DSCI Derma Sciences, Inc.

Net sales up 22.6% to $21.8 millionExpects positive EBITDA and positive cash flow from operations for the fourth quarter; updates 2016 sales guidance

Conference call begins at 11:00 a.m. Eastern Time today

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 nine months ended September 30, 2016.

Highlights of the third quarter of 2016 and recent weeks include:

• Completed the sale of the First Aid Division (FAD) including inventory for $9.7 million in cash and a $2.7 million promissory note
• Completed the acquisition of BioD, LLC (BioD), 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 members and employees
• Named Russell Olsen president of the AWC business segment, which includes the previous Derma Sciences (DS) AWC business plus the expanded human birth tissues and new Surgical Solutions (SS) AWC business, which is comprised of the acquired BioD business

Third quarter 2016 GAAP Results (which include preliminary purchase accounting and non-recurring costs related to the acquisition of BioD and sale of FAD) (all comparisons are with the third quarter of 2015):

• Net sales were $21.8 million, an increase of 22.6%
• Gross profit percentage was 49.1%, up from 41.0%
• Net loss was $1.4 million compared to $9.0 million
• Basic and diluted net loss per share was $0.05, compared to $0.35
• Cash, cash equivalents and short-term investments were $41.0 million and long-term equity investment was $15.4 million as of September 30, 2016

Other financial highlights of the third quarter of 2016 include (all comparisons are with the third quarter of 2015):

• AWC net sales were $15.8 million including $4 million in SS AWC sales, an increase of 39.1%,
• DS AWC business unit contribution improved by $2.2 million to a loss of $0.3 million
• Adjusted gross profit percentage* was 52.8% compared with 44.1%
• Adjusted EBITDA* was $(0.9) million compared with $(3.6) million
• Adjusted loss from continuing operations before income taxes* was $2.8 million compared with $5.7 million

*See the accompanying tables for definitions of each Non-GAAP metric. Reconciliations of GAAP Net Loss to Adjusted EBITDA, GAAP Gross Profit to Adjusted Gross Profit, and GAAP Loss from continuing operations before income taxes to Adjusted Loss from continuing operations before income taxes appear in the tables at the end of this press release.

Management Commentary

Stephen T. Wills, Executive Chairman and Interim Principal Executive Officer of Derma Sciences, commented, “The third quarter was an exceptionally busy and productive time for Derma Sciences. We sold our lower-margin FAD business, which provided upfront cash of $9.7 million, to invest in our AWC growth strategy. In acquiring BioD we became a leading manufacturer and marketer of birth tissue products for use in surgical procedures and wound care. Our gross profit expanded substantially, and our DS AWC business unit contribution improved from a loss of $2.5 million in the third quarter of 2015 to a loss of $0.3 million this quarter. Although one-time expenses of $3.1 million related to the BioD acquisition negatively impacted our quarterly results, we continue to expect positive EBITDA and positive cash flow from operations for the fourth quarter of 2016.”

Commenting on AWC activities and results, Russell Olsen, president of AWC said, “Opportunities for cross selling DS AWC products and SS AWC products exist, and this effort has begun by bringing select wound care products to the surgical market. We are in the process of reviewing our indirect and direct sales force size and territories, and are taking steps to increase headcount where appropriate and in areas where the investment will quickly have a positive impact on earnings. I would like to share a few specific examples of our success through the first nine months of the year, compared to the same period in 2015. AMNIOEXCEL sales are up 33% in the U.S., TCC-EZ is enjoying an 18% growth in the U.S. and MEDIHONEY is up 13% in Europe. In addition, Surgical Solutions sales have experienced significant growth of 38%, driven primarily in the areas of sports medicine and ophthalmology.”

