10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

___________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

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

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:  August 12, 2013	Class:	Common Stock, par value $.01 per share
		Shares Outstanding:  17,264,198

PART I – FINANCIAL INFORMATION

DERMA SCIENCES, INC.

FORM 10-Q

INDEX

Description			Page
Part I – Financial Information
	Item 1.  Financial Statements (Unaudited)
		Consolidated Balance Sheets – June 30, 2013 and December 31, 2012	2
		Consolidated Statements of Comprehensive Loss – Three months ended June 30, 2013 and June 30, 2012	3
		Consolidated Statements of Comprehensive Loss – Six months ended June 30, 2013 and June 30, 2012	4
		Consolidated Statements of Cash Flows – Six months ended June 30, 2013 and June 30, 2012	5
		Notes to Consolidated Financial Statements	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		27
	Item 4.  Controls and Procedures		27
Part II - Other Information
	Item 1.  Legal Proceedings		28
	Item 1A.  Risk Factors		28
	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

Part I – Financial Information

Item 1. Financial Statements.

DERMA SCIENCES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

ASSETS	June 30, 2013			December 31, 2012
Current Assets
Cash and cash equivalents	$	21,402,603		$	41,616,657
Short-term investments		16,472,000			3,730,000
Accounts receivable, net		7,425,109			7,085,713
Inventories		14,051,601			13,670,588
Prepaid expenses and other current assets		3,068,825			3,209,031
Total current assets		62,420,138			69,311,989
Long-term investments		1,494,000			498,000
Equipment and improvements, net		2,986,501			3,304,852
Identifiable intangible assets, net		15,781,556			17,128,883
Goodwill		13,457,693			13,457,693
Other assets		138,858			141,213
Total Assets	$	96,278,746		$	103,842,630
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	4,817,561		$	3,993,687
Accrued expenses and other current liabilities		4,058,851			4,132,934
Total current liabilities		8,876,412			8,126,621
Long-term liabilities		274,661			268,517
Deferred tax liability		1,744,792			1,736,299
Total Liabilities		10,895,865			10,131,437
Commitments and contingencies (Note 8)
Stockholders’ Equity
Convertible preferred stock, $.01 par value; shares authorized 1,468,750; issued and outstanding 73,332 at June 30, 2013 and December 31, 2012 (liquidation preference of $3,222,368 at June 30, 2013)		733			733
Common stock, $.01 par value; shares authorized 35,000,000; issued and outstanding 17,241,248 at June 30, 2013 and 16,524,723 at December 31, 2012		172,412			165,247
Additional paid-in capital		137,636,158			132,163,083
Accumulated other comprehensive income – cumulative translation adjustments		1,369,788			1,588,888
Accumulated deficit		(53,796,210	)		(40,206,758	)
Total Stockholders’ Equity		85,382,881			93,711,193
Total Liabilities and Stockholders’ Equity	$	96,278,746		$	103,842,630

See accompanying consolidated notes.

2

DERMA SCIENCES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss (Unaudited)

	Three Months Ended June 30,
	2013			2012
Net Sales	$	18,148,061		$	17,609,799
Cost of sales		11,473,900			11,411,224
Gross Profit		6,674,161			6,198,575
Operating Expenses
Selling, general and administrative		10,823,370			9,229,184
Research and development		3,242,599			1,515,329
Total operating expenses		14,065,969			10,744,513
Operating loss		(7,391,808	)		(4,545,938	)
Other (income) expense, net:
Interest income		(8,030	)		(5,771	)
Other (income) expense, net		(8,703	)		56,069
Total other (income) expense, net		(16,733	)		50,298
Loss before income taxes		(7,375,075	)		(4,596,236	)
Income tax benefit		(30,402	)		(1,804,187	)
Net Loss		(7,344,673	)		(2,792,049	)
Other Comprehensive Loss
Foreign currency translation adjustment		(169,419	)		(86,510	)
Comprehensive Loss	$	(7,514,092	)	$	(2,878,559	)
Net loss per common share – basic and diluted	$	(0.43	)	$	(0.23	)
Shares used in computing net loss per common share – basic and diluted		17,068,854			12,243,156

See accompanying consolidated notes.

3

DERMA SCIENCES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss (Unaudited)

	Six Months Ended June 30,
	2013			2012
Net Sales	$	36,937,807		$	32,887,165
Cost of sales		23,559,181			21,812,430
Gross Profit		13,378,626			11,074,735
Operating Expenses
Selling, general and administrative		20,676,455			15,588,274
Research and development		6,235,765			2,630,027
Total operating expenses		26,912,220			18,218,301
Operating loss		(13,533,594	)		(7,143,566	)
Other expense (income), net:
Interest income		(14,052	)		(10,850	)
Other expense, net		86,124			1,185
Total other expense (income), net		72,072			(9,665	)
Loss before income taxes		(13,605,666	)		(7,133,901	)
Income tax benefit		(16,214	)		(1,802,951	)
Net Loss		(13,589,452	)		(5,330,950	)
Other Comprehensive Loss
Foreign currency translation adjustment		(219,100	)		(7,170	)
Comprehensive Loss	$	(13,808,552	)	$	(5,338,120	)
Net loss per common share – basic and diluted	$	(0.81	)	$	(0.46	)
Shares used in computing net loss per common share – basic and diluted		16,832,578			11,660,609

See accompanying consolidated notes.

4

DERMA SCIENCES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,
	2013			2012
Operating Activities
Net loss	$	(13,589,452	)	$	(5,330,950	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of equipment and improvements		467,400			516,209
Amortization of intangible assets		1,447,327			667,540
Provision (recovery) for bad debts		14,000			(2,923	)
(Recovery) allowance for sales adjustments		(16,805	)		12,080
Provision for inventory obsolescence		73,781			84,060
Loss on disposal of equipment		--			25,653
Deferred rent expense		16,945			(15,459	)
Stock based compensation		2,806,137			1,251,322
Deferred income taxes		74,639			(1,829,470	)
Changes in operating assets and liabilities:
Accounts receivable		(349,151	)		340,591
Inventories		(732,687	)		(3,711,502	)
Prepaid expenses and other current assets		83,236			1,305,474
Other assets		(431	)		(46,799	)
Accounts payable		871,362			(224,045	)
Accrued expenses and other current liabilities		30,839			(211,360	)
Net cash used in operating activities		(8,802,860	)		(7,169,579	)
Investing Activities
Investment in acquired business, net of cash acquired		--			(14,382,578	)
Purchase of investments		(16,475,000	)		(1,990,000	)
Proceeds from sale of investments		2,737,000			2,240,000
Purchase of equipment and improvements		(282,574	)		(409,944	)
Proceeds from sale of equipment		--			43,000
Purchase of identifiable intangible assets		(100,000	)		--
Net cash used in investing activities		(14,120,574	)		(14,499,522	)
Financing Activities
Proceeds from sale of common stock, net of costs		--			17,855,922
Proceeds from exercise of stock options and warrants, net of costs		2,750,549			329,878
Payment of withholding taxes related to employee stock compensation		(76,446	)		(68,190	)
Net cash provided by financing activities		2,674,103			18,117,610
Effect of exchange rate changes on cash and cash equivalents		35,277			40,867
Net decrease in cash and cash equivalents		(20,214,054	)		(3,510,624	)
Cash and cash equivalents
Beginning of period		41,616,657			17,110,350
End of period	$	21,402,603		$	13,599,726
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	717		$	943

See accompanying consolidated notes.

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 medical technology 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 and the Far East. The Company also 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 8 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 six months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. Information included in the consolidated balance sheet as of December 31, 2012 has been derived from the consolidated financial statements and footnotes thereto for the year ended December 31, 2012, 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.

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 six months ended June 30, 2013 and 2012 as the effect would be anti-dilutive.

6

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

	Three and Six Months Ended June 30,
	2013		2012
Dilutive shares:
Convertible preferred stock		73,332		73,332
Additional stock issuable related to conversion of preferred stock		73,566		-
Restricted share units		802,800		54,400
Warrants		2,305,593		3,035,036
Stock options		1,853,805		1,745,317
Total dilutive shares		5,109,096		4,908,085

2. Acquisition

On April 16, 2012, the Company acquired all of the outstanding stock of MedEfficiency, Inc. (“MedEfficiency”) pursuant to the terms of an Agreement and Plan of Merger. The purchase price was $14,500,000 and was funded by the Company with cash on hand.

MedEfficiency develops, manufactures and markets medical devices for treating chronic wounds and lower extremity injuries, specializing in total contact casting (“TCC”) products. The TCC-EZ total contact cast system is MedEfficiency’s lead product, in addition to a line of traditional and specialized contact casts and related equipment. The Company has distributed MedEfficiency’s TCC products since 2008 under an exclusive distribution agreement.

The acquisition has been accounted for as a purchase. Accordingly, the results of operations of MedEfficiency have been included in the consolidated financial statements commencing April 17, 2012. The allocation of the purchase price to the estimated fair value of the assets acquired and the liabilities assumed is outlined below:

Current assets	$	925,817
Equipment		29,579
Acquired intangible assets		10,700,000
Goodwill		6,362,967
Total assets acquired		18,018,363
Current liabilities		653,315
Deferred tax liability		2,982,470
Total liabilities assumed		3,635,785
Net assets acquired	$	14,382,578
Purchase price	$	14,500,000
Less cash acquired		117,422
Net cash paid	$	14,382,578

The allocation of the purchase price to the assets acquired and liabilities assumed was based on an independent valuation study to establish the fair value of the identifiable intangible assets acquired. The identifiable intangible assets acquired consist of developed technology and patents, customer relationships, a supply agreement, trade names and trademarks and non-compete agreements. The Company recorded the excess of the purchase price over the fair values of the identifiable assets acquired and liabilities assumed as goodwill. While the acquired intangible assets are amortizable for financial reporting purposes, the acquired intangible assets and goodwill are not deductible for tax purposes. Deferred taxes have been recorded associated with the acquisition for the basis differences for financial reporting and income tax purposes for the acquired identifiable intangible assets at the effective tax rates for the period in which the deferred tax asset and liability are expected to reverse.

7

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The unaudited pro forma information below presents combined results of operations as if the acquisition had occurred at the beginning of the periods presented instead of April 16, 2012. The pro forma information is based on historical results adjusted for the effect of purchase accounting and is not necessarily indicative of the results of operations of the combined entity had the acquisition occurred at the beginning of the periods presented, nor is it necessarily indicative of future results.

	Three months ended,			Six months ended,
	June 30, 2012			June 30, 2012
	(Unaudited)			(Unaudited)
Revenues	$	17,752,254		$	34,274,654
Net Loss	$	(4,936,884	)	$	(5,666,891	)
Net Loss per common share:
Basic and Diluted	$	(0.40	)	$	(0.49	)
Weighted average number of shares:
Basic and Diluted		12,243,156			11,660,609

The proforma results of operations include a deferred income tax benefit of $1,919,656 associated with the acquisition for differences in financial and income tax reporting basis differences of the acquired identifiable intangible assets at the effective tax rates for the period in which the deferred tax assets and liabilities are expected to reverse.

3. Cash and Cash Equivalents and Investments

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 considers highly liquid investments purchased with an original maturity greater than three months as investments. Investments with maturities greater than one year from the balance sheet date are classified as a long-term asset.

Cash and cash equivalents and investments at June 30, 2013 and December 31, 2012 consisted of the following:

	June 30, 2013		December 31, 2012
Cash	$	4,422,179	$	4,909,663
Money market mutual funds		16,980,424		36,706,994
Cash and cash equivalents		21,402,603		41,616,657
Investments		17,966,000		4,228,000
Total cash and cash equivalents and investments	$	39,368,603	$	45,844,657

The Company maintains cash with various domestic and foreign financial institutions within the ordinary course of business, which at times may exceed jurisdictional insurance limits. The money market mutual funds consist of funds deposited into mutual funds investing in U.S. government obligations that are fully secured by the U.S. government. Investments consist of certificates of deposits in various U.S. financial institutions and are fully insured by the Federal Deposit Insurance Corporation. The Company intends to hold its investments to maturity and accordingly these investments are carried at cost.

8

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table provides fair value information as of June 30, 2013:

			Fair Value Measurements, Using
	Total carrying value as of June 30, 2013		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash and cash equivalents	$	21,402,603	$	21,402,603	$	-	$	-
Investments		17,966,000		17,946,671		-		-
Total	$	39,368,603	$	39,349,274	$	-	$	-

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.

