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, 2014

¨ 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 (§232.405 of this chapter) 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	x
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

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 5, 2014	Class:	Common Stock, par value $.01 per share
		Shares Outstanding:  25,248,398

PART I – FINANCIAL INFORMATION

DERMA SCIENCES, INC.

FORM 10-Q

INDEX

Description	Page
Part I – Financial Information	2
Item 1.  Financial Statements (Unaudited)	2
Consolidated Balance Sheets – June 30, 2014 and December 31, 2013	2
Consolidated Statements of Comprehensive Loss – Three months ended June 30, 2014 and June 30, 2013	3
Consolidated Statements of Comprehensive Loss – Six months ended June 30, 2014 and June 30, 2013	4
Consolidated Statements of Cash Flows – Six months ended June 30, 2014 and June 30, 2013	5
Notes to Consolidated Financial Statements	6
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.  Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.  Controls and Procedures	26
Part II - Other Information
Item 1.  Legal Proceedings	27
Item 1A.  Risk Factors	27
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.  Defaults upon Senior Securities	28
Item 4.  Mine Safety Disclosures	29
Item 5.  Other Information	29
Item 6.  Exhibits	29

1

Part I – Financial Information

Item 1. Financial Statements.

DERMA SCIENCES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

	June 30, 2014			December 31, 2013
ASSETS
Current Assets
Cash and cash equivalents	$	57,089,886		$	6,501,586
Short-term investments		31,493,000			15,478,000
Accounts receivable, net		7,860,975			7,332,756
Inventories		17,599,680			16,472,640
Prepaid expenses and other current assets		3,065,618			3,746,753
Total current assets		117,109,159			49,531,735
Long-term investments		7,565,683			7,858,140
Equipment and improvements, net		3,231,956			2,953,469
Identifiable intangible assets, net		14,534,750			14,635,998
Goodwill		13,457,693			13,457,693
Other assets		147,310			139,318
Total Assets	$	156,046,551		$	88,576,353
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	4,625,433		$	4,522,508
Accrued expenses and other current liabilities		4,493,913			4,969,225
Total current liabilities		9,119,346			9,491,733
Long-term liabilities		232,977			242,325
Deferred tax liability		1,735,859			1,694,147
Total Liabilities		11,088,182			11,428,205
Contingencies (note 9)
Stockholders’ Equity
Convertible preferred stock, $.01 par value; shares authorized 1,468,750;  issued and outstanding 73,332 at June 30, 2014 and December 31, 2013 (liquidation preference of $3,222,368 at June 30, 2014)		733			733
Common stock, $.01 par value; shares authorized 50,000,000; issued and outstanding 25,236,582 at June 30, 2014 and 17,347,071 at December 31, 2013		252,366			173,471
Additional paid-in capital		226,351,602			140,064,607
Accumulated other comprehensive income		1,481,296			1,080,148
Accumulated deficit		(83,127,628	)		(64,170,811	)
Total Stockholders’ Equity		144,958,369			77,148,148
Total Liabilities and Stockholders’ Equity	$	156,046,551		$	88,576,353

See accompanying consolidated notes.

2

DERMA SCIENCES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss (Unaudited)

	Three Months Ended June 30,
	2014			2013
Net Sales	$	20,916,225		$	18,148,061
Cost of sales		13,071,408			11,473,900
Gross Profit		7,844,817			6,674,161
Operating Expenses
Selling, general and administrative		12,631,590			10,823,370
Research and development		4,365,267			3,242,599
Total operating expenses		16,996,857			14,065,969
Operating loss		(9,152,040	)		(7,391,808	)
Other income, net		(233,050	)		(16,733	)
Loss before income taxes		(8,918,990	)		(7,375,075	)
Income tax benefit		(232,188	)		(30,402	)
Net Loss		(8,686,802	)		(7,344,673	)
Other Comprehensive Income (Loss)
Foreign currency translation adjustment		117,750			(169,419	)
Unrealized gain on equity securities, net of taxes		862,685			—
Total other comprehensive income (loss)		980,435			(169,419	)
Comprehensive Loss	$	(7,706,367	)	$	(7,514,092	)
Net loss per common share – basic and diluted	$	(0.34	)	$	(0.43	)
Shares used in computing net loss per common share – basic and diluted		25,199,805			17,068,854

See accompanying consolidated notes.