Mr. Wills added, “Overall we are pleased with our operational and financial performance. Although our 2016 net sales growth target is off a few percentage points, we are significantly ahead on our operating loss target reduction with the operating loss from continuing operations, excluding acquisition-related expenses, narrowing to $2.7 million from a loss of $5.1 million a year ago. We budgeted a cash burn for the first nine months of the year to be approximately $6.5 million, and excluding acquisition and divestiture related activity, the cash burn was less than $5 million. Now our focus is on completing the integration of the SS AWC business into Derma Sciences, increasing cross-selling opportunities, and continuing to increase operating and gross margins. We are also focused on product and clinical-based data development to lay the foundation for greater topline growth in 2017 while still meeting our objectives for positive EBITDA and positive operating cash flow.”

Financial Results

Net sales for the third quarter of 2016 were $21.8 million, up 22.6% from $17.8 million for the third quarter of 2015. This included AWC sales of $15.8 million, up 39.1% from $11.3 million in the prior-year quarter, and TWC sales of $6.0 million, down 6.5% from $6.4 million in the prior-year quarter. The AWC sales increase includes $4.0 million from SS AWC sales for approximately two months of the quarter together with the DS AWC sales that were 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 traditional and private-label retail demand in the U.S.

Gross profit for the third quarter of 2016 was $10.7 million, up 46.8% from $7.3 million in the third quarter of 2015. The increase in gross profit was driven by the sale of higher-margin SS AWC products, higher sales of DS AWC products and lower sales of lower-margin TWC products. Gross margin percentage was 49.1%, for the third quarter of 2016, compared with 41.0% in the prior year. The increase in gross margin percentage was principally due to favorable product sales mix, partially offset by higher manufacturing costs.

Operating expense for the third quarter of 2016 was $16.5 million, compared with $12.3 million for the third quarter of 2015. The increase was principally due to the addition of $3.4 million in SS AWC operating expenses, $3.1 million in transaction-related expenses and $0.8 million of one-time severance expense, partially offset by cost-reduction initiatives.

Net loss from continuing operations for the third quarter of 2016 was $4.6 million, or $0.17 per share, compared with a net loss from continuing operations for the third quarter of 2015 of $4.7 million, or $0.18 per share.

Net sales for the nine months ended September 30, 2016 were $55.5 million, compared with $51.4 million for the nine months ended September 30, 2015. AWC net sales were $37.4 million, up 18.9% from $31.4 million in the prior-year period. TWC net sales were $18.2 million, down 9.0% from $20.0 million in the prior-year period. Operating expense decreased $3.1 million, or 7.9%, to $35.7 million in the first nine months of 2016 from $38.8 million in the first nine months of 2015, reflecting the Company’s restructuring initiatives and lower research and development expenses of approximately of $10.6 million, partially offset by $7.5 million of SS AWC operating, transaction and other related expenses. This contributed to the improvement in operating loss to $10.9 million in the first nine months of 2016 from $17.7 million in the first nine months of 2015.

The Company reported a net loss from continuing operations for the nine months ended September 30, 2016 of $5.0 million, or $0.19 per share, compared with a net loss from continuing operations of $17.1 million, or $0.66 per share, for the same period in 2015. The Company reported net income from discontinued operations of $3.8 million, or $0.15 per share, related to the FAD divestiture for the nine months ended September 30, 2016 and a loss of $11.8 million, or $0.46 per share for the discontinuation of FAD and its DSC127 pharmaceutical development program for the same period in 2015. The Company reported a net loss of $1.2 million, or $0.04 per share, for the nine months ended September 30, 2016, compared with a net loss of $28.9 million, or $1.12 per share, for the nine months ended September 30, 2015.

As of September 30, 2016, Derma Sciences had cash, cash equivalents and short-term investments of $41.0 million, compared with $40.8 million as of December 31, 2015. In addition, the Company had a $15.4 million investment in equity securities as of September 30, 2016, compared with $16.1 million as of December 31, 2015.

The Company’s financial results reflect the presentation of FAD as a discontinued operation.