4. Inventories

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

	June 30, 2013		December 31, 2012
Finished goods	$	9,499,636	$	9,574,685
Work in process		859,735		554,129
Packaging materials		1,065,926		991,157
Raw materials		2,626,304		2,550,617
Total inventory	$	14,051,601	$	13,670,588

5. Stockholders’ Equity

Preferred Stock

Subsequent to the issuances of the preferred stock, the Company has undertaken a number of common stock offerings that would impact the preferred stock conversion ratios. Previous preferred stockholders who have converted their preferred shares will receive an additional 141,448 shares of common stock as a result of the conversion ratio adjustments, of which 115,639 shares were issued during the six months ended June 30, 2013 and 25,809 remain issuable. As of June 30, 2013, current Series A and B preferred stockholders holding 73,332 preferred shares are entitled to receive an aggregate of 121,089 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 141,448 incremental shares associated with the conversion ratio adjustment will be recorded to common stock at par with the offset to additional paid in capital when issued as all of the convertible preferred stock was issued prior to the November 16, 2000 effective date of certain provisions of ASC 470 (formerly, EITF 00-27 Application of Issue No. 98-5 to Certain Convertible Instruments).

9

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Common Stock

On May 22, 2013, shareholders of the Company approved the proposal to increase the number of authorized shares of common stock from 25,000,000 to 35,000,000. During the six months ended June 30, 2013, the Company issued 716,525 shares of common stock consisting of: 537,466 shares upon the exercise of stock purchase warrants and options for which the Company received $2,778,757 (net of $28,208 in expenses), 115,639 shares in connection with the preferred stock ratio adjustments, 58,970 shares in connection with the vesting of 66,900 shares of restricted common stock net of the shares withheld for payment of withholding taxes, and 4,450 shares to a retired director of the Company for consulting services.

Stock Purchase Warrants

At June 30, 2013, 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
L		6,250	$	3.12	March 31, 2014
N		100,000	$	6.25	February 22, 2015
O		230,900	$	5.50	February 22, 2015
P		2,508	$	6.25	February 16, 2015
Q		133,333	$	5.50	February 22, 2015
R		1,832,602	$	9.90	June 22, 2016
Total		2,305,593

During the six months ended June 30, 2013, a total of 624,561 warrants were exercised on a for cash and cashless basis consisting of 367,814 Series K, 200,893 Series J, 53,667 Series O, and 2,187 Series P warrants. A total of 421,278 shares of common stock were issued in connection with the 2013 warrant exercises.

Equity Based Compensation

Under the Equity Incentive Plan (the “EIP Plan”) the Company is authorized to issue shares of common stock. On May 22, 2013, shareholders of the Company approved the proposal to increase the number of authorized shares of common stock the Company can issue from 2,812,500 to 4,500,000. 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 June 30, 2013, options to purchase 1,853,805 shares and 802,800 restricted share units were issued and outstanding under the EIP Plan and 1,428,264 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 six months ended June 30, 2013 and 2012, 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:

10

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Risk-free interest rate		1.16	%		1.11	%		1.22	%		1.17	%
Volatility factor		70.2	%		73.6	%		70.0	%		74.5	%
Dividend yield		0	%		0	%		0	%		0	%
Expected option life (years)		6.25			6.25			6.25			6.25

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 6.25 year expected option life for Company employees and directors while the 10 year 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.

A summary of the Company’s stock option activity and related information for the six months ended June 30, 2013 was as follows:

	Options			Weighted Average Exercise Price
Outstanding – January 1, 2013		1,639,985		$	6.38
Granted		393,180		$	12.07
Exercised		(165,622	)	$	5.65
Forfeited		(13,738	)	$	9.77
Outstanding – June 30, 2013		1,853,805		$	7.67
Expected to vest – June 30, 2013		1,835,267		$	7.67
Exercisable at June 30, 2013		1,351,798		$	6.52

During 2013, the Company granted 277,580 service based options and 115,600 performance based options to Company employees and consultants. The weighted average fair value per share of options granted during the six months ended June 30, 2013 was $8.25.

During the six months ended June 30, 2013, 165,622 stock options were exercised on a for cash and cashless basis. A total of 116,188 shares of common stock were issued in connection with the 2013 stock option exercises. The intrinsic value of options exercised in 2013 was $1,111,730.

During the three and six months ended June 30, 2013 and 2012, stock option compensation expense was recorded as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Cost of sales	$	13,636	$	36,266	$	68,343	$	80,184
Selling, general and administrative expenses		627,186		407,070		1,135,792		950,059
Research and development		13,895		2,648		71,655		8,781
Total stock option compensation expense	$	654,717	$	445,984	$	1,275,790	$	1,039,024

As of June 30, 2013, there was $2,097,639 of unrecognized compensation cost related to nonvested service based awards and $641,715 related to nonvested performance based awards. These costs are expected to be recognized over the options’ remaining weighted average vesting period of 1.93 years for the service and 0.50 years for the performance based awards.

11

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Restricted Share Units

The Company has issued service, performance and market based restricted share units to employees 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.

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

	Number of Shares			Weighted Average Fair Value
Unvested January, 1, 2013		786,900		$	7.07
Granted		82,800			13.66
Vested		(66,900	)		9.52
Unvested, June 30, 2013		802,800		$	9.22

In connection with the vesting of restricted share unit awards during the six months ended June 30, 2013, 7,930 common stock shares with a fair value of $76,446 were withheld in satisfaction of employee tax withholding obligations.

During the three and six months ended June 30, 2013 and 2012, restricted share unit compensation expense was recorded as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Cost of sales	$	-	$	7,796	$	-	$	12,994
Selling, general and administrative expenses		661,329		115,180		1,192,925		199,304
Total restricted share unit compensation expense	$	661,329	$	122,976	$	1,192,925	$	212,298

As of June 30, 2013, there was $6,192,258 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 2.87 years.

In consideration of prior service to the Company, a retiring director received 5,000 restricted share units, acceleration of the vesting of any unvested stock options and restricted share units and extension of the date to exercise vested stock options to the earlier of 36 months or the awards original expiration date (versus 90 days) from the date of the retirement. Also during the six months ended June 30, 2013, the Company granted 4,450 shares of common stock to a former director for consulting services. An additional $337,422 of stock based compensation expense was recognized during the three and six months ended June 30, 2013 and included in selling, general and administrative expense in connection with these activities.

12

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Shares Reserved for Future Issuance

At June 30, 2013, the Company had reserved the following shares of common stock for future issuance:

Convertible preferred shares (series A – B)	73,332
Additional stock issuable related to conversion of preferred stock	73,566
Common stock options outstanding	1,853,805
Common stock warrants outstanding	2,305,593
Restricted share units outstanding	802,800
Common stock equivalents available for grant	1,428,264
Total common stock shares reserved	6,537,360

6. 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, bandages and ointments 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 closer strips, catheter fasteners and skin care products. Pharmaceutical wound care products consist of DSC127, a novel product for the treatment of diabetic foot ulcers which is presently under development.

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 end users. 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 DSC127.

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 2013 and 2012 were as follows:

	Three Months Ended June 30, 2013
	Advanced Wound Care			Traditional Wound Care			Pharmaceutical Wound Care			Other			Total Company
Net sales	$	7,910,616		$	10,237,445		$	-		$	-		$	18,148,061
Gross profit		3,938,156			2,736,005			-			-			6,674,161
Direct expense		(5,200,282	)		(1,284,977	)		(3,269,670	)		-			(9,754,929	)
Segment contribution	$	(1,262,126	)	$	1,451,028		$	(3,269,670	)		-			(3,080,768	)
Indirect expenses										$	(4,263,905	)		(4,263,905	)
Net loss													$	(7,344,673	)

	Three Months Ended June 30, 2012
Net sales	$	5,800,152		$	11,809,647		$	-		$	-		$	17,609,799
Gross profit		3,127,521			3,071,054			-			-			6,198,575
Direct expense		(5,101,082	)		(1,136,273	)		(1,532,058	)		-			(7,769,413	)
Segment contribution	$	(1,973,561	)	$	1,934,781		$	(1,532,058	)		-			(1,570,838	)
Indirect expenses										$	(1,221,211	)		(1,221,211	)
Net loss													$	(2,792,049	)

	Six Months Ended June 30, 2013
	Advanced Wound Care			Traditional Wound Care			Pharmaceutical Wound Care			Other			Total Company
Net sales	$	15,398,998		$	21,538,809		$	-		$	-		$	36,937,807
Gross profit		7,567,297			5,811,329			-			-			13,378,626
Direct expense		(10,423,871	)		(2,487,944	)		(6,285,762	)		-			(19,197,577	)
Segment contribution	$	(2,856,574	)	$	3,323,385		$	(6,285,762	)		-			(5,818,951	)
Indirect expenses										$	(7,770,501	)		(7,770,501	)
Net loss													$	(13,589,452	)

	Six Months Ended June 30, 2012
Net sales	$10,297,206			$22,589,959			$	-		$	-		$32,887,165
Gross profit		5,230,227			5,844,508			-			-			11,074,735
Direct expense		(8,228,560	)		(2,252,113	)		(2,657,093	)		-			(13,137,766	)
Segment contribution	$	(2,998,333	)	$	3,592,395		$	(2,657,093	)		-			(2,063,031	)
Indirect expenses										$	(3,267,919	)		(3,267,919	)
Net loss													$	(5,330,950	)

14

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents net sales by geographic region.

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
United States		80	%		72	%		79	%		71	%
Canada		11	%		20	%		13	%		21	%
Other		9	%		8	%		8	%		8	%

For the six months ended June 30, 2013 and 2012, the Company had a major Canadian customer comprising 13% and 20%, respectively, of consolidated net sales. Due to outstanding rebate obligations, the Company was in a net liability position to this customer at June 30, 2013.

7. Income Taxes

The following table summarizes the income tax expense and effective tax rate for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,
	2013			2012
Current tax (benefit) expense	$	(72,832	)	$	55,654
Deferred tax expense (benefit)		42,430			(1,859,841	)
Income tax benefit	$	(30,402	)	$	(1,804,187	)
Effective tax rate		0.4	%		39.3	%

		Six Months Ended June 30,
		2013			2012
Current tax (benefit) expense	$	(90,853	)	$	26,519
Deferred tax expense (benefit)		74,639			(1,829,470	)
Income tax benefit	$	(16,214	)	$	(1,802,951	)
Effective tax rate		0.1	%		25.3	%

The income tax expense for the three and six months ended June 30, 2013 and 2012 consisted of a U.S. deferred income tax expense and foreign tax benefit. The U.S. income tax expense for the three and six months ended June 30, 2013 and 2012 related to indefinite lived intangible assets and for 2013 was reduced by a deferred income tax benefit from periodic amortization of nondeductible acquired intangible assets acquired in the MedEfficiency acquisition.

15

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

8. Commitments and Contingencies

New Cast Industry Co., Ltd. Supply Agreement

On March 27, 2013, the Company entered into a supply agreement (the “International Agreement”) with New Cast Industry Co., Ltd. (“NCIC”) relating to NCIC’s proprietary technology for the casting element within the TCC-EZ total contact casting system (the “Technology”). The Company has been purchasing product from NCIC utilizing the Technology in the TCC-EZ series of total contact casting system products for TCC-EZ product sales within North America pursuant to the supply agreement dated April 17, 2012 (the “North America Agreement”), and intends to continue to do so.

Under the International Agreement, NCIC agreed to exclusively supply the Company with its product utilizing the Technology and granted the Company the exclusive right to sell products incorporating the Technology outside North America. If the Company does not achieve the first commercial sale of a product incorporating the Technology in Latin America, Europe, Middle East, Australia, Asia and India (the “Territory”) by certain dates, NCIC has the right, as its sole remedy, to convert the exclusive license in the Territory to a non-exclusive license. Unless otherwise terminated pursuant to the terms of the International Agreement, the term is for five years with automatic five year renewals.

In consideration for the exclusive international rights set forth above, the Company paid NCIC $200,000. Provided this agreement has not been terminated as a result of a breach by the Company, NCIC will refund $100,000 to the Company on the first anniversary of the International Agreement. The initial cost of $100,000 has been capitalized as an identifiable intangible asset and is being amortized over the initial five year term of the agreement, and a $100,000 deposit has been recorded. Further, the International Agreement includes milestone payments of up to $1,000,000 to NCIC based upon achievement of international net sales levels during a calendar year.

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. and its subsidiaries (“we” or “us” or the “Company”), a Delaware corporation, 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 filed on March 28, 2013 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.