3

DERMA SCIENCES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss (Unaudited)

	Six Months Ended June 30,
	2014			2013
Net Sales	$	40,703,258		$	36,937,807
Cost of sales		25,946,117			23,559,181
Gross Profit		14,757,141			13,378,626
Operating Expenses
Selling, general and administrative		25,681,143			20,676,455
Research and development		8,548,868			6,235,765
Total operating expenses		34,230,011			26,912,220
Operating loss		(19,472,870	)		(13,533,594	)
Other (income) expense, net		(272,300	)		72,072
Loss before income taxes		(19,200,570	)		(13,605,666	)
Income tax benefit		(243,753	)		(16,214	)
Net Loss		(18,956,817	)		(13,589,452	)
Other Comprehensive Income (Loss)
Foreign currency translation adjustment		(84,862	)		(219,100	)
Unrealized gain on equity securities, net of taxes		486,010			—
Total other comprehensive income (loss)		401,148			(219,100	)
Comprehensive Loss	$	(18,555,669	)	$	(13,808,552	)
Net loss per common share – basic and diluted	$	(0.79	)	$	(0.81	)
Shares used in computing net loss per common share – basic and diluted		23,889,487			16,832,578

See accompanying consolidated notes.

4

DERMA SCIENCES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,
	2014			2013
Operating Activities
Net loss	$	(18,956,817	)	$	(13,589,452	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of equipment and improvements		450,734			467,400
Amortization of identifiable intangible assets		1,480,998			1,447,327
Provision for bad debts		9,942			14,000
Allowance for sales adjustments		(5,642	)		(16,805	)
Provision for inventory obsolescence		65,069			73,781
Deferred rent		(10,142	)		16,945
Stock-based compensation		3,495,944			2,806,137
Deferred income taxes		(219,514	)		74,639
Changes in operating assets and liabilities:
Accounts receivable		(521,797	)		(349,151	)
Inventories		(1,333,931	)		(732,687	)
Prepaid expenses and other current assets		785,061			83,236
Other assets		25,541			(431	)
Accounts payable		89,676			871,362
Accrued expenses and other current liabilities		(424,585	)		30,839
Net cash used in operating activities		(15,069,463	)		(8,802,860	)
Investing Activities
Purchase of investments		(35,000,000	)		(16,475,000	)
Proceeds from sale of investments		19,981,000			2,737,000
Purchase of equipment and improvements		(733,436	)		(282,574	)
Purchase of intangible assets		(1,250,000	)		(100,000	)
Net cash used in investing activities		(17,002,436	)		(14,120,574	)
Financing Activities
Proceeds from the sale of common stock, net of costs		80,616,032			—
Proceeds from exercise of stock options and warrants, net of costs		2,245,782			2,750,549
Payment of withholding taxes related to employee stock compensation		(121,618	)		(76,446	)
Net cash provided by financing activities		82,740,196			2,674,103
Effect of exchange rate changes on cash		(79,997	)		35,277
Net increase (decrease) in cash and cash equivalents		50,588,300			(20,214,054	)
Cash and cash equivalents
Beginning of period		6,501,586			41,616,657
End of period	$	57,089,886		$	21,402,603
Supplemental disclosures of cash flow information:
Issuance of a warrant in connection with a licensing agreement	$	129,750		$	-
Cash paid during the year for:
Interest	$	5,442		$	717

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 tissue regeneration 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 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, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. Information included in the consolidated balance sheet as of December 31, 2013 has been derived from the consolidated financial statements and footnotes thereto for the year ended December 31, 2013, 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, 2014 and 2013 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,
	2014		2013
Excluded dilutive shares:
Convertible preferred stock		73,332		73,332
Additional stock issuable related to conversion of preferred stock		49,782		73,566
Restricted share units		744,850		802,800
Stock options		2,324,554		1,853,805
Warrants		2,143,584		2,305,593
Total dilutive shares		5,336,102		5,109,096

Recently Issued Accounting Pronouncements – In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

2. Cash and Cash Equivalents and Investments

Cash and Cash Equivalents

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. Money market mutual funds consist of funds deposited into mutual funds investing in U.S. government and non-government obligations. The Company maintains cash and cash equivalents and money market mutual funds with various domestic and foreign financial institutions within the ordinary course of business, which at times may exceed jurisdictional insurance limits.

Investments in Debt Securities

Investments in debt securities includes certificates of deposit purchased with an original maturity greater than three months which are deposited in various U.S. financial institutions and are fully insured by the Federal Deposit Insurance Corporation. The Company intends to hold the certificates of deposit to maturity and accordingly these investments are carried at amortized cost. Investments in debt securities with maturities greater than one year from the balance sheet date are classified as a long-term asset.