Financial Guidance

Derma Sciences is providing the following updated information and financial guidance for 2016, based upon a current assessment of its fourth quarter performance capabilities.

• GAAP 2016, which reflects purchase accounting and thus includes BioD net sales since August 5, 2016:
  • Net sales of $81.6 million
    • Representing sales growth of $13.8 million, or 20.4% compared with net sales of $67.8 million for 2015
  • AWC net sales of $56.8 million, compared with prior guidance of $57.7 million
    • Representing sales growth of 35.9% compared with net sales of $41.8 million for 2015
  • TWC net sales of $24.8 million
    • Representing a sales decline of 4.6% compared with net sales of $26.0 million for 2015
• Pro forma 2016, which assumes 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):
  • Net sales of $95.2 million, compared with prior guidance of $97.3 million
    • Representing sales growth of 10.2% compared with net sales of $86.4 million for 2015
  • AWC net sales of $70.4 million, compared with prior guidance of $71.5 million
    • Representing sales growth of 16.6% compared with net sales of $60.4 million for 2015
    • Consisting of $46.4 million for DS AWC product sales (up 11.0% over 2015), compared with prior guidance of $47.2 million, plus $24.0 million for SS AWC product sales (up 29% over 2015), compared with prior guidance of $24.3 million
    • Gross margin for the AWC business of approximately 65%
  • TWC net sales of $24.8 million, compared with prior guidance of $25.8 million
    • Representing a sales decline of 4.6% compared with net sales of $26.0 million for 2015

Conference Call and Webcast

Derma Sciences management will host a conference call at 11:00 a.m. Eastern time today to discuss third 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 11970991. 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 November 16, 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 11970991. 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 September 30,         2016     2015* Net Sales $ 21,809,526 $ 17,787,527 Cost of sales         11,103,064         10,491,932   Gross Profit         10,706,462         7,295,595   Operating Expenses Selling, general and administrative 13,694,540 12,228,883 Acquisition related 2,734,653 - Research and development         76,274         120,386   Total operating expenses         16,505,467         12,349,269   Operating loss (5,799,005 ) (5,053,674 ) Other expense, net         (230,571 )       (672,259 ) Loss from continuing operations before income taxes (6,029,576 ) (5,725,933 ) Income tax benefit         1,456,277         1,051,892   Net Loss from Continuing Operations         (4,573,299 )       (4,674,041 ) Discontinued Operations Loss from discontinued DSC127 program - (4,851,892 ) Income from discontinued FAD operations 261,658 591,202 Gain on sale of FAD business 3,755,205 - Income tax provision         (835,135 )       (28,071 ) Income (Loss) from Discontinued Operations         3,181,728         (4,288,761 ) Net Loss       $ (1,391,571 )     $ (8,962,802 ) Net income (loss) per common share- basic and diluted Continuing operations $ (0.17 ) $ (0.18 ) Discontinued operations         0.12         (0.17 ) Total net loss per common share - basic and diluted       $ (0.05 )     $ (0.35 ) Shares used in computing net loss per common share – basic and diluted         27,241,706         25,806,549   * Reclassified for discontinued operations             DERMA SCIENCES, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)                         Nine Months Ended         September 30,         2016     2015* Net Sales $ 55,525,732 $ 51,371,639 Cost of sales         30,754,229         30,310,463   Gross Profit         24,771,503         21,061,176   Operating Expenses Selling, general and administrative 32,726,074 38,053,638 Acquisition related 2,892,713 - Research and development         76,274         703,511   Total operating expenses         35,695,061         38,757,149   Operating loss (10,923,558 ) (17,695,973 ) Other income (expense), net         4,572,570         (159,533 ) Loss from continuing operations before income taxes (6,350,988 ) (17,855,506 ) Income tax benefit         1,394,120         755,108   Net Loss from Continuing Operations         (4,956,868 )       (17,100,398 ) Discontinued Operations Loss from discontinued DSC127 program - (13,231,893 ) Income from discontinued FAD operations 1,115,583 1,558,380 Gain on sale of FAD assets 3,755,205 - Income tax provision         (1,080,704 )       (84,179 ) Income (Loss) from Discontinued Operations         3,790,084         (11,757,692 ) Net Loss       $ (1,166,784 )     $ (28,858,090 ) Net income (loss) per common share- basic and diluted Continuing operations $ (0.19 ) $ (0.66 ) Discontinued operations         0.15         (0.46 ) Total net loss per common share - basic and diluted       $ (0.04 )     $ (1.12 ) Shares used in computing net loss per common share – basic and diluted         26,343,962         25,707,314   * Reclassified for discontinued operations             DERMA SCIENCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)                   September 30, December 31, ASSETS 2016     2015* Current Assets Cash and cash equivalents $ 25,974,166 $ 15,814,205 Short-term investments 15,000,000 25,003,990 Accounts receivable, net of allowances of $3,089,492 and $667,826, respectively 10,697,668 6,307,148 Inventories 14,393,173 16,351,013 Current portion of notes receivable 938,677 - Prepaid expenses and other current assets 1,680,343 1,406,799 Current assets of discontinued operations   577,762         7,172,095   Total current assets 69,261,789 72,055,250 Long-term equity investment 15,426,148 16,110,178 Long-term portion of notes receivable 2,086,879 -