Quarter Ended June 30, 2013 Compared to Quarter Ended June 30, 2012

Overview

Operating Results of Quarters Ended June 30, 2013 and 2012

The following table highlights the operating results of the quarters ended June 30, 2013 and 2012:

	Quarter Ended June 30,						Variance
	2013			2012
Gross sales	$	19,983,956		$	20,159,902		$	(175,946	)	(0.9	)%
Sales adjustments		(1,835,895	)		(2,550,103	)		714,208		(28.0	)%
Net sales		18,148,061			17,609,799			538,262		3.1	%
Cost of sales		11,473,900			11,411,224			62,676		0.5	%
Gross profit		6,674,161			6,198,575			475,586		7.7	%
Selling, general and administrative expense		10,823,370			9,229,184			1,594,186		17.3	%
Research and development expense		3,242,599			1,515,329			1,727,270		114.0	%
Interest income		(8,030	)		(5,771	)		(2,259	)	39.1	%
Other (income) expense, net		(8,703	)		56,069			(64,772	)	*
Total expenses		14,049,236			10,794,811			3,254,425		30.1	%
Loss before income taxes		(7,375,075	)		(4,596,236	)		(2,778,839	)	60.5	%
Income tax benefit		(30,402	)		(1,804,187	)		1,773,785		*
Net loss	$	(7,344,673	)	$	(2,792,049	)	$	(4,552,624	)	163.1	%

* – not meaningful

17

Gross to Net Sales Adjustments

Gross to net sales adjustments comprise the following:

	Quarter Ended June 30,
	2013			2012
Gross sales	$	19,983,956		$	20,159,902
Trade rebates		(1,159,703	)		(1,856,329	)
Distributor fees		(172,732	)		(323,431	)
Sales incentives		(270,217	)		(149,391	)
Returns and allowances		(71,272	)		(92,318	)
Cash discounts		(161,971	)		(128,634	)
Total adjustments		(1,835,895	)		(2,550,103	)
Net sales	$	18,148,061		$	17,609,799

Trade rebates decreased in 2013 versus 2012 principally due to lower sales in Canada, and a decrease in the rebate percentage due to a change in product mix towards lower rebated products, partially offset by an increase in U.S. sales subject to rebate due to sales growth. The decrease in distributor fees is commensurate with the decrease in Canadian sales upon which the fees are based. The increase in sales incentives reflects higher sales subject to incentives. The increase in cash discounts relates to an increase in U.S. sales to customers that normally take the cash discount along with higher U.S. sales subject to cash discount.

Rebate Reserve Roll-Forward

A roll-forward of the trade rebate accruals for the quarters ended June 30, 2013 and 2012 were as follows:

	June 30,
	2013			2012
Beginning balance – April 1	$	2,357,166		$	2,057,381
Rebates paid		(1,722,313	)		(1,897,233	)
Rebates accrued		1,159,703			1,856,329
Ending balance – June 30	$	1,794,556		$	2,016,477

The $562,610 decrease in the trade rebate reserve balance at June 30, 2013 from March 31, 2013 principally reflects a decrease in sales subject to rebate in Canada and the timing of rebate payments. There has been no other significant change in the nature of our business in 2013 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 quarters ended June 30, 2013 versus 2012:

	Quarter Ended June 30,						Variance
	2013			2012
Net Sales	$	18,148,061		$	17,609,799		$	538,262	3.1	%
Cost of sales		11,473,900			11,411,224			62,676	0.5	%
Gross Profit	$	6,674,161		$	6,198,575		$	475,586	7.7	%
Gross Profit %		36.8	%		35.2	%

18

Net sales increased $538,262, or 3.1% (3.4% adjusted for exchange) in 2013 versus 2012. Advanced wound care sales increased $2,110,464, or 36.4%, to $7,910,616 in 2013 from $5,800,152 in 2012. Traditional wound care sales decreased $1,572,202, or 13.3%, to $10,237,445 in 2013 from $11,809,647 in 2012.

Sales from U.S. operating entities increased $1,898,964, or 13.9%, to $15,587,137 in 2013 from $13,688,173 in 2012. The increase was driven by higher advanced wound care sales of $1,971,660, or 38.5%, offset by a decrease in traditional wound care sales of $72,696, or 0.8%. The U.S. advanced wound care sales increase was led by Medihoney and Total Contact Casting (“TCC”). The traditional wound care sales decrease was driven by lower first aid products offset by higher private label. Sales from the Canadian subsidiary decreased $1,485,170, or 44.4% (43.2% adjusted for exchange), to $1,859,406 in 2013 from $3,344,576 in 2012. This decrease was driven by lower end user demand of 10.1% due to business lost in 2012, a significant reduction in sales to our exclusive distributor during the quarter as a result of the distributor’s decision to rebalance its inventory and unfavorable exchange of $41,214 associated with a 1.3% weakening of the Canadian dollar. Sales from the international operating subsidiary increased $124,468, or 21.6% (24.3% adjusted for exchange), to $701,518 in 2013 from $577,050 in 2012. The increase was driven by higher advanced wound care sales of $103,399 and higher traditional wound care sales of $21,069.

Gross profit increased $475,586, or 7.7%, in 2013 versus 2012. Advanced wound care gross profit increased $810,635, or 25.9%, to $3,938,156 in 2013 from $3,127,521 in 2012. Traditional wound care gross profit decreased $335,049, or 10.9%, to $2,736,005 in 2013 from $3,071,054 in 2012. The overall gross profit margin percentage increased to 36.8% in 2013 from 35.2% in 2012. The increase in gross profit dollars reflected higher sales, coupled with the higher gross profit margin percentage. The higher gross margin percentage principally reflected an increase in higher margined advanced wound care sales, partially offset by higher product costs.

Selling, General and Administrative Expenses

The following table highlights selling, general and administrative expenses by type for the quarters ended June 30, 2013 versus 2012:

	Quarter Ended June 30,				Variance
	2013		2012
Distribution	$	569,754	$	511,949	$	57,805	11.3	%
Marketing		1,477,734		1,100,114		377,620	34.3	%
Sales		4,262,758		3,657,147		605,611	16.6	%
General and administrative		4,513,124		3,959,974		553,150	14.0	%
Total	$	10,823,370	$	9,229,184	$	1,594,186	17.3	%

Selling, general and administrative expenses increased $1,594,186, or 17.3% (17.5% adjusted for exchange) in 2013 versus 2012.

Distribution expense increased $57,805, or 11.3% (11.6% adjusted for exchange), in 2013 versus 2012. The increase reflected higher operating costs in support of our growing base of sales.

Marketing expense increased $377,620, or 34.3% (34.5% adjusted for exchange), in 2013 versus 2012. The increase was attributable to higher U.S. compensation associated with the issuance of the 2012 and 2013 executive stock-based awards, compensation and benefits for two new marketing and two new clinical personnel added in 2012 and in 2013, and promotional and product development costs principally in support of our advanced wound care growth initiatives, partially offset by lower recruiting costs.

Sales expense increased $605,611, or 16.6% (16.8% adjusted for exchange), in 2013 versus 2012. This increase was principally attributable to incremental costs consisting of compensation and benefits, commission, travel and sample expenses associated with the expansion of the advanced wound care sales force from 20 to 38 representatives that began in the third quarter of 2011 and was completed during the second quarter of 2012, along with the incremental investment of a traditional wound care sales management position to better utilize the capacity of our Toronto manufacturing facility and an international sales management position to support our international growth, compensation expense associated with 2012 and 2013 executive stock based awards, and administrative fees associated with group purchasing and sales data collection programs.

19

General and administrative expenses increased $553,150, or 14.0% (14.2% adjusted for exchange), in 2013 versus 2012. Excluding the 2012 MedEfficiency transaction and integration related expenses of $787,208, general and administrative costs increased $1,340,358. This increase reflects higher legal costs, compensation expense associated with the 2012 and 2013 executive and director’s stock based awards, annual salary increases and the addition of five new positions in 2012 and 2013 to support our growth, along with associated recruiting costs, higher professional service costs, information technology expenses associated with an information systems integration project and insurance expense.

Research and Development Expense

Research and development expense increased $1,727,270 to $3,242,599 in 2013 from $1,515,329 in 2012. The increase reflected the ongoing ramp up of DSC127 Phase 3 related expenses.

Other (Income) Expense, net

Other (income) expense increased $64,772 to income of $8,703 in 2013 from an expense of $56,069 in 2012 due principally to changes in foreign currency exchange.

Income Tax Benefit

Income tax benefit decreased $1,773,785 to $30,402 in 2013 from $1,804,187 in 2012. The income tax benefit for the three months ended June 30, 2012, included a $1,887,383 deferred tax benefit associated with the reduction in the Company’s U.S. valuation allowance in connection with the MedEfficiency acquisition. Excluding the 2012 valuation allowance adjustment the 2013 and 2012 income tax benefits reflects normal operating activity.

Net Loss

We generated a net loss of $7,344,673, or $0.43 per share (basic and diluted), compared to a net loss of $2,792,049, or $0.23 per share (basic and diluted), in 2012.

20

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Overview

Operating Results of Six Months Ended June 30, 2013 and 2012

The following table highlights the operating results of the six months ended June 30, 2013 and 2012:

	Six Months Ended June 30,						Variance
	2013			2012
Gross sales	$	41,026,530		$	37,703,008		$	3,323,522		8.8	%
Sales adjustments		(4,088,723	)		(4,815,843	)		727,120		(15.1	)%
Net sales		36,937,807			32,887,165			4,050,642		12.3	%
Cost of sales		23,559,181			21,812,430			1,746,751		8.0	%
Gross profit		13,378,626			11,074,735			2,303,891		20.8	%
Selling, general and administrative expense		20,676,455			15,588,274			5,088,181		32.6	%
Research and development expense		6,235,765			2,630,027			3,605,738		137.1	%
Interest income		(14,052	)		(10,850	)		(3,202	)	29.5	%
Other expense, net		86,124			1,185			84,939		*
Total expenses		26,984,292			18,208,636			8,775,656		48.2	%
Loss before income taxes		(13,605,666	)		(7,133,901	)		(6,471,765	)	90.7	%
Income tax benefit		(16,214	)		(1,802,951	)		1,786,737		*
Net loss	$	(13,589,452	)	$	(5,330,950	)	$	(8,258,502	)	154.9	%

* – not meaningful

21

Gross to Net Sales Adjustments

Gross to net sales adjustments comprise the following:

	Six Months Ended June 30,
	2013			2012
Gross sales	$	41,026,530		$	37,703,008
Trade rebates		(2,699,434	)		(3,500,491	)
Distributor fees		(437,598	)		(627,702	)
Sales incentives		(484,084	)		(253,656	)
Returns and allowances		(153,122	)		(177,573	)
Cash discounts		(314,485	)		(256,421	)
Total adjustments		(4,088,723	)		(4,815,843	)
Net sales	$	36,937,807		$	32,887,165

Trade rebates decreased in 2013 versus 2012 principally due to lower sales in Canada, and a decrease in the rebate percentage due to a change in product mix towards lower rebated products, partially offset by an increase in U.S. sales subject to rebate due to sales growth. The decrease in distributor fees is commensurate with the decrease in Canadian sales upon which the fees are based. The increase in sales incentives reflects higher sales subject to incentives. The increase in cash discounts principally relates an increase in U.S. sales to customers that normally take the cash discount along with higher U.S. sales subject to cash discount.

22

Rebate Reserve Roll-Forward

A roll-forward of the trade rebate accruals for the six months ended June 30, 2013 and 2012 were as follows:

	June 30,
	2013			2012
Beginning balance – January 1	$	2,466,091		$	2,195,006
Rebates paid		(3,370,969	)		(3,679,020	)
Rebates accrued		2,699,434			3,500,491
Ending balance – June 30	$	1,794,556		$	2,016,477

The $671,535 decrease in the trade rebate reserve balance at June 30, 2013 from December 31, 2012 principally reflects a decrease in sales subject to rebate in Canada. There has been no other significant change in the nature of our business in 2013 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 six months ended June 30, 2013 versus 2012:

	Six Months Ended June 30,						Variance
	2013			2012
Net Sales	$	36,937,807		$	32,887,165		$	4,050,642	12.3	%
Cost of sales		23,559,181			21,812,430			1,746,751	8.0	%
Gross Profit	$	13,378,626		$	11,074,735		$	2,303,891	20.8	%
Gross Profit %		36.2	%		33.7	%

Net sales increased $4,050,642, or 12.3% (12.6% adjusted for exchange) in 2013 versus 2012. Advanced wound care sales increased $5,101,792, or 49.5%, to $15,398,998 in 2013 from $10,297,206 in 2012. Traditional wound care sales decreased $1,051,150, or 4.7%, to $21,538,809 in 2013 from $22,589,959 in 2012.