Investment in Equity Securities

In 2013, the Company purchased 2,272,277 shares of Comvita Limited (“Comvita”) common stock for $7,000,000. The equity investment represented 7.3% of Comvita’s outstanding shares on the date of purchase. In conjunction with this investment, the Company’s chairman and chief executive officer was named to Comvita’s board of directors. Comvita will use the proceeds from this investment to purchase additional apiaries and upgrade and expand its Manuka honey processing capabilities. This investment will assist Comvita in its effort to better ensure supply for the Company’s medical-grade honey requirements in an environment of growing global demand for Manuka honey.

The investment in Comvita common stock is classified as an available-for-sale investment carried at fair value, with any unrealized gains and losses associated with the investment included in accumulated other comprehensive income and any dividends received recorded in other income. The investment is classified as a long term asset. As of June 30, 2014, the fair value of the Comvita common stock was $7,565,683 as determined by the quoted market price of the outstanding stock on the New Zealand stock exchange. The cumulative increase in fair value from cost of $565,683, net of taxes of $217,533, has been recorded in accumulated other comprehensive income.

7

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Cash and cash equivalents and investments at June 30, 2014 and December 31, 2013 consisted of the following:

	June 30, 2014		December 31, 2013
Cash	$	6,775,752	$	5,265,903
Money market mutual funds		50,314,134		1,235,683
Cash and cash equivalents		57,089,886		6,501,586
Investments in debt securities		31,493,000		16,474,000
Investment in equity securities		7,565,683		6,862,140
Total investments		39,058,683		23,336,140
Total cash and cash equivalents and investments	$	96,148,569	$	29,837,726

The following table provides fair value information as of June 30, 2014:

			Fair Value Measurements, Using
	Total carrying value as of June 30, 2014		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash and cash equivalents	$	57,089,886	$	57,089,886	$	-	$	-
Investments in debt securities		31,493,000		31,489,965		-		-
Investment in equity securities		7,565,683		7,565,683		-		-
Total investments		39,058,683		39,055,648		-		-
Total	$	96,148,569	$	96,145,534	$	-	$	-

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.

3. 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, 2014		December 31, 2013
Finished goods	$	12,380,839	$	11,044,746
Work in process		667,773		1,009,315
Packaging materials		1,369,982		1,408,521
Raw materials		3,181,086		3,010,058
Total inventory	$	17,599,680	$	16,472,640

8

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

4. BioDLogics, LLC License Agreement

On January 14, 2014, the Company entered into a license, market development and commercialization agreement (the “Agreement”) with BioDLogics, LLC (“BioD”) relating to BioD’s human placental based products (the “Licensed Products”) and intellectual property related thereto.

Under the Agreement, BioD granted to the Company an exclusive, perpetual, royalty-bearing license to use, offer for sale and sell, the Licensed Products in North America (the “Territory”), including the rights to sublicense solely as provided in the Agreement, for a broad range of dermal applications (the “Field”). During the term of the Agreement, the Company will be responsible for the sale and marketing of the Licensed Products in the Field throughout the Territory. As part of its commercialization efforts, the Company is required to fund clinical studies up to $2,000,000 in support of the Field pursuant to the Agreement.

The Company paid BioD an initial license fee of $1,250,000 and granted BioD a warrant to purchase 100,000 shares of the Company’s common stock. One quarter (25%) of the warrant was exercisable immediately at a price of $11.81, while the remaining 75% of the warrant becomes exercisable, if at all, upon the achievement of certain milestones. The warrant expires five years from the date of issuance in January 2019 (note 5). The warrant has been valued at $129,750 using the Black-Scholes option pricing model. Total consideration paid to BioD of $1,379,750 has been recorded as an intangible asset and is being amortized to cost of sales over an estimated useful life of seven years. In addition to the initial license fee and warrant, royalties are payable to BioD based upon a sliding scale of the Company’s net sales of Licensed Products within the Territory and declining as net sales increase. Royalty rates range from the low double digits and decline to the mid-single digits. The Agreement also requires the Company to make milestone payments to BioD of up to $19,750,000 based upon the achievement of certain development events and annual net sales levels.

