,145,589
Inventories 18,286,773 20,690,706
Prepaid expenses and other current assets   1,014,749     1,449,407
Total current assets 72,632,361 71,103,897
Long-term equity investment 15,776,448 16,110,178
Equipment and improvements, net of accumulated depreciation and
amortization of $8,426,608 and $7,634,541, respectively 3,951,851 4,129,208
Identifiable intangible assets, net of accumulated amortization of
$15,064,010 and $13,615,631, respectively 8,382,866 9,831,245
Goodwill 13,457,693 13,457,693
Other assets   150,348     147,934
Total Assets $ 114,351,567   $ 114,780,155
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,285,434 $ 2,473,056
Accrued expenses and other current liabilities 4,951,112 6,691,340
Liabilities of discontinued operations   1,477,511     4,371,010
Total current liabilities 8,714,057 13,535,406
Long-term liabilities 684,441 1,014,378
Deferred tax liability   2,819,509     1,804,516
Total Liabilities   12,218,007     16,354,300
Stockholders' Equity
Convertible preferred stock, $.01 par value; 1,468,750 shares authorized;
issued and outstanding 73,332 at June 30, 2016 and
December 31, 2015 (liquidation preference of $3,222,368
at June 30, 2016) 733 733
Common stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding 25,963,801 at June 30, 2016 and
25,876,870 at December 31, 2015 259,638 258,769
Additional paid-in capital 236,303,495 234,943,291
Accumulated other comprehensive income 7,394,757 5,272,908
Accumulated deficit   (141,825,063)     (142,049,846)
Total Stockholders' Equity   102,133,560     98,425,855
Total Liabilities and Stockholders' Equity $ 114,351,567   $ 114,780,155
 

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