Sales from U.S. operating entities increased $5,726,632, or 22.8%, to $30,844,526 in 2013 from $25,117,894 in 2012. The increase was driven by higher advanced wound care sales of $5,020,151, or 57.5%, and higher traditional wound care sales of $706,481, or 4.3%. Excluding Total Contact Casting (“TCC”) sales which were positively impacted by our April 2012 acquisition of MedEfficiency, U.S. advanced wound care sales increased 34.2% led by Medihoney and Bioguard. The traditional wound care sales increase was driven by higher private label and first aid products sales. Sales from the Canadian subsidiary decreased $1,819,855, or 27.9% (27.0% adjusted for exchange), to $4,711,920 in 2013 from $6,531,775 in 2012. This decrease was driven by lower end user demand of 12.9% due to business lost in 2012, a significant reduction in sales to our exclusive distributor during the second quarter as a result of the distributor’s decision to rebalance its inventory, and an unfavorable exchange of $58,987 associated with a 1.0% weakening of the Canadian dollar. Sales from the international operating subsidiary increased $143,865, or 11.6% (13.4% adjusted for exchange), to $1,381,361 in 2013 from $1,237,496 in 2012. The increase was driven by higher advanced wound care sales of $81,615 and traditional wound care sales of $62,250.

Gross profit increased $2,303,891, or 20.8%, in 2013 versus 2012. Advanced wound care gross profit increased $2,337,070, or 44.7%, to $7,567,297 in 2013 from $5,230,227 in 2012. Traditional wound care gross profit decreased $33,179, or 0.6%, to $5,811,329 in 2013 from $5,844,508 in 2012. The overall gross profit margin percentage increased to 36.2% in 2013 from 33.7% in 2012. The increase in gross profit dollars reflected higher sales, coupled with the higher gross profit margin percentage. The higher gross margin percentage principally reflected an increase in higher margined advanced wound care sales principally driven by the MedEfficiency acquisition in April 2012, partially offset by higher product costs.

23

Selling, General and Administrative Expenses

The following table highlights selling, general and administrative expenses by type for the six months ended June 30, 2013 versus 2012:

	Six Months Ended June 30,				Variance
	2013		2012
Distribution	$	1,119,692	$	1,008,200	$	111,492	11.1	%
Marketing		2,716,159		1,707,436		1,008,723	59.1	%
Sales		8,680,046		6,612,557		2,067,489	31.3	%
General and administrative		8,160,558		6,260,081		1,900,477	30.4	%
Total	$	20,676,455	$	15,588,274	$	5,088,181	32.6	%

Selling, general and administrative expenses increased $5,088,181, or 32.6% (32.8% adjusted for exchange) in 2013 versus 2012.

Distribution expense increased $111,492, or 11.1% (11.3% adjusted for exchange), in 2013 versus 2012. The increase reflected higher operating costs in support of our growing base of sales.

Marketing expense increased $1,008,723, or 59.1% (59.2% adjusted for exchange), in 2013 versus 2012. The increase was attributable to higher compensation expense associated with the issuance of the 2012 and 2013 executive stock based awards, two new marketing and two new clinical personnel added in 2012 and 2013, and promotional and product development costs principally in support of our advanced wound care growth initiatives, partially offset by lower recruiting costs.

Sales expense increased $2,067,489, or 31.3% (31.5% adjusted for exchange), in 2013 versus 2012. This increase was principally attributable to incremental costs consisting of compensation and benefits, commission, travel and sample expenses associated with the expansion of the advanced wound care sales force in the U.S., Canada, and United Kingdom which was completed during the second quarter of 2012, along with the incremental investment of a traditional wound care sales management position to better utilize the capacity of our Toronto manufacturing facility and a international sales management position to support our international growth, as well as the compensation expense associated with 2012 and 2013 executive stock based awards.

General and administrative expenses increased $1,900,477, or 30.4% (30.6% adjusted for exchange), in 2013 versus 2012. Excluding the 2012 Medefficiency transaction and integration related expenses of $900,879, general and administrative costs increased $2,801,356 or 44.7%. This increase reflects higher legal costs, compensation expense associated with the 2012 and 2013 executive and director’s stock based awards, compensation and benefits related to annual salary increases and the addition of five new positions in 2012 and 2013 to support our growth, professional service costs, information technology costs associated with a information systems intergration project, insurance and corporate office expenses, which were partially offset by lower recruiting costs.

Research and Development Expense

Research and development expense increased $3,605,738 to $6,235,765 in 2013 from $2,630,027 in 2012. The increase reflected the ongoing ramp up of DSC127 Phase 3 related expenses.

Other Expense

Other expense increased $84,939 to $86,124 in 2013 from $1,185 in 2012 due principally to foreign currency exchange losses.

24

Income Tax Benefit

Income tax benefit decreased $1,786,737 to $16,214 in 2013 from $1,802,951 in 2012. The income tax benefit for the six months ended June 30, 2012, included a $1,887,383 deferred tax benefit associated with the reduction in the Company’s U.S. valuation allowance in connection with MedEfficiency acquisition. Excluding the 2012 valuation allowance adjustment the 2013 and 2012 income tax benefits reflects normal operating activity.

Net Loss

We generated a net loss of $13,589,452, or $0.81 per share (basic and diluted), compared to a net loss of $5,330,950, or $0.46 per share (basic and diluted), in 2012.

Liquidity and Capital Resources

Cash Flow and Working Capital

At June 30, 2013 and December 31, 2012, we had cash and cash equivalents of $21,402,603 and $41,616,657, respectively. The $20,214,054 decrease in cash and cash equivalents reflected net cash used in operating activities of $8,802,860 and investing activities of $14,120,574, partially offset by cash provided by financing activities of $2,674,103 and the exchange rate effect on cash of $35,277.

Net cash used in operating activities of $8,802,860 resulted from $8,706,028 cash used in operations (net loss plus non-cash items) together with $96,832 cash used in the change in operating assets and liabilities. Higher research and development expense associated with growing Phase 3 costs and the impact of advanced wound care sales and marketing growth related expenses preceding revenue growth were the main contributors of the cash used in operations. Higher inventory and accounts receivable partially offset by lower accounts payable were the main drivers behind the net cash used in the change in operating assets and liabilities.

Net cash used in investing activities of $14,120,574 included cash used for the net purchase of investments of $13,738,000, $282,574 for capital expenditures and $100,000 for other intangibles. 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 $2,674,103 included net proceeds of $2,750,549 from the exercise of warrants and stock options partially offset by the payment of payroll withholding taxes related to stock compensation of $76,446 in connection with net share settlements.

Working capital decreased $7,641,642 at June 30, 2013 to $53,543,726 from $61,185,368 at December 31, 2012. This decrease principally reflected the net cash outflow from operating activities, and the net purchase of long term investments partially offset by net cash provided by the exercise of warrants and stock options. Management believes that it has sufficient working capital on-hand to support our existing operations for at least the next twelve months.

Prospective Assessment

Our strategic objective is to build the Company by both continuing to progress DSC127, with an initial indication for the treatment of diabetic foot ulcers, as well as in-licensing, 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 will consider initiating additional development programs on new indications for DSC127. 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, the sale of licensing rights to DSC127, jointly developing products with third parties and/or selling a portion of our existing business.

25

The launch of a number of advanced wound product line extensions in recent years and the acquisition of the MedEfficiency line of TCC products in April 2012 bodes well for the future growth of our higher-margined advanced wound care products both domestically and abroad. We continue to work on our pipeline and have identified several new products and product line extensions that are capable of contributing to future sales growth.

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. We continue to expand our sales and marketing resources in support of our advanced wound care growth initiatives, albeit on a diminishing scale. In March 2013, we entered into an exclusive agreement for the international rights to sell products incorporating the casting element within TCC-EZ. Additional sales and marketing resources will continue to be prudently added as needed to support the continued growth of this segment of our business. In April 2013, we hired a Vice President of International Sales to manage international markets (excluding Canada, Europe, Middle East and Asia). We have established a presence in Europe through a direct sales organization in the U.K. and through distributors in a number of other countries, as well as a presence in Australia, New Zealand, South Korea, and various countries throughout Latin America and the Middle East through distributors. 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 DSC127 is estimated to be three years away (pending the acceptance of a New Drug Application ("NDA") by the U.S. Food and Drug Administration ("FDA")), we believe the market potential of this product for diabetic foot ulcers and other indications that we have the rights to are significant. 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 earlier this year, 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 as planned. At this time, we are working towards completion of the last trial by mid - 2015. 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 $45 to $50 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 are also planning pre-clinical activities for scar prevention, and anticipate having initial data sometime within 2013 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. During the first quarter of 2013, we hired a Director of Private Label Sales to better utilize available manufacturing capacity at our Toronto manufacturing facility. 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 planned improvement in operations, expected working capital requirements and cash on-hand as of June 30, 2013, 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 DSC127 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.

26

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 June 30, 2013, we had no off-balance sheet arrangements.

Critical Accounting Policies

There have been no changes in critical accounting policies from those disclosed in the December 31, 2012 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

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 of June 30, 2013. 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 Securities Exchange Act of 1934, within the time periods specified in the Commission’s rules and forms.

During the three months ended June 30, 2013, 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.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

In July, 2013, the pending legal proceedings that have been previously reported in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 has been settled, terms of which are confidential.

Item 1A. Risk Factors.

The following risk factors update the related risk factors set forth in the Company’s Annual Report on Form 10-K filed with the Commission:

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

We incurred losses of $13,589,452 in the six months ended June 30, 2013 (unaudited), $12,070,431 for the year ended December 31, 2012, and additional losses in previous years. At June 30, 2013, we had an accumulated deficit of $53,796,210. We expect to incur losses for the next several years as we continue to develop DSC127, 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 June 30, 2013, up to 5,109,096 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 17,241,248 shares of common stock outstanding as of June 30, 2013.

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.

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 2008 through 2012 and the first six months of 2013 are set forth in the table below:

Derma Sciences, Inc.
Trading Range – Common Stock

Year	Low		High
2008	$	1.60	$	10.80
2009	$	1.92	$	6.80
2010	$	4.40	$	9.00
2011	$	4.50	$	12.72
2012	$	6.94	$	11.89
2013*	$	9.93	$	14.92

(*) January 1 through June 30. 

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Events that may affect our common stock price include:

• Results from further development of DSC127;

• 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.

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
10.1	2013 Director Compensation Program (filed as exhibit 10.1 to our Form 8-K filed with the commission May 24, 2013 and incorporated by reference herein)
10.2	Amended and Restated 2012 Equity Incentive Plan dated May 22, 2013 (filed as exhibit 10.2 to our Form 8-K filed with the commission May 24, 2013 and incorporated by reference herein)
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.LAB#	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE#	XBRL Taxonomy Extension Presentation Linkbase Document

# In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.

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:  August 12, 2013	By:	/s/ John E. Yetter
		John E. Yetter, CPA
		Chief Financial Officer

30

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Edward J. Quilty, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Derma Sciences, Inc. (the “Registrant”);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated:  August 12, 2013	/s/ Edward J. Quilty
	Edward J. Quilty
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Principal Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, John E. Yetter, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Derma Sciences, Inc. (the “Registrant”);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated:  August 12, 2013	/s/ John E. Yetter
	John E. Yetter, CPA
	Executive Vice President, Finance and Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification of Principal Executive Officer

Pursuant to U.S.C. Section 1350

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Edward J. Quilty, Chairman, President and Chief Executive Officer of Derma Sciences, Inc., hereby certify that the Quarterly Report on Form 10-Q for the period ended June 30, 2013 of Derma Sciences, Inc. (the “Form 10-Q”) upon my best knowledge and belief fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Derma Sciences, Inc.

Dated:  August 12, 2013	/s/ Edward J. Quilty
	Edward J. Quilty
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)

EX-32.2

Exhibit 32.2

Certification of Principal Financial Officer

Pursuant to U.S.C. Section 1350

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, John E. Yetter, Executive Vice President, Finance and Chief Financial Officer of Derma Sciences, Inc., hereby certify that the Quarterly Report on Form 10-Q for the period ended June 30, 2013 of Derma Sciences, Inc. (the “Form 10-Q”) upon my best knowledge and belief fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Derma Sciences, Inc.