The Agreement may be terminated as follows: (i) upon mutual agreement of the parties; (ii) by BioD if the Company challenges certain BioD patents or trade secrets; (iii) by BioD if the Company fails to meet the annual minimum net sales requirement under the Agreement, unless the Company pays the difference between the amount of royalties that would have been due had the minimum annual net sales for such year been achieved and royalty payments made by the Company with respect to net sales during such year plus any milestone payments payable; or (iv) by either party in the event of a material breach or certain events of bankruptcy.

5. Stockholders’ Equity

Preferred Stock

Subsequent to the issuances of the preferred stock, the Company has undertaken a number of common stock offerings that impact the preferred stock conversion ratios. As of June 30, 2014, current Series A and B preferred stockholders holding 73,332 preferred shares are entitled to receive an aggregate of 123,114 shares (49,782 additional 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. In the six months ended June 30, 2014, the Company issued 1,397 common shares to prior preferred stock holders based on the adjustment of the conversion ratios.

The 49,782 incremental shares associated with the conversion ratio adjustment will be recorded to common stock at par with the offset to additional paid in capital as all of the convertible preferred stock was issued prior to the November 16, 2000 effective date of certain provisions of Accounting Standards Codification 470 (formerly, EITF 00-27 Application of Issue No. 98-5 to Certain Convertible Instruments).

Common Stock

On January 29, 2014, the Company raised $80,616,032 (net of $5,633,968 in commission and other offering expenses) from the sale of 7,500,000 shares of the Company’s common stock at $11.50 per share. The Company plans to use the net proceeds from the offering for the continued development of its pharmaceutical product DSC127, for sales force expansion and for general corporate purposes.

9

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

On May 20, 2014, stockholders of the Company approved the proposal to increase the number of authorized shares of common stock from 35,000,000 to 50,000,000. On June 6, 2014, the Company amended its Certificate of Incorporation to reflect the increase in the number of authorized shares of common stock. During the six months ended June 30, 2014, the Company issued 7,889,511 shares of common stock consisting of: 7,500,000 shares in connection with the January 29, 2014 equity offering, 325,621 shares upon the exercise of stock purchase warrants and options for which the Company received $2,245,782; 62,493 shares in connection with the vesting of 71,800 restricted share units, and 1,397 shares in connection with preferred stock conversion ratio adjustments.

Stock Purchase Warrants

At June 30, 2014, 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
N		100,000	$	6.25	February 22, 2015
O		102,734	$	5.50	February 22, 2015
P		2,187	$	6.25	February 16, 2015
Q		133,333	$	5.50	February 22, 2015
R		1,705,330	$	9.90	June 22, 2016
S		100,000	$	11.81	January 14, 2019
Total		2,143,584

During the six months ended June 30, 2014, a total of 261,688 warrants were exercised on a for cash and cashless basis consisting of 128,166 Series O, 127,272 Series R, and 6,250 Series L warrants. A total of 260,111 shares of common stock were issued in connection with the 2014 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 20, 2014, stockholders of the Company approved the proposal to increase the number of authorized shares of common stock the Company can issue from 4,500,000 to 6,000,000. 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, 2014, options to purchase 2,324,554 shares and 744,850 restricted share units were issued and outstanding under the EIP Plan and 2,235,035 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.

10

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

For the three and six months ended June 30, 2014 and 2013, 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,
	2014			2013			2014			2013
Risk-free interest rate		1.97	%		1.16	%		1.79	%		1.22	%
Volatility factor		61.9	%		70.2	%		63.2	%		70.0	%
Dividend yield		0	%		0	%		0	%		0	%
Expected option life (years)		6.25			6.25			5.89			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 expected option life for Company employees and directors while the 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, 2014 is as follows:

	Options			Weighted Average Exercise Price
Outstanding – January 1, 2014		1,814,233		$	7.67
Granted		628,661		$	13.04
Forfeited		(12,662	)	$	12.13
Exercised		(102,178	)	$	6.95
Expired		(3,500	)	$	12.28
Outstanding –  June 30, 2014		2,324,554		$	9.12
Expected to vest – June 30, 2014		2,301,308		$	9.12
Exercisable at June 30, 2014		1,557,590		$	7.53

During 2014, the Company granted 443,335 service based options and 185,326 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, 2014 was $7.64.

During the six months ended June 30, 2014, 102,178 stock options were exercised on a for cash and cashless basis. A total of 65,510 shares of common stock were issued in connection with the 2014 stock option exercises. The intrinsic value of options exercised in 2014 was $467,604.