Equipment and improvements, net of accumulated depreciation andamortization of $7,838,929 and $7,158,155, respectively

4,474,165 4,025,811

Identifiable intangible assets, net of accumulated amortization of$14,915,522 and $12,805,688, respectively

24,951,604 9,441,188 Goodwill 64,590,456 8,778,009 Other assets 103,820 99,385 Long-term assets of discontinued operations   -         5,221,689   Total Assets $ 180,894,861       $ 115,731,510     LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 3,194,480 $ 3,283,581 Accrued expenses and other current liabilities 8,193,998 6,297,691 Current portion of contingent consideration 42,078,758 - Current liabilities of discontinued operations   120,192         4,905,489   Total current liabilities 53,587,428 14,486,761 Long-term portion of contingent consideration 12,372,775 - Long-term liabilities 498,055 1,014,378 Deferred tax liability 2,023,906 920,879 Long-term liabilities of discontinued operations   -         883,637   Total Liabilities   68,482,164         17,305,655   Stockholders’ Equity Convertible preferred stock 733 733 Common stock 282,692 258,769 Additional paid-in capital 248,140,518 234,943,291 Accumulated other comprehensive income 7,205,384 5,272,908 Accumulated deficit   (143,216,630 )       (142,049,846 ) Total Stockholders’ Equity   112,412,697         98,425,855   Total Liabilities and Stockholders’ Equity $ 180,894,861       $ 115,731,510   * Reclassified for discontinued operations  

Derma Sciences, Inc. and SubsidiariesNon-GAAP Financial Measures and Reconciliation

Beginning this quarter, the Company has reported Adjusted Gross Profit, Adjusted Loss from continuing operations before income taxes and Adjusted EBITDA in addition to reporting GAAP results.The Company believes that the presentation of these measures provides important supplemental information to management and investors regarding our operational performance and/or financial position to both investors and management. Each of these non-GAAP financial measures reflects a measure of the Company’s operating results before consideration of certain charges and consequently, none of these measures should be construed as an alternative to our disclosure determined in accordance with GAAP.