Dated:  August 12, 2013	/s/ John E. Yetter
	John E. Yetter, CPA
	Executive Vice President, Finance and Chief Financial Officer
	(Principal Financial Officer)

XML

Cash and Cash Equivalents and Investments (Tables)

6 Months Ended

Jun. 30, 2013

Cash and Cash Equivalents and Investments [Abstract]

Schedule of Cash and Cash Equivalents and Investments

	June 30, 2013		December 31, 2012
Cash	$	4,422,179	$	4,909,663
Money market mutual funds		16,980,424		36,706,994
Cash and cash equivalents		21,402,603		41,616,657
Investments		17,966,000		4,228,000
Total cash and cash equivalents and investments	$	39,368,603	$	45,844,657

Fair Value of Cash and Cash Equivalents and Investments

			Fair Value Measurements, Using
	Total carrying value as of June 30, 2013		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash and cash equivalents	$	21,402,603	$	21,402,603	$	-	$	-
Investments		17,966,000		17,946,671		-		-
Total	$	39,368,603	$	39,349,274	$	-	$	-

XML

Consolidated Statements of Comprehensive Loss (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Consolidated Statements of Comprehensive Loss [Abstract]
Net Sales	$ 18,148,061	$ 17,609,799	$ 36,937,807	$ 32,887,165
Cost of sales	11,473,900	11,411,224	23,559,181	21,812,430
Gross Profit	6,674,161	6,198,575	13,378,626	11,074,735
Operating Expenses
Selling, general and administrative	10,823,370	9,229,184	20,676,455	15,588,274
Research and development	3,242,599	1,515,329	6,235,765	2,630,027
Total operating expenses	14,065,969	10,744,513	26,912,220	18,218,301
Operating loss	(7,391,808)	(4,545,938)	(13,533,594)	(7,143,566)
Other (income) expense, net:
Interest income	(8,030)	(5,771)	(14,052)	(10,850)
Other (income) expense, net	(8,703)	56,069	86,124	1,185
Total other (income) expense, net	(16,733)	50,298	72,072	(9,665)
Loss before income taxes	(7,375,075)	(4,596,236)	(13,605,666)	(7,133,901)
Income tax benefit	(30,402)	(1,804,187)	(16,214)	(1,802,951)
Net Loss	(7,344,673)	(2,792,049)	(13,589,452)	(5,330,950)
Other Comprehensive Loss
Foreign currency translation adjustment	(169,419)	(86,510)	(219,100)	(7,170)
Comprehensive Loss	$ (7,514,092)	$ (2,878,559)	$ (13,808,552)	$ (5,338,120)
Net loss per common share - basic and diluted	$ (0.43)	$ (0.23)	$ (0.81)	$ (0.46)
Shares used in computing net loss per common share - basic and diluted	17,068,854	12,243,156	16,832,578	11,660,609

XML

Stockholders' Equity

6 Months Ended

Jun. 30, 2013

Stockholders' Equity [Abstract]

Stockholders' Equity

5. Stockholders' Equity

Preferred Stock

Subsequent to the issuances of the preferred stock, the Company has undertaken a number of common stock offerings that would impact the preferred stock conversion ratios. Previous preferred stockholders who have converted their preferred shares will receive an additional 141,448 shares of common stock as a result of the conversion ratio adjustments, of which 115,639 shares were issued during the six months ended June 30, 2013 and 25,809 remain issuable. As of June 30, 2013, current Series A and B preferred stockholders holding 73,332 preferred shares are entitled to receive an aggregate of 121,089 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 141,448 incremental shares associated with the conversion ratio adjustment will be recorded to common stock at par with the offset to additional paid in capital when issued as all of the convertible preferred stock was issued prior to the November 16, 2000 effective date of certain provisions of ASC 470 (formerly, EITF 00-27 Application of Issue No. 98-5 to Certain Convertible Instruments).

Common Stock

On May 22, 2013, shareholders of the Company approved the proposal to increase the number of authorized shares of common stock from 25,000,000 to 35,000,000. During the six months ended June 30, 2013, the Company issued 716,525 shares of common stock consisting of: 537,466 shares upon the exercise of stock purchase warrants and options for which the Company received $2,778,757 (net of $28,208 in expenses), 115,639 shares in connection with the preferred stock ratio adjustments, 58,970 shares in connection with the vesting of 66,900 shares of restricted common stock net of the shares withheld for payment of withholding taxes, and 4,450 shares to a retired director of the Company for consulting services.

Stock Purchase Warrants

At June 30, 2013, 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
L		6,250	$	3.12	March 31, 2014
N		100,000	$	6.25	February 22, 2015
O		230,900	$	5.50	February 22, 2015
P		2,508	$	6.25	February 16, 2015
Q		133,333	$	5.50	February 22, 2015
R		1,832,602	$	9.90	June 22, 2016
Total		2,305,593

During the six months ended June 30, 2013, a total of 624,561 warrants were exercised on a for cash and cashless basis consisting of 367,814 Series K, 200,893 Series J, 53,667 Series O, and 2,187 Series P warrants. A total of 421,278 shares of common stock were issued in connection with the 2013 warrant exercises.

Equity Based Compensation

Under the Equity Incentive Plan (the "EIP Plan") the Company is authorized to issue shares of common stock. On May 22, 2013, shareholders of the Company approved the proposal to increase the number of authorized shares of common stock the Company can issue from 2,812,500 to 4,500,000. 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 June 30, 2013, options to purchase 1,853,805 shares and 802,800 restricted share units were issued and outstanding under the EIP Plan and 1,428,264 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 six months ended June 30, 2013 and 2012, 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 June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Risk-free interest rate		1.16	%		1.11	%		1.22	%		1.17	%
Volatility factor		70.2	%		73.6	%		70.0	%		74.5	%
Dividend yield		0	%		0	%		0	%		0	%
Expected option life (years)		6.25			6.25			6.25			6.25

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 6.25 year expected option life for Company employees and directors while the 10 year 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.

A summary of the Company's stock option activity and related information for the six months ended June 30, 2013 was as follows:

	Options			Weighted Average Exercise Price
Outstanding - January 1, 2013		1,639,985		$	6.38
Granted		393,180		$	12.07
Exercised		(165,622	)	$	5.65
Forfeited		(13,738	)	$	9.77
Outstanding - June 30, 2013		1,853,805		$	7.67
Expected to vest - June 30, 2013		1,835,267		$	7.67
Exercisable at June 30, 2013		1,351,798		$	6.52

During 2013, the Company granted 277,580 service based options and 115,600 performance based options to Company employees and consultants. The weighted average fair value per share of options granted during the six months ended June 30, 2013 was $8.25.

During the six months ended June 30, 2013, 165,622 stock options were exercised on a for cash and cashless basis. A total of 116,188 shares of common stock were issued in connection with the 2013 stock option exercises. The intrinsic value of options exercised in 2013 was $1,111,730.

During the three and six months ended June 30, 2013 and 2012, stock option compensation expense was recorded as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Cost of sales	$	13,636	$	36,266	$	68,343	$	80,184
Selling, general and administrative expenses		627,186		407,070		1,135,792		950,059
Research and development		13,895		2,648		71,655		8,781
Total stock option compensation expense	$	654,717	$	445,984	$	1,275,790	$	1,039,024

As of June 30, 2013, there was $2,097,639 of unrecognized compensation cost related to nonvested service based awards and $641,715 related to nonvested performance based awards. These costs are expected to be recognized over the options' remaining weighted average vesting period of 1.93 years for the service and 0.50 years for the performance based awards.

Restricted Share Units

The Company has issued service, performance and market based restricted share units to employees 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.

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

	Number of Shares			Weighted Average Fair Value
Unvested January, 1, 2013		786,900		$	7.07
Granted		82,800			13.66
Vested		(66,900	)		9.52
Unvested, June 30, 2013		802,800		$	9.22

In connection with the vesting of restricted share unit awards during the six months ended June 30, 2013, 7,930 common stock shares with a fair value of $76,446 were withheld in satisfaction of employee tax withholding obligations.

During the three and six months ended June 30, 2013 and 2012, restricted share unit compensation expense was recorded as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Cost of sales	$	-	$	7,796	$	-	$	12,994
Selling, general and administrative expenses		661,329		115,180		1,192,925		199,304
Total restricted share unit compensation expense	$	661,329	$	122,976	$	1,192,925	$	212,298

As of June 30, 2013, there was $6,192,258 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 2.87 years.

In consideration of prior service to the Company, a retiring director received 5,000 restricted share units, acceleration of the vesting of any unvested stock options and restricted share units and extension of the date to exercise vested stock options to the earlier of 36 months or the awards original expiration date (versus 90 days) from the date of the retirement. Also during the six months ended June 30, 2013, the Company granted 4,450 shares of common stock to a former director for consulting services. An additional $337,422 of stock based compensation expense was recognized during the three and six months ended June 30, 2013 and included in selling, general and administrative expense in connection with these activities.

Shares Reserved for Future Issuance

At June 30, 2013, the Company had reserved the following shares of common stock for future issuance:

Convertible preferred shares (series A - B)	73,332
Additional stock issuable related to conversion of preferred stock	73,566
Common stock options outstanding	1,853,805
Common stock warrants outstanding	2,305,593
Restricted share units outstanding	802,800
Common stock equivalents available for grant	1,428,264
Total common stock shares reserved	6,537,360

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Acquisition (Narrative) (Details) (USD $)	0 Months Ended
	Apr. 16, 2012
Acquisition [Abstract]
Purchase price	$ 14,500,000

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Inventories (Tables)

6 Months Ended

Jun. 30, 2013

Inventories [Abstract]

Schedule of Inventories

	June 30, 2013		December 31, 2012
Finished goods	$	9,499,636	$	9,574,685
Work in process		859,735		554,129
Packaging materials		1,065,926		991,157
Raw materials		2,626,304		2,550,617
Total inventory	$	14,051,601	$	13,670,588

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Operating Segments (Narrative) (Details) (Net sales [Member], Customer [Member])	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Net sales [Member] | Customer [Member]
Concentration Risk [Line Items]
Concentration percentage	13.00%	20.00%

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Cash and Cash Equivalents and Investments (Schedule of Cash and Cash Equivalents and Investments) (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012	Dec. 31, 2011
Cash and Cash Equivalents and Investments [Abstract]
Cash	$ 4,422,179	$ 4,909,663
Money market mutual funds	16,980,424	36,706,994
Cash and cash equivalents	21,402,603	41,616,657	13,599,726	17,110,350
Investments	17,966,000	4,228,000
Total cash and cash equivalents and investments	$ 39,368,603	$ 45,844,657

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Acquisition (Combined Results of Operations as if Acquisition Had Occurred at Beginning of Period) (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012
Acquisition [Abstract]
Net Sales	$ 17,752,254	$ 34,274,654
Net Loss	(4,936,884)	(5,666,891)
Net Loss per common share - basic and diluted	$ (0.40)	$ (0.49)
Weighted average number of shares - basic and diluted	12,243,156	11,660,609
Amortization of intangible assets	$ 1,919,656	$ 1,919,656

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Stockholders' Equity (Allocation of Stock Option Compensation Expense) (Details) (Stock options [Member], USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock option compensation expense	$ 654,717	$ 445,984	$ 1,275,790	$ 1,039,024
Cost of sales [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock option compensation expense	13,636	36,266	68,343	80,184
Selling, general and administrative expenses [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock option compensation expense	627,186	407,070	1,135,792	950,059
Research and development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock option compensation expense	$ 13,895	$ 2,648	$ 71,655	$ 8,781

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Operating Segments (Schedule of Net Sales by Geographic Region) (Details) (Net sales [Member])	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Unites States [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration percentage	80.00%	72.00%	79.00%	71.00%
Canada [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration percentage	11.00%	20.00%	13.00%	21.00%
Other [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration percentage	9.00%	8.00%	8.00%	8.00%

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Stockholders' Equity (Schedule of Warrants Outstanding) (Details)	6 Months Ended
	Jun. 30, 2013
Class of Warrant or Right [Line Items]
Number of Warrants	2,305,593
Warrants exercised	624,561
Warrants exercised, shares issued	421,278
J [Member]
Class of Warrant or Right [Line Items]
Warrants exercised	200,893
K [Member]
Class of Warrant or Right [Line Items]
Warrants exercised	367,814
L [Member]
Class of Warrant or Right [Line Items]
Number of Warrants	6,250
Exercise Price	3.12
Expiration Date	Mar. 31, 2014
N [Member]
Class of Warrant or Right [Line Items]
Number of Warrants	100,000
Exercise Price	6.25
Expiration Date	Feb. 22, 2015
O [Member]
Class of Warrant or Right [Line Items]
Number of Warrants	230,900
Exercise Price	5.50
Expiration Date	Feb. 22, 2015
Warrants exercised	53,667
P [Member]
Class of Warrant or Right [Line Items]
Number of Warrants	2,508
Exercise Price	6.25
Expiration Date	Feb. 16, 2015
Warrants exercised	2,187
Q [Member]
Class of Warrant or Right [Line Items]
Number of Warrants	133,333
Exercise Price	5.50
Expiration Date	Feb. 22, 2015
R [Member]
Class of Warrant or Right [Line Items]
Number of Warrants	1,832,602
Exercise Price	9.90
Expiration Date	Jun. 22, 2016