11

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

During the three and six months ended June 30, 2014 and 2013, stock option compensation expense was recorded as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Cost of sales	$	32,870	$	13,636	$	118,046	$	68,343
Selling, general and administrative expenses		623,336		627,186		1,836,158		1,135,792
Research and development		82,385		13,895		103,171		71,655
Total stock option compensation expense	$	738,591	$	654,717	$	2,057,375	$	1,275,790

As of June 30, 2014, there was $3,429,722 of unrecognized compensation cost related to nonvested service based awards and $498,503 related to nonvested performance based awards. These costs are expected to be recognized over the options’ remaining weighted average vesting period of 2.20 years and 0.50 years for the service and performance based awards, respectively.

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 Units			Weighted Average Fair Value
Unvested–January 1, 2014		720,550		$	9.03
Granted		101,100			10.05
Vested		(71,800	)		13.48
Forfeited		(5,000	)		10.74
Unvested–June 30, 2014		744,850		$	8.82

In connection with the vesting of restricted share unit awards during the six months ended June 30, 2014, 9,307 common stock shares with a fair value of $121,618 were withheld in satisfaction of employee tax withholding obligations.

During the three months ended June 30, 2014 and 2013, restricted share unit compensation expense was $715,117 and $661,329, and for the six months ended June 30, 2014 and 2013, restricted share unit compensation expense was $1,390,033 and $1,192,925, respectively, and included in selling, general and administrative expense.

As of June 30, 2014, there was $4,237,494 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 1.32 years.

In consideration of prior service, the Company accelerated the vesting of any unvested stock options and the restricted share units scheduled to vest in 2014 of a retiring director and extended the date to exercise vested stock options to 24 months (versus 90 days) from the date of retirement. An additional $48,536 of stock based compensation expense was recognized during the six months ended June 30, 2014 and included in selling, general and administrative expense in connection with the retirement. For the six months ended June 30, 2013, the Company recognized an additional $337,422 of stock based compensation expense associated with a director’s retirement and a former director’s consulting expenses which were included in selling, general and administrative expense.

12

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Shares Reserved for Future Issuance

At June 30, 2014, the Company had reserved the following shares of common stock for future issuance:

Convertible preferred stock (series A – B)	73,332
Additional stock issuable related to conversion of preferred stock (series A – B)	49,782
Common stock options outstanding	2,324,554
Common stock warrants outstanding	2,143,584
Restricted share units outstanding	744,850
Common stock equivalents available for grant	2,235,035
Total common stock shares reserved	7,571,137

6. Accumulated Other Comprehensive Income

The Company’s accumulated other comprehensive income as of June 30, 2014 was as follows:

	Foreign Currency Translation Adjustments			Unrealized (Loss) Gain on Equity Securities, Net of Taxes			Total
Balance at January 1, 2014	$	1,218,008		$	(137,860	)	$	1,080,148
Current period - other comprehensive (loss) gain		(84,862	)		486,010			401,148
Balance at June 30, 2014	$	1,133,146		$	348,150		$	1,481,296

7. 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, devices and skin substitutes 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 closure strips, catheter fasteners and skin care products. Pharmaceutical wound care products consist of DSC127, a novel, first in class angiotensin peptide for the treatment of a variety of dermal applications.

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 care providers and through retail. 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 for diabetic foot ulcers and pre-clinical work on scar prevention.

13

DERMA SCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 2014 and 2013 were as follows:

	Three Months Ended June 30, 2014
	Advanced Wound Care			Traditional Wound Care			Pharmaceutical Wound Care			Other			Total Company
Net sales	$	8,812,685		$	12,103,540		$	-		$	-		$	20,916,225
Gross profit		4,446,075			3,398,742			-			-			7,844,817
Direct expense		(7,663,928	)		(1,362,889	)		(4,361,559	)		-			(13,388,376	)
Segment contribution	$	(3,217,853	)	$	2,035,853		$	(4,361,559)			-			(5,543,559	)
Indirect expenses										$	(3,143,243	)		(3,143,243	)
Net loss													$	(8,686,802	)

	Three Months Ended June 30, 2013
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	)

	Six Months Ended June 30, 2014
		Advanced Wound Care			Traditional Wound Care			Pharmaceutical Wound Care			Other			Total Company
Net sales	$	17,164,748		$	23,538,510		$	-		$	-		$	40,703,258
Gross profit		8,373,050			6,384,091			-			-			14,757,141
Direct expense		(15,309,862	)		(2,671,058	)		(8,540,726	)		-			(26,521,646	)
Segment contribution	$	(6,936,812	)	$	3,713,033		$	(8,540,726)			-			(11,764,505	)
Indirect expenses										$	(7,192,312	)		(7,192,312	)
Net loss													$	(18,956,817	)

	Six Months Ended June 30, 2013
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	)

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,
	2014			2013			2014			2013
United States		75	%		80	%		74	%		79	%
Canada		16	%		11	%		16	%		13	%
Other		9	%		9	%		10	%		8	%

For the six months ended June 30, 2014 and 2013, the Company had a major Canadian customer comprising 16% and 13%, respectively, of consolidated net sales. Due to outstanding rebate obligations, the Company was in a net liability position to this customer at June 30, 2014.