In addition to our GAAP results, we provide Adjusted gross profit, Adjusted loss from continuing operations before income taxes and Adjusted EBITDA. Adjusted Gross Profit consists of GAAP gross profit excluding amortization of fair value step up in inventory and amortization of identifiable intangible assets. Adjusted Loss from continuing operations before income taxes consists of GAAP loss from continuing operations before income taxes excluding acquisition related costs, amortization of fair value step up in inventory, change in fair value of contingent consideration and gain on sale of equity investment. Adjusted EBITDA consists of GAAP net loss excluding acquisition related costs, amortization of fair value step up of inventory, change in fair value of contingent consideration, interest income, net, dividend income, gain on sale of equity investment, income taxes continuing operations, depreciation expense, amortization of identifiable intangible assets, stock based compensation, loss from discontinued DSC 127 program and income on sale of discontinued FAD business.

With respect to the non-GAAP financial measure discussed in the press release, the Company has provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures below:

       

Reconciliation of Adjusted Gross Profit

  ADJUSTED GROSS PROFIT     Three Months Ended September 30, Nine Months Ended September 30, 2016 2015 2016 2015   Gross Profit - Per GAAP $10,706,462 $7,295,595 $24,771,503 $21,061,176   Add back:

Amortization of fair value step up in inventory

163,285 — 163,285 — Amortization of identifiable intangible assets 636,131 552,315 1,740,760 1,656,944   Adjusted Gross Profit $11,505,878 $7,847,910 $26,675,548 $22,718,120   Adjusted Gross Profit % 52.8% 44.1% 48.0% 44.2%       Notes:   DS amortization 519,464 552,315 1,624,093 1,656,944 SS amortization 116,667   116,667     Total Amortization Expense in COS 636,131 552,315 1,740,760 1,656,944   Net Sales 21,809,526 17,787,527 55,525,732 51,371,639   GAAP Gross Margin 10,706,462 7,295,595 24,771,503 21,061,176   GAAP GM % 49.1% 41.0% 44.6% 41.0%            

Reconciliation of Loss from Continuing Operations before Income Taxes

  ADJUSTED LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES   Three Months Ended September 30, Nine Months Ended September 30, 2016 2015 2016 2015   Loss from continuing operations before income taxes ($6,029,576) ($5,725,933) ($6,350,988) ($17,855,506)   Add back: Acquisition related costs 2,734,653 _ 2,892,713 _ Amortization of fair value step up in inventory 163,285 _ 163,285 _ Change in fair value of contingent consideration 370,000 _ 370,000 _ Gain on sale of equity investment     (4,740,136) _   Adjusted Loss from continuing operations before taxes ($2,761,638) ($5,725,933) ($7,665,126) ($17,855,506)        

Reconciliation of Net Loss to Adjusted EBITDA

  ADJUSTED EBITDA   Three Months Ended September 30, Nine Months Ended September 30, 2016 2015 2016 2015   Net Loss - Per GAAP ($1,391,571) ($8,962,802) ($1,166,784) ($28,858,090)   Add back: Acquisition related costs 2,734,653 — 2,892,713 — Amortzation of fair value step up in inventory 163,285 — 163,285 — Change in fair value of contingent consideration 370,000 — 370,000 — Interest Income, net (30,402) (26,810) (96,650) (108,998) Dividend Income (31,823) — (189,439) (210,695) Gain on sale of equity investment — — (4,740,136) — Income taxes continuing operations (1,456,277) (1,051,892) (1,394,120) (755,108) Depreciation expense 338,329 229,413 845,620 736,520 Amortization of identifiable intangible assets 1,187,797 693,565 2,556,176 2,080,694 Stock based compensation 446,042 1,197,760 1,787,501 4,006,063 Loss from discontinued DSC 127 program — 4,851,892 — 13,231,893 Income from discontinued FAD business (3,181,728) (563,131) (3,790,084) (1,474,201)   Adjusted EBITDA ($851,695) ($3,632,005) ($2,761,918) ($11,351,922)

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Derma Sciences, Inc.John Yetter, 609-514-4744Chief Financial Officerjyetter@dermasciences.comorInvestorsLHAKim Sutton Golodetz, 212-838-3777kgolodetz@lhai.comorBruce Voss, 310-691-7100bvoss@lhai.com