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Acquisition (Preliminary Allocation of Purchase Price to Estimated Fair Values of Assets Acquired and Liabilities Assumed) (Details) (USD $)	0 Months Ended	6 Months Ended
	Apr. 16, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Acquisition [Abstract]
Current assets	$ 925,817
Equipment	29,579
Acquired intangible assets	10,700,000
Goodwill	6,362,967	13,457,693		13,457,693
Total assets acquired	18,018,363
Current liabilities	653,315
Deferred tax liability	2,982,470
Total liabilities assumed	3,635,785
Net assets acquired	14,382,578
Purchase price	14,500,000
Less cash acquired	117,422
Net cash paid	$ 14,382,578		$ 14,382,578

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Organization and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

Organization and Summary of Significant Accounting Policies [Abstract]

Organization and Summary of Significant Accounting Policies

1. Organization and Summary of Significant Accounting Policies

Derma Sciences, Inc. and its subsidiaries (the "Company") is a medical technology 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 and the Far East. The Company also 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 8 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 six months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. Information included in the consolidated balance sheet as of December 31, 2012 has been derived from the consolidated financial statements and footnotes thereto for the year ended December 31, 2012, 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.

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 six months ended June 30, 2013 and 2012 as the effect would be anti-dilutive.

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

	Three and Six Months Ended June 30,
	2013		2012
Dilutive shares:
Convertible preferred stock		73,332		73,332
Additional stock issuable related to conversion of preferred stock		73,566		-
Restricted share units		802,800		54,400
Warrants		2,305,593		3,035,036
Stock options		1,853,805		1,745,317
Total dilutive shares		5,109,096		4,908,085

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Cash and Cash Equivalents and Investments

6 Months Ended

Jun. 30, 2013

Cash and Cash Equivalents and Investments [Abstract]

Cash and Cash Equivalents and Investments

3. Cash and Cash Equivalents and Investments

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 considers highly liquid investments purchased with an original maturity greater than three months as investments. Investments with maturities greater than one year from the balance sheet date are classified as a long-term asset.

Cash and cash equivalents and investments at June 30, 2013 and December 31, 2012 consisted of the following:

	June 30, 2013		December 31, 2012
Cash	$	4,422,179	$	4,909,663
Money market mutual funds		16,980,424		36,706,994
Cash and cash equivalents		21,402,603		41,616,657
Investments		17,966,000		4,228,000
Total cash and cash equivalents and investments	$	39,368,603	$	45,844,657

The Company maintains cash with various domestic and foreign financial institutions within the ordinary course of business, which at times may exceed jurisdictional insurance limits. The money market mutual funds consist of funds deposited into mutual funds investing in U.S. government obligations that are fully secured by the U.S. government. Investments consist of certificates of deposits in various U.S. financial institutions and are fully insured by the Federal Deposit Insurance Corporation. The Company intends to hold its investments to maturity and accordingly these investments are carried at cost.

The following table provides fair value information as of June 30, 2013:

			Fair Value Measurements, Using
	Total carrying value as of June 30, 2013		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash and cash equivalents	$	21,402,603	$	21,402,603	$	-	$	-
Investments		17,966,000		17,946,671		-		-
Total	$	39,368,603	$	39,349,274	$	-	$	-

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.

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Operating Segments

6 Months Ended

Jun. 30, 2013

Operating Segments [Abstract]

Operating Segments

6. 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, bandages and ointments 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 closer strips, catheter fasteners and skin care products. Pharmaceutical wound care products consist of DSC127, a novel product for the treatment of diabetic foot ulcers which is presently under development.

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 end users. 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 DSC127.

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.

Operating segment sales, gross profit, segment contribution and other related information for 2013 and 2012 were as follows:

Three Months Ended June 30, 2013
	Advanced Wound Care			Traditional Wound Care			Pharmaceutical Wound Care			Other			Total Company
Net sales	$	7,910,616		$	10,237,445		$	-		$	-		$	18,148,061
Gross profit		3,938,156			2,736,005			-			-			6,674,161
Direct expense		(5,200,282	)		(1,284,977	)		(3,269,670	)		-			(9,754,929	)
Segment contribution	$	(1,262,126	)	$	1,451,028		$	(3,269,670)			-			(3,080,768	)
Indirect expenses										$	(4,263,905	)		(4,263,905	)
Net loss													$	(7,344,673	)

Three Months Ended June 30, 2012
Net sales	$	5,800,152		$	11,809,647		$	-		$	-		$	17,609,799
Gross profit		3,127,521			3,071,054			-			-			6,198,575
Direct expense		(5,101,082	)		(1,136,273	)		(1,532,058	)		-			(7,769,413	)
Segment contribution	$	(1,973,561	)	$	1,934,781		$	(1,532,058	)		-			(1,570,838	)
Indirect expenses										$	(1,221,211	)		(1,221,211	)
Net loss													$	(2,792,049	)

Six Months Ended June 30, 2013
	Advanced Wound Care			Traditional  Wound Care			Pharmaceutical Wound Care			Other			Total  Company
Net sales	$	15,398,998		$	21,538,809		$	-		$	-		$	36,937,807
Gross profit		7,567,297			5,811,329			-			-			13,378,626
Direct expense		(10,423,871	)		(2,487,944	)		(6,285,762	)		-			(19,197,577	)
Segment contribution	$	(2,856,574	)	$	3,323,385			($(6,285,762)			-			(5,818,951	)
Indirect expenses										$	(7,770,501	)		(7,770,501	)
Net loss													$	(13,589,452	)

Six Months Ended June 30, 2012
Net sales	$	10,297,206		$	22,589,959		$	-		$	-		$	32,887,165
Gross profit		5,230,227			5,844,508			-			-			11,074,735
Direct expense		(8,228,560	)		(2,252,113	)		(2,657,093	)		-			(13,137,766	)
Segment contribution	$	(2,998,333	)	$	3,592,395		$	(2,657,093	)		-			(2,063,031	)
Indirect expenses										$	(3,267,919	)		(3,267,919	)
Net loss													$	(5,330,950	)

The following table presents net sales by geographic region.

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
United States		80	%		72	%		79	%		71	%
Canada		11	%		20	%		13	%		21	%
Other		9	%		8	%		8	%		8	%

For the six months ended June 30, 2013 and 2012, the Company had a major Canadian customer comprising 13% and 20%, respectively, of consolidated net sales. Due to outstanding rebate obligations, the Company was in a net liability position to this customer at June 30, 2013.

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Inventories

6 Months Ended

Jun. 30, 2013

Inventories [Abstract]

Inventories

4. Inventories

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

	June 30, 2013		December 31, 2012
Finished goods	$	9,499,636	$	9,574,685
Work in process		859,735		554,129
Packaging materials		1,065,926		991,157
Raw materials		2,626,304		2,550,617
Total inventory	$	14,051,601	$	13,670,588

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Income Taxes (Summary of Income Tax Expense and Effective Tax Rate) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Income Taxes [Abstract]
Current tax benefit	$ (72,832)	$ 55,654	$ (90,853)	$ 26,519
Deferred tax expense	42,430	(1,859,841)	74,639	(1,829,470)
Income tax expense	$ (30,402)	$ (1,804,187)	$ (16,214)	$ (1,802,951)
Effective tax rate	0.40%	39.30%	0.10%	25.30%

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Cash and Cash Equivalents and Investments (Fair Value of Cash and Cash Equivalents and Investments) (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	$ 21,402,603
Investments	17,966,000
Total cash and cash equivalents and investments	39,368,603	45,844,657
Quoted prices in active markets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	21,402,603
Investments	17,946,671
Total cash and cash equivalents and investments	39,349,274
Significant other observable inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents
Investments
Total cash and cash equivalents and investments
Significant unobservable inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents
Investments
Total cash and cash equivalents and investments

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Stockholders' Equity (Weighted Average Assumptions Used in Estimation of Fair Value of Option Awards) (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Stockholders' Equity [Abstract]
Risk free interest rate	1.16%	1.11%	1.22%	1.17%
Volatility factor	70.20%	73.60%	70.00%	74.50%
Dividend yield	0.00%	0.00%	0.00%	0.00%
Expected option life (years)	6 years 3 months	6 years 3 months	6 years 3 months	6 years 3 months
Forfeiture rate	1.00%	1.00%	1.00%	1.00%

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Stockholders' Equity (Common Stock Shares Reserved for Future Issuance) (Details)	Jun. 30, 2013
Class of Stock [Line Items]
Common stock shares reserved for future issuance	6,537,360
Convertible preferred shares (series A - B) [Member]
Class of Stock [Line Items]
Common stock shares reserved for future issuance	73,332
Additional stock issuable related to conversion of preferred stock [Member]
Class of Stock [Line Items]
Common stock shares reserved for future issuance	73,566
Common stock options outstanding [Member]
Class of Stock [Line Items]
Common stock shares reserved for future issuance	1,853,805
Common stock warrants outstanding [Member]
Class of Stock [Line Items]
Common stock shares reserved for future issuance	2,305,593
Restricted share units outstanding [Member]
Class of Stock [Line Items]
Common stock shares reserved for future issuance	802,800
Common stock equivalents available for grant [Member]
Class of Stock [Line Items]
Common stock shares reserved for future issuance	1,428,264

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Consolidated Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Consolidated Balance Sheets [Abstract]
Convertible preferred stock, par value per share	$ 0.01	$ 0.01
Convertible preferred stock, shares authorized	1,468,750	1,468,750
Convertible preferred stock, shares issued	73,332	73,332
Convertible preferred stock, shares outstanding	73,332	73,332
Convertible preferred stock, liquidation preference	$ 3,222,368
Common stock, par value per share	$ 0.01	$ 0.01
Common stock, shares authorized	35,000,000	25,000,000
Common stock, shares issued	17,241,248	16,524,723
Common stock, shares outstanding	17,241,248	16,524,723

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Organization and Summary of Significant Accounting Policies (Policy)

6 Months Ended

Jun. 30, 2013

Organization and Summary of Significant Accounting Policies [Abstract]

Basis of Presentation

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 8 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 six months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. Information included in the consolidated balance sheet as of December 31, 2012 has been derived from the consolidated financial statements and footnotes thereto for the year ended December 31, 2012, 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.

Principles of Consolidation

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

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

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 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 six months ended June 30, 2013 and 2012 as the effect would be anti-dilutive.