8. Income Taxes

The following table summarizes the income tax expense and effective tax rate for the three and six months ended June 30, 2014 and 2013:

	Three Months Ended June 30,
	2014			2013
Current tax benefit	$	(17,093	)	$	(72,832	)
Deferred tax (benefit) expense		(215,095	)		42,430
Income tax benefit	$	(232,188	)	$	(30,402	)
Effective tax rate		2.6	%		0.4	%

	Six Months Ended June 30,
	2014			2013
Current tax benefit	$	(24,239	)	$	(90,853	)
Deferred tax (benefit) expense		(219,514	)		74,639
Income tax benefit	$	(243,753	)	$	(16,214	)
Effective tax rate		1.3	%		0.1	%

The income tax benefit for the three and six months ended June 30, 2014 consisted of a U.S. deferred income tax benefit related to a reduction in the Company’s U.S. valuation allowance to offset the tax impact of the unrealized gain on equity securities included in accumulated other comprehensive income and a tax benefit from foreign operations. In addition, the U.S. income tax benefit for the three and six months ended June 30, 2014 was reduced by the tax effect of differences in financial reporting and tax treatment of goodwill, net of amortization for financial reporting but not for tax purposes of acquired MedEfficiency identified intangible assets.

The income tax benefit for the three and six months ended June 30, 2013 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 related to tax differences in financial reporting and tax treatment of goodwill, net of amortization for financial reporting but not for tax purposes of acquired MedEfficiency identified intangible assets.

9. 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.

15

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 for the fiscal year ended December 31, 2013 filed on March 13, 2014 (the “2013 Form 10-K”) and other filings with the Securities and Exchange Commission (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.

16

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Overview

Operating Results of Three Months Ended June 30, 2014 and 2013

The following table highlights the operating results of the three months ended June 30, 2014 and 2013:

	Three Months Ended June 30,						Variance
	2014			2013
Gross sales	$	23,579,807		$	19,983,956		$	3,595,851		18.0	%
Sales adjustments		(2,663,582	)		(1,835,895	)		(827,687	)	45.1	%
Net sales		20,916,225			18,148,061			2,768,164		15.3	%
Cost of sales		13,071,408			11,473,900			1,597,508		13.9	%
Gross profit		7,844,817			6,674,161			1,170,656		17.5	%
Selling, general and administrative expense		12,631,590			10,823,370			1,808,220		16.7	%
Research and development expense		4,365,267			3,242,599			1,122,668		34.6	%
Other income, net		(233,050	)		(16,733	)		(216,317	)	*
Total expenses		16,763,807			14,049,236			2,714,571		19.3	%
Loss before income taxes		(8,918,990	)		(7,375,075	)		(1,543,915	)	20.9	%
Income tax benefit		(232,188	)		(30,402	)		(201,786	)	*
Net loss	$	(8,686,802	)	$	(7,344,673	)	$	(1,342,129	)	18.3	%

* – not meaningful

17

Gross to Net Sales Adjustments

Gross to net sales adjustments comprise the following:

	Three Months Ended June 30,
	2014			2013
Gross sales	$	23,579,807		$	19,983,956
Trade rebates		(1,875,437	)		(1,159,703	)
Distributor fees		(306,148	)		(172,732	)
Sales incentives		(215,927	)		(270,217	)
Returns and allowances		(104,494	)		(71,272	)
Cash discounts		(161,576	)		(161,971	)
Total adjustments		(2,663,582	)		(1,835,895	)
Net sales	$	20,916,225		$	18,148,061

Trade rebates increased in 2014 versus 2013 principally due to higher sales in Canada, and an increase in the rebate percentage due to a change in product mix towards higher rebated products. The increase in distributor fees was commensurate with the increase in Canadian sales upon which the fees are based. The decrease in sales incentives reflected lower sales subject to incentives.

