Derma Sciences second-quarter net sales increase 14% to $13.2 million

Derma Sciences, Inc. (Nasdaq: DSCI), a medical device and pharmaceutical company focused on advanced wound care, today reported financial and operating results for the three and six months ended June 30, 2010. Highlights of the second quarter of 2010 and recent weeks include:

“The overall growth of 47% and the continued success of our MEDIHONEY products support our decision to invest in additional sales and marketing resources.”

• Net sales increased 14% to $13.2 million from $11.6 million in the second quarter of 2009.
• Advanced wound care sales were $2.6 million, up 47% from $1.7 million in the prior year second quarter and up 13% from $2.3 million in the first quarter of 2010.
• Consolidated gross margin improved to 30.4% in the second quarter of 2010, from 29.6% in the second quarter of 2009.
• Net loss was $932,855 compared with net loss of $560,502 in the prior year second quarter, reflecting continued investment in growth initiatives.
• MEDIHONEY® sales increased 82% to $1.2 million from $0.7 million in the second quarter of 2009.
• Seven sales representatives were added during the quarter to achieve the Company's goal of 20 U.S. representatives.
• An international subsidiary, Derma Sciences Europe Limited, was established and an office near London was opened.
• The Company submitted a 510(k) application to the U.S. Food and Drug Administration (FDA) for MEDIHONEY® Gel Wound & Burn Dressing.
• The Company's stock was added to the Russell Microcap® Index.

Commentary

"During the second quarter we continued to execute on our number one strategic objective, to build our advanced wound care franchise," said Edward J. Quilty, Chairman and Chief Executive Officer of Derma Sciences. "The overall growth of 47% and the continued success of our MEDIHONEY products support our decision to invest in additional sales and marketing resources.

"With 20 sales representatives dedicated to advanced wound care and the launch of Derma Sciences Europe, we will be able to achieve our goal of doubling MEDIHONEY sales in 2010. This investment will not pay for itself overnight, but taking advantage of the market for MEDIHONEY and our other advanced wound care products now will ultimately improve our bottom line performance.

"The balance of our core business is sound. Traditional wound care and private label sales have met expectations. Improved performance in First Aid products sales along with new business beginning in the second half of 2010 will add to our top line sales growth."

Mr. Quilty continues, "Enrollment in the Phase II trail for DSC 127, our topical drug for wound healing with the first indication being diabetic foot ulcers, continues to progress. We will be able to report top line efficacy approximately 12 weeks after the last patient is enrolled, which we are optimistic will occur before year end."

Financial Results

Net sales for the second quarter of 2010 increased 14% to $13,230,106, compared with $11,563,341 in the second quarter of 2009. The increase was principally driven by a 47% increase in advanced wound care products sales world wide to $2,587,625, compared with 1,755,913 in the second quarter of 2009. In addition, sales of first-aid products grew 8% to $3,345,131 in the second quarter, compared with $3,085,019 in the previous year, reflecting new business and improving demand among existing customers.

Gross profit increased 18% to $4,027,904 in the second quarter of 2010, compared with the same period in 2009, and gross margin improved to 30.4% in the 2010 quarter from 29.6% in the 2009 quarter. The higher gross margin reflects favorable mix towards higher-margin products, partially offset by increasing product costs and higher obsolescence and transportation expense.

Selling, general and administrative expense was $4,689,774 in the second quarter of 2010, compared with $3,703,038 in the prior year quarter. The increase was mainly attributable to the incremental selling expense associated with the planned expansion of the U.S. sales force from 10 to 20 representatives, which was completed by the end of the quarter, partially offset by lower first-aid product compensation and benefits associated with a position eliminated in the first quarter and not replaced. Also contributing to higher expenses were incremental international sales expense of $159,298, and the incremental amortization expense of $114,800 associated with the Worldwide MEDIHONEY License Agreement signed in February 2010.

Research and development expense was $123,744 in the second quarter of 2010, compared with $87,580 in the prior year quarter. The increase principally reflects data management expenses that started to be incurred in the second half of 2009.

Interest expense decreased to $134,707 in the 2010 second quarter from $239,600 in the 2009 second quarter. The decrease is principally attributable to lower term and promissory note interest associated with the payoff of these loans in February 2010, and to lower loan-related fees and lower deferred financing expense due to the write-off of a portion of the outstanding deferred financing balance in connection with the payoff of the term loan.

Other income increased to $68,625 in the second quarter of 2010 from $42,252 in the second quarter of 2009, primarily due to a foreign exchange gain of $26,896 and slightly higher royalty income, partially offset by higher miscellaneous expense.

The Company recorded an $81,159 foreign income tax provision for the second quarter of 2010, consisting of a $90,125 current foreign tax provision and an $8,966 deferred foreign tax benefit based on its Canadian subsidiary's operating results. No tax benefit was recorded for U.S. operations in 2010 or 2009. Due to uncertainties surrounding the Company's ability to use its U.S. net operating loss carry forwards and net deferred tax assets, a full valuation allowance for the U.S. net deferred tax assets has been provided.

The net loss for the second quarter of 2010 was $932,855 or $0.14 per share, compared with a net loss of $560,502 or $0.11 per share in the second quarter of 2009.

As of June 30, 2010 working capital was $9,264,882, and cash and cash equivalents were $385,425. Total debt at quarter-end was $4,130,485, all of which is short term. This figure is comprised of $4,107,476 outstanding under its $8,000,000 revolving credit line and other current maturities of $23,009.

Net sales for the six months ended June 30, 2010 were $26,074,487, up 19% compared with net sales of $21,995,232 in the same period in 2009. Gross profit was $8,053,303, or 30.9% of sales, compared with $6,781,402, or 30.8% of sales, in the six months ended June 30, 2009. The net loss in the first half of 2010 was $1,467,759 or $0.24 per share, compared with net loss of $1,318,581 or $0.26 per share in the first half of 2009.