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

	Three and Six Months Ended June 30,
	2013		2012
Dilutive shares:
Convertible preferred stock		73,332		73,332
Additional stock issuable related to conversion of preferred stock		73,566		-
Restricted share units		802,800		54,400
Warrants		2,305,593		3,035,036
Stock options		1,853,805		1,745,317
Total dilutive shares		5,109,096		4,908,085

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Consolidated Statements of Cash Flows (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Operating Activities
Net loss	$ (13,589,452)	$ (5,330,950)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of equipment and improvements	467,400	516,209
Amortization of intangible assets	1,447,327	667,540
Provision (recovery) for bad debts	14,000	(2,923)
(Recovery) allowance for sales adjustments	(16,805)	12,080
Provision for inventory obsolescence	73,781	84,060
Loss on disposal of equipment		25,653
Deferred rent expense	16,945	(15,459)
Stock based compensation	2,806,137	1,251,322
Deferred income taxes	74,639	(1,829,470)
Changes in operating assets and liabilities:
Accounts receivable	(349,151)	340,591
Inventories	(732,687)	(3,711,502)
Prepaid expenses and other current assets	83,236	1,305,474
Other assets	(431)	(46,799)
Accounts payable	871,362	(224,045)
Accrued expenses and other current liabilities	30,839	(211,360)
Net cash used in operating activities	(8,802,860)	(7,169,579)
Investing Activities
Investment in acquired business, net of cash acquired		(14,382,578)
Purchase of investments	(16,475,000)	(1,990,000)
Proceeds from sale of investments	2,737,000	2,240,000
Purchase of equipment and improvements	(282,574)	(409,944)
Proceeds from sale of equipment		43,000
Purchase of identifiable intangible assets	(100,000)
Net Cash used in investing activiites	(14,120,574)	(14,499,522)
Financing Activities
Proceeds from the sale of common stock, net of costs		17,855,922
Proceeds from exercise of stock options and warrants, net of costs	2,750,549	329,878
Payment of withholding taxes related to employee stock compensation	(76,446)	(68,190)
Net cash provided by financing activities	2,674,103	18,117,610
Effect of exchange rate changes on cash and cash equivalents	35,277	40,867
Net decrease in cash and cash equivalents	(20,214,054)	(3,510,624)
Cash and cash equivalents
Beginning of period	41,616,657	17,110,350
End of period	21,402,603	13,599,726
Supplemental disclosures of cash flow information:
Cash paid during the year for interest	$ 717	$ 943

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Consolidated Balance Sheets (USD $)	Jun. 30, 2013	Dec. 31, 2012
Current Assets
Cash and cash equivalents	$ 21,402,603	$ 41,616,657
Short-term investments	16,472,000	3,730,000
Accounts receivable, net	7,425,109	7,085,713
Inventories	14,051,601	13,670,588
Prepaid expenses and other current assets	3,068,825	3,209,031
Total current assets	62,420,138	69,311,989
Long-term investments	1,494,000	498,000
Equipment and improvements, net	2,986,501	3,304,852
Identifiable intangible assets, net	15,781,556	17,128,883
Goodwill	13,457,693	13,457,693
Other assets	138,858	141,213
Total Assets	96,278,746	103,842,630
Current Liabilities
Accounts payable	4,817,561	3,993,687
Accrued expenses and other current liabilities	4,058,851	4,132,934
Total current liabilities	8,876,412	8,126,621
Long-term liabilities	274,661	268,517
Deferred tax liability	1,744,792	1,736,299
Total Liabilities	10,895,865	10,131,437
Stockholders' Equity
Convertible preferred stock, $.01 par value; 1,468,750 shares authorized;issued and outstanding 73,332 at June 30, 2013 and December 31, 2012 (liquidation preference of $3,222,368 at June 30, 2013)	733	733
Common stock, $.01 par value; shares authorized 35,000,000; issued and outstanding 17,241,248 at June 30, 2013 and 16,524,723 at December 31, 2012	172,412	165,247
Additional paid-in capital	137,636,158	132,163,083
Accumulated other comprehensive income - cumulative translation adjustments	1,369,788	1,588,888
Accumulated deficit	(53,796,210)	(40,206,758)
Total Stockholders' Equity	85,382,881	93,711,193
Total Liabilities and Stockholders' Equity	$ 96,278,746	$ 103,842,630

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Inventories (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Inventories [Abstract]
Finished goods	$ 9,499,636	$ 9,574,685
Work in process	859,735	554,129
Packaging materials	1,065,926	991,157
Raw materials	2,626,304	2,550,617
Total inventory	$ 14,051,601	$ 13,670,588

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Organization and Summary of Significant Accounting Policies (Potentially Dilutive Shares Excluded as Result of Effects Being Anti-dilutive) (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive shares	5,109,096	4,908,085	5,109,096	4,908,085
Convertible preferred stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive shares	73,332	73,332	73,332	73,332
Additional stock issuable related to conversion of preferred stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive shares	73,566		73,566
Restricted share units [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive shares	802,800	54,400	802,800	54,400
Warrants [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive shares	2,305,593	3,035,036	2,305,593	3,035,036
Stock options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive shares	1,853,805	1,745,317	1,853,805	1,745,317

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Operating Segments (Schedule of Operating Segment Sales, Gross Profit, Segment Contribution and Other Related Information) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Segment Reporting Information [Line Items]
Net sales	$ 18,148,061	$ 17,609,799	$ 36,937,807	$ 32,887,165
Gross profit	6,674,161	6,198,575	13,378,626	11,074,735
Direct expense	(9,754,929)	(7,769,413)	(19,197,577)	(13,137,766)
Segment contribution	(3,080,768)	(1,570,838)	(5,818,951)	(2,063,031)
Indirect expenses	(4,263,905)	(1,221,211)	(7,770,501)	(3,267,919)
Net Loss	(7,344,673)	(2,792,049)	(13,589,452)	(5,330,950)
Advanced Wound Care [Member]
Segment Reporting Information [Line Items]
Net sales	7,910,616	5,800,152	15,398,998	10,297,206
Gross profit	3,938,156	3,127,521	7,567,297	5,230,227
Direct expense	(5,200,282)	(5,101,082)	(10,423,871)	(8,228,560)
Segment contribution	(1,262,126)	(1,973,561)	(2,856,574)	(2,998,333)
Traditional Wound Care [Member]
Segment Reporting Information [Line Items]
Net sales	10,237,445	11,809,647	21,538,809	22,589,959
Gross profit	2,736,005	3,071,054	5,811,329	5,844,508
Direct expense	(1,284,977)	(1,136,273)	(2,487,944)	(2,252,113)
Segment contribution	1,451,028	1,934,781	3,323,385	3,592,395
Pharmaceutical Wound Care [Member]
Segment Reporting Information [Line Items]
Net sales
Gross profit
Direct expense	(3,269,670)	(1,532,058)	(6,285,762)	(2,657,093)
Segment contribution	(3,269,670)	(1,532,058)	(6,285,762)	(2,657,093)
Other [Member]
Segment Reporting Information [Line Items]
Net sales
Gross profit
Direct expense
Segment contribution
Indirect expenses	$ (4,263,905)	$ (1,221,211)	$ (7,770,501)	$ (3,267,919)

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Stockholders' Equity (Summary of Restricted Share Unit Activity) (Details) (USD $)	6 Months Ended
	Jun. 30, 2013
Number of Shares
Unvested beginning balance	786,900
Granted	82,800
Vested	(66,900)
Unvested ending balance	802,800
Weighted Average Fair Value
Unvested beginning balance	$ 7.07
Granted	$ 13.66
Vested	$ 9.52
Unvested ending balance	$ 9.22

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Stockholders' Equity (Allocation of Restricted Share Unit Compensation Expense) (Details) (Restricted share units [Member], USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Restricted share unit compensation expense	$ 661,329	$ 122,976	$ 1,192,925	$ 212,298
Cost of sales [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Restricted share unit compensation expense		7,796		12,994
Selling, general and administrative expenses [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Restricted share unit compensation expense	$ 661,329	$ 115,180	$ 1,192,925	$ 199,304

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies [Abstract]

Commitments and Contingencies

8. Commitments and Contingencies

New Cast Industry Co., Ltd. Supply Agreement

On March 27, 2013, the Company entered into a supply agreement (the "International Agreement") with New Cast Industry Co., Ltd. ("NCIC") relating to NCIC's proprietary technology for the casting element within the TCC-EZ total contact casting system (the "Technology"). The Company has been purchasing product from NCIC utilizing the Technology in the TCC-EZ series of total contact casting system products for TCC-EZ product sales within North America pursuant to the supply agreement dated April 17, 2012 (the "North America Agreement"), and intends to continue to do so.

Under the International Agreement, NCIC agreed to exclusively supply the Company with its product utilizing the Technology and granted the Company the exclusive right to sell products incorporating the Technology outside North America. If the Company does not achieve the first commercial sale of a product incorporating the Technology in Latin America, Europe, Middle East, Australia, Asia and India (the "Territory") by certain dates, NCIC has the right, as its sole remedy, to convert the exclusive license in the Territory to a non-exclusive license. Unless otherwise terminated pursuant to the terms of the International Agreement, the term is for five years with automatic five year renewals.

In consideration for the exclusive international rights set forth above, the Company paid NCIC $200,000. Provided this agreement has not been terminated as a result of a breach by the Company, NCIC will refund $100,000 to the Company on the first anniversary of the International Agreement. The initial cost of $100,000 has been capitalized as an identifiable intangible asset and is being amortized over the initial five year term of the agreement, and a $100,000 deposit has been recorded. Further, the International Agreement includes milestone payments of up to $1,000,000 to NCIC based upon achievement of international net sales levels during a calendar year.

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.

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Stockholders' Equity (Narrative) (Details) (USD $)	6 Months Ended				6 Months Ended	3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended					6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	May 22, 2013	Dec. 31, 2012	Jun. 30, 2013 Retiring Director [Member]	Jun. 30, 2013 Stock options [Member]	Jun. 30, 2012 Stock options [Member]	Jun. 30, 2013 Stock options [Member]	Jun. 30, 2012 Stock options [Member]	Jun. 30, 2013 Restricted share units [Member]	Jun. 30, 2012 Restricted share units [Member]	Jun. 30, 2013 Restricted share units [Member]	Jun. 30, 2012 Restricted share units [Member]	Jun. 30, 2013 Restricted share units [Member] Retiring Director [Member]	Jun. 30, 2013 2012 Plan [Member]	May 22, 2013 2012 Plan [Member]	Jun. 30, 2013 2012 Plan [Member] Stock options [Member]	Jun. 30, 2013 2012 Plan [Member] Restricted share units [Member]	Jun. 30, 2013 2012 Plan [Member] Service based options [Member]	Jun. 30, 2013 2012 Plan [Member] Performance based options [Member]	Jun. 30, 2013 Conversion Ratio Adjustments [Member]
Class of Stock [Line Items]
Convertible preferred stock, shares outstanding	73,332			73,332																	73,332
Number of common stock shares issuable for preferred stock	25,809																				121,089
Additional shares issuable																					141,448
Proceeds from the sale of common stock, net of costs		$ 17,855,922
Number of shares sold	716,525
Common stock, shares authorized	35,000,000		35,000,000	25,000,000
Amount received upon the exercise of stock purchase warrants and options	2,778,757
Cost of stock purchase warrants and options exercised	28,208
Shares of common stock issued in connection with the vesting of restricted common stock	58,970
Shares of restricted common stock vested	66,900
Conversion of preferred stock, shares issued	115,639
Intrinsic value of options exercised	1,111,730
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Warrants to purchase shares of common stock	2,305,593
Number of shares authorized previously			25,000,000													2,812,500
Number of shares of common stock authorized to be issued pursuant to the plan															4,500,000	4,500,000
Number of shares reserved for issuance under the plan	6,537,360
Shares issued																	1,853,805	802,800
Shares outstanding	1,853,805			1,639,985													1,853,805	802,800
Shares available for grant															1,428,264
Contractual option life															10 years
Granted	393,180																277,580			115,600
Shares of common stock issued upon the exercise of stock purchase warrants and options	537,466							116,118
Weighted average fair value per share of options granted																	$ 8.25
Unrecognized compensation cost																		6,192,258	2,097,639	641,715
Remaining weighted average vesting period																		2 years 10 months 13 days	1 year 11 months 5 days	6 months
Shares withheld in satisfaction of employee tax withholding obligations																		7,930
Fair value of shares withheld in satisfaction of employee tax withholding obligations																		76,446
Shares issued to retiring director	4,450													5,000
Extension of the period of time to exercise vested stock options														36 months
Period of time to exercise vested stock options														90 days
Stock option compensation expense					$ 337,422	$ 654,717	$ 445,984	$ 1,275,790	$ 1,039,024	$ 661,329	$ 122,976	$ 1,192,925	$ 212,298

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Commitments and Contingencies (Details) (USD $)	6 Months Ended
	Jun. 30, 2013
Commitments and Contingencies [Abstract]
Cash paid for agreement	$ 200,000
Refundable amount	100,000
Identifiable intangible asset	100,000
Term of agreement	5 years
Deposit	100,000
Maximum milestone payments	$ 1,000,000

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Acquisition (Tables)

6 Months Ended

Jun. 30, 2013

Acquisition [Abstract]

Preliminary Allocation of Purchase Price to Estimated Fair Values of Assets Acquired and Liabilities Assumed

Current assets	$	925,817
Equipment		29,579
Acquired intangible assets		10,700,000
Goodwill		6,362,967
Total assets acquired		18,018,363
Current liabilities		653,315
Deferred tax liability		2,982,470
Total liabilities assumed		3,635,785
Net assets acquired	$	14,382,578
Purchase price	$	14,500,000
Less cash acquired		117,422
Net cash paid	$	14,382,578

Combined Results of Operations as if Acquisition Had Occurred at Beginning of Period

	Three months ended,			Six months ended,
	June 30, 2012			June 30, 2012
	(Unaudited)			(Unaudited)
Revenues	$	17,752,254		$	34,274,654
Net Loss	$	(4,936,884	)	$	(5,666,891	)
Net Loss per common share:
Basic and Diluted	$	(0.40	)	$	(0.49	)
Weighted average number of shares:
Basic and Diluted		12,243,156			11,660,609

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Income Taxes

6 Months Ended

Jun. 30, 2013

Income Taxes [Abstract]

Income Taxes

7. Income Taxes

The following table summarizes the income tax expense and effective tax rate for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,
	2013			2012
Current tax (benefit) expense	$	(72,832	)	$	55,654
Deferred tax expense (benefit)		42,430			(1,859,841	)
Income tax benefit	$	(30,402	)	$	(1,804,187	)
Effective tax rate		0.4	%		39.3	%

		Six Months Ended June 30,
		2013			2012
Current tax (benefit) expense	$	(90,853	)	$	26,519
Deferred tax expense (benefit)		74,639			(1,829,470	)
Income tax benefit	$	(16,214	)	$	(1,802,951	)
Effective tax rate		0.1	%		25.3	%

The income tax expense for the three and six months ended June 30, 2013 and 2012 consisted of a U.S. deferred income tax expense and foreign tax benefit. The U.S. income tax expense for the three and six months ended June 30, 2013 and 2012 related to indefinite lived intangible assets and for 2013 was reduced by a deferred income tax benefit from periodic amortization of nondeductible acquired intangible assets acquired in the MedEfficiency acquisition.