Rebate Reserve Roll-Forward

A roll-forward of the trade rebate accruals for the three months ended June 30, 2014 and 2013 were as follows:

	Three Months Ended June 30,
	2014			2013
Beginning balance – April 1	$	1,816,821		$	2,357,166
Rebates paid		(1,602,983	)		(1,722,313	)
Rebates accrued		1,875,437			1,159,703
Ending balance – June 30	$	2,089,275		$	1,794,556

The $272,454 increase in the trade rebate reserve balance at June 30, 2014 from April 1, 2014 principally reflected an increase in sales subject to rebate in Canada and the timing of rebate payments. There was no other significant change in the nature of our business during the quarter ended June 30, 2014 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 three months ended June 30, 2014 versus 2013:

	Three Months Ended June 30,						Variance
	2014			2013
Net Sales	$	20,916,225		$	18,148,061		$	2,768,164	15.3	%
Cost of Sales		13,071,408			11,473,900			1,597,508	13.9	%
Gross Profit	$	7,844,817		$	6,674,161		$	1,170,656	17.5	%
Gross Profit %		37.5	%		36.8	%

Net sales increased $2,768,164, or 15.3% (15.5% adjusted for exchange) in 2014 versus 2013. Advanced wound care sales increased $902,069, or 11.4%, to $8,812,685 in 2014 from $7,910,616 in 2013. Traditional wound care sales increased $1,866,095, or 18.2%, to $12,103,540 in 2014 from $10,237,445 in 2013.

18

Sales from U.S. operating entities increased $939,131, or 6.0%, to $16,526,268 in 2014 from $15,587,137 in 2013. The increase was driven by higher advanced wound care sales of $459,921, or 6.5%, and traditional wound care sales of $479,210, or 5.6%. The U.S. advanced wound care sales increase was led by Medihoney and Total Contact Casting (“TCC”). The traditional wound care sales increase was driven by higher first aid division sales. Sales from the Canadian subsidiary increased $1,441,386, or 77.5% (83.6% adjusted for exchange), to $3,300,792 in 2014 from $1,859,406 in 2013. This increase was driven by an increase in sales to our exclusive distributor of $1,554,270 to support an increase in its inventory partially offset by unfavorable foreign exchange of $112,884. Sales from the international operating subsidiary increased $387,647, or 55.3% (45.7% adjusted for exchange), to $1,089,165 in 2014 from $701,518 in 2013. The increase was driven by higher advanced wound care sales.

Gross profit increased $1,170,656, or 17.5%, in 2014 versus 2013. Advanced wound care gross profit increased $507,919, or 12.9%, to $4,446,075 in 2014 from $3,938,156 in 2013. Traditional wound care gross profit increased $662,737, or 24.2%, to $3,398,742 in 2014 from $2,736,005 in 2013. The overall gross profit margin percentage increased to 37.5% in 2014 from 36.8% in 2013. The increase in gross profit dollars reflected higher overall sales, coupled with the increase in sales of higher margin products. The higher gross margin percentage principally reflected favorable sales mix towards higher margined products partially offset by higher product costs.

Selling, General and Administrative Expenses

The following table highlights selling, general and administrative expenses by type for the three months ended June 30, 2014 versus 2013:

	Three Months Ended June 30,				Variance
	2014		2013
Distribution	$	592,010	$	569,754	$	22,256		3.9	%
Marketing		2,327,359		1,477,734		849,625		57.5	%
Sales		5,909,990		4,262,758		1,647,232		38.6	%
General and administrative		3,802,231		4,513,124		(710,893	)	(15.8	)%
Total	$	12,631,590	$	10,823,370	$	1,808,220		16.7	%

Selling, general and administrative expenses increased $1,808,220, or 16.7% (17.0% adjusted for exchange) in 2014 versus 2013.

Distribution expense increased $22,256, or 3.9% (4.8% adjusted for exchange), in 2014 versus 2013. The increase reflected higher operating costs in support of our growing base of sales.

Marketing expense increased $849,625, or 57.5%, in 2014 versus 2013. The increase was attributable to higher compensation expense associated with the addition of five marketing, two clinical and one product development positions added in the second half of 2013 and 2014 coupled with higher travel, consulting, promotional and product development costs principally in support of our advanced wound care growth initiatives.

Sales expense increased $1,647,232, or 38.6% (38.4% adjusted for exchange), in 2014 versus 2013. The increase was principally attributable to incremental costs consisting of compensation and benefits, commission, travel and recruiting expenses to support the expansion of the advanced wound care sales force in the U.S. along with the incremental investment in a sales management position to support our international growth, samples and tradeshow expenses, and administrative fees associated with group purchasing programs.