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Acquisition

6 Months Ended

Jun. 30, 2013

Acquisition [Abstract]

Acquisition

2. Acquisition

On April 16, 2012, the Company acquired all of the outstanding stock of MedEfficiency, Inc. ("MedEfficiency") pursuant to the terms of an Agreement and Plan of Merger. The purchase price was $14,500,000 and was funded by the Company with cash on hand.

MedEfficiency develops, manufactures and markets medical devices for treating chronic wounds and lower extremity injuries, specializing in total contact casting ("TCC") products. The TCC-EZ total contact cast system is MedEfficiency's lead product, in addition to a line of traditional and specialized contact casts and related equipment. The Company has distributed MedEfficiency's TCC products since 2008 under an exclusive distribution agreement.

The acquisition has been accounted for as a purchase. Accordingly, the results of operations of MedEfficiency have been included in the consolidated financial statements commencing April 17, 2012. The allocation of the purchase price to the estimated fair value of the assets acquired and the liabilities assumed is outlined below:

Current assets	$	925,817
Equipment		29,579
Acquired intangible assets		10,700,000
Goodwill		6,362,967
Total assets acquired		18,018,363
Current liabilities		653,315
Deferred tax liability		2,982,470
Total liabilities assumed		3,635,785
Net assets acquired	$	14,382,578
Purchase price	$	14,500,000
Less cash acquired		117,422
Net cash paid	$	14,382,578

The allocation of the purchase price to the assets acquired and liabilities assumed was based on an independent valuation study to establish the fair value of the identifiable intangible assets acquired. The identifiable intangible assets acquired consist of developed technology and patents, customer relationships, a supply agreement, trade names and trademarks and non-compete agreements. The Company recorded the excess of the purchase price over the fair values of the identifiable assets acquired and liabilities assumed as goodwill. While the acquired intangible assets are amortizable for financial reporting purposes, the acquired intangible assets and goodwill are not deductible for tax purposes. Deferred taxes have been recorded associated with the acquisition for the basis differences for financial reporting and income tax purposes for the acquired identifiable intangible assets at the effective tax rates for the period in which the deferred tax asset and liability are expected to reverse.

The unaudited pro forma information below presents combined results of operations as if the acquisition had occurred at the beginning of the periods presented instead of April 16, 2012. The pro forma information is based on historical results adjusted for the effect of purchase accounting and is not necessarily indicative of the results of operations of the combined entity had the acquisition occurred at the beginning of the periods presented, nor is it necessarily indicative of future results.

	Three months ended,			Six months ended,
	June 30, 2012			June 30, 2012
	(Unaudited)			(Unaudited)
Revenues	$	17,752,254		$	34,274,654
Net Loss	$	(4,936,884	)	$	(5,666,891	)
Net Loss per common share:
Basic and Diluted	$	(0.40	)	$	(0.49	)
Weighted average number of shares:
Basic and Diluted		12,243,156			11,660,609

The proforma results of operations include a deferred income tax benefit of $1,919,656 associated with the acquisition for differences in financial and income tax reporting basis differences of the acquired identifiable intangible assets at the effective tax rates for the period in which the deferred tax assets and liabilities are expected to reverse.

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Stockholders' Equity (Summary of Stock Option Activity) (Details) (USD $)	6 Months Ended
	Jun. 30, 2013
Number of Shares
Outstanding - beginning balance	1,639,985
Granted	393,180
Exercised	(165,622)
Forfeited	(13,738)
Outstanding - ending balance	1,853,805
Expected to vest	1,835,267
Exercisable	1,351,798
Weighted Average Exercise Price Per Share
Outstanding - beginning balance	$ 6.38
Granted	$ 12.07
Exercised	$ 5.65
Forfeited	$ 9.77
Outstanding - ending balance	$ 7.67
Expected to vest	$ 7.67
Exercisable	$ 6.52

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Stockholders' Equity (Tables)

6 Months Ended

Jun. 30, 2013

Stockholders' Equity [Abstract]

Schedule of Warrants Outstanding

Series	Number of Warrants		Exercise Price		Expiration Date
L		6,250	$	3.12	March 31, 2014
N		100,000	$	6.25	February 22, 2015
O		230,900	$	5.50	February 22, 2015
P		2,508	$	6.25	February 16, 2015
Q		133,333	$	5.50	February 22, 2015
R		1,832,602	$	9.90	June 22, 2016
Total		2,305,593

Weighted Average Assumptions Used in Estimation of Fair Value of Option Awards

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Risk-free interest rate		1.16	%		1.11	%		1.22	%		1.17	%
Volatility factor		70.2	%		73.6	%		70.0	%		74.5	%
Dividend yield		0	%		0	%		0	%		0	%
Expected option life (years)		6.25			6.25			6.25			6.25

Summary of Stock Option Activity

	Options			Weighted Average Exercise Price
Outstanding - January 1, 2013		1,639,985		$	6.38
Granted		393,180		$	12.07
Exercised		(165,622	)	$	5.65
Forfeited		(13,738	)	$	9.77
Outstanding - June 30, 2013		1,853,805		$	7.67
Expected to vest - June 30, 2013		1,835,267		$	7.67
Exercisable at June 30, 2013		1,351,798		$	6.52

Allocation of Stock Option Compensation Expense

	Three Months Ended June 30,				Six Months Ended                    June 30,
	2013		2012		2013		2012
Cost of sales	$	13,636	$	36,266		68,343		80,184
Selling, general and administrative expenses		627,186		407,070		1,135,792		950,059
Research and development		13,895		2,648		71,655		8,781
Total stock option compensation expense	$	654,717	$	445,984	$	1,275,790	$	1,039,024

Summary of Restricted Share Unit Activity

	Number of Shares			Weighted Average Fair Value
Unvested January, 1, 2013		786,900		$	7.07
Granted		82,800			13.66
Vested		(66,900	)		9.52
Unvested, June 30, 2013		802,800		$	9.22

Allocation of Restricted Share Unit Compensation Expense

	Three Months Ended June 30,				Six Months Ended June      30,
	2013		2012		2013		2012
Cost of sales	$	-	$	7,796			$	12,994
Selling, general and administrative expenses		661,329		115,180		1,192,925		199,304
Total restricted share unit compensation expense	$	661,329	$	122,976	$	1,192,925	$	212,298

Common Stock Shares Reserved for Future Issuance

Convertible preferred shares (series A - B)	73,332
Additional stock issuable related to conversion of preferred stock	73,566
Common stock options outstanding	1,853,805
Common stock warrants outstanding	2,305,593
Restricted share units outstanding	802,800
Common stock equivalents available for grant	1,428,264
Total common stock shares reserved	6,537,360

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Organization and Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2013

Organization and Summary of Significant Accounting Policies [Abstract]

Potentially Dilutive Shares Excluded as Result of Effects Being Anti-dilutive

	Three and Six Months Ended June 30,
	2013		2012
Dilutive shares:
Convertible preferred stock		73,332		73,332
Additional stock issuable related to conversion of preferred stock		73,566		-
Restricted share units		802,800		54,400
Warrants		2,305,593		3,035,036
Stock options		1,853,805		1,745,317
Total dilutive shares		5,109,096		4,908,085

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Organization and Summary of Significant Accounting Policies (Narrative) (Details)	6 Months Ended
	Jun. 30, 2013
Organization and Summary of Significant Accounting Policies [Abstract]
Number of operating segments	3

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Operating Segments (Tables)

6 Months Ended

Jun. 30, 2013

Operating Segments [Abstract]

Schedule of Operating Segment Sales, Gross Profit, Segment Contribution and Other Related Information

Three Months Ended June 30, 2013
	Advanced Wound Care			Traditional Wound Care			Pharmaceutical Wound Care			Other			Total Company
Net sales	$	7,910,616		$	10,237,445		$	-		$	-		$	18,148,061
Gross profit		3,938,156			2,736,005			-			-			6,674,161
Direct expense		(5,200,282	)		(1,284,977	)		(3,269,670	)		-			(9,754,929	)
Segment contribution	$	(1,262,126	)	$	1,451,028		$	(3,269,670)			-			(3,080,768	)
Indirect expenses										$	(4,263,905	)		(4,263,905	)
Net loss													$	(7,344,673	)

Three Months Ended June 30, 2012
Net sales	$	5,800,152		$	11,809,647		$	-		$	-		$	17,609,799
Gross profit		3,127,521			3,071,054			-			-			6,198,575
Direct expense		(5,101,082	)		(1,136,273	)		(1,532,058	)		-			(7,769,413	)
Segment contribution	$	(1,973,561	)	$	1,934,781		$	(1,532,058	)		-			(1,570,838	)
Indirect expenses										$	(1,221,211	)		(1,221,211	)
Net loss													$	(2,792,049	)

Six Months Ended June 30, 2013
	Advanced Wound Care			Traditional  Wound Care			Pharmaceutical Wound Care			Other			Total  Company
Net sales	$	15,398,998		$	21,538,809		$	-		$	-		$	36,937,807
Gross profit		7,567,297			5,811,329			-			-			13,378,626
Direct expense		(10,423,871	)		(2,487,944	)		(6,285,762	)		-			(19,197,577	)
Segment contribution	$	(2,856,574	)	$	3,323,385			($(6,285,762)			-			(5,818,951	)
Indirect expenses										$	(7,770,501	)		(7,770,501	)
Net loss													$	(13,589,452	)

Six Months Ended June 30, 2012
Net sales	$	10,297,206		$	22,589,959		$	-		$	-		$	32,887,165
Gross profit		5,230,227			5,844,508			-			-			11,074,735
Direct expense		(8,228,560	)		(2,252,113	)		(2,657,093	)		-			(13,137,766	)
Segment contribution	$	(2,998,333	)	$	3,592,395		$	(2,657,093	)		-			(2,063,031	)
Indirect expenses										$	(3,267,919	)		(3,267,919	)
Net loss													$	(5,330,950	)

Schedule of Net Sales by Geographic Region

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
United States		80	%		72	%		79	%		71	%
Canada		11	%		20	%		13	%		21	%
Other		9	%		8	%		8	%		8	%

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Document and Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 12, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	DERMA SCIENCES, INC.
Entity Central Index Key	0000892160
Trading Symbol	DSCI
Amendment Flag	false
Document Type	10-Q
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2013
Document Period End Date	Jun. 30, 2013
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		17,264,198

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Income Taxes (Tables)

6 Months Ended

Jun. 30, 2013

Income Taxes [Abstract]

Income Tax Benefit and Effective Tax Rate

	Three Months Ended June 30,
	2013			2012
Current tax (benefit) expense	$	(72,832	)	$	55,654
Deferred tax expense (benefit)		42,430			(1,859,841	)
Income tax benefit	$	(30,402	)	$	(1,804,187	)
Effective tax rate		0.4	%		39.3	%

		Six Months Ended June 30,
		2013			2012
Current tax (benefit) expense	$	(90,853	)	$	26,519
Deferred tax expense (benefit)		74,639			(1,829,470	)
Income tax benefit	$	(16,214	)	$	(1,802,951	)
Effective tax rate		0.1	%		25.3	%