General and administrative expenses decreased $710,893, or 15.8% (14.8% adjusted for exchange), in 2014 versus 2013. The decrease was primarily related to legal fees from litigation that were incurred in 2013 but not in 2014, partially offset by higher compensation and benefits due to the addition of new positions, and higher public relations expense.

Research and Development Expense

Research and development expense increased $1,122,668 to $4,365,267 in 2014 from $3,242,599 in 2013. The increase principally reflected the ongoing DSC127 Phase 3 related expenses, together with incremental pre-clinical DSC127 scar prevention and AWC clinical studies.

19

Other Income, net

Other income, net increased $216,317 to $233,050 in 2014 from $16,733 in 2013 due principally to a dividend received from Comvita of $183,258 and favorable changes in foreign currency exchange.

Income Tax Benefit

Income tax benefit increased $201,786 to $232,188 in 2014 from $30,402 in 2013 principally due to a U.S. deferred income tax benefit related to a reduction in the Company’s U.S. valuation allowance to offset the tax impact of the unrealized gain on equity securities included in accumulated other comprehensive income.

Net Loss

We generated a net loss of $8,686,802, or $0.34 per share (basic and diluted) in 2014, compared to a net loss of $7,344,673, or $0.43 per share (basic and diluted), in 2013.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Overview

Operating Results of Six Months Ended June 30, 2014 and 2013

The following table highlights the operating results of the six months ended June 30, 2014 and 2013:

	Six Months Ended June 30,						Variance
	2014			2013
Gross sales	$	45,809,371		$	41,026,530		$	4,782,841		11.7	%
Sales adjustments		(5,106,113	)		(4,088,723	)		(1,017,390	)	24.9	%
Net sales		40,703,258			36,937,807			3,765,451		10.2	%
Cost of sales		25,946,117			23,559,181			2,386,936		10.1	%
Gross profit		14,757,141			13,378,626			1,378,515		10.3	%
Selling, general and administrative expense		25,681,143			20,676,455			5,004,688		24.2	%
Research and development expense		8,548,868			6,235,765			2,313,103		37.1	%
Other (income) expense, net		(272,300	)		72,072			(344,372	)	*
Total expenses		33,957,711			26,984,292			6,973,419		25.8	%
Loss before income taxes		(19,200,570	)		(13,605,666	)		(5,594,904	)	41.1	%
Income tax benefit		(243,753	)		(16,214	)		(227,539	)	*
Net loss	$	(18,956,817	)	$	(13,589,452	)	$	(5,367,365	)	39.5	%

* – not meaningful

20

Gross to Net Sales Adjustments

Gross to net sales adjustments comprise the following:

	Six Months Ended June 30,
	2014			2013
Gross sales	$	45,809,371		$	41,026,530
Trade rebates		(3,596,021	)		(2,699,434	)
Distributor fees		(594,135	)		(437,598	)
Sales incentives		(390,372	)		(484,084	)
Returns and allowances		(210,769	)		(153,122	)
Cash discounts		(314,816	)		(314,485	)
Total adjustments		(5,106,113	)		(4,088,723	)
Net sales	$	40,703,258		$	36,937,807

Trade rebates increased in 2014 versus 2013 principally due to higher sales in Canada, and an increase in the rebate percentage due to a change in product mix towards higher rebated products. The increase in distributor fees is commensurate with the increase in Canadian sales upon which the fees are based. The decrease in sales incentives reflected lower sales subject to incentives.

Rebate Reserve Roll-Forward

A roll-forward of the trade rebate accruals for the six months ended June 30, 2014 and 2013 were as follows:

	Six Months Ended June 30,
	2014			2013
Beginning balance – January 1	$	1,746,993		$	2,466,091
Rebates paid		(3,253,739	)		(3,370,969	)
Rebates accrued		3,596,021			2,699,434
Ending balance – June 30	$	2,089,275		$	1,794,556

The $342,282 increase in the trade rebate reserve balance at June 30, 2014 from January 1, 2014 principally reflected an increase in sales subject to rebate in Canada and the timing of rebate payments. There was no other significant change in the nature of our business during the six months ended June 30, 2014 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, 2014 versus 2013:

	Six Months Ended June 30,						Variance
	2014			2013
Net  Sales	$	40,703,258		$	36,937,807		$	3,765,451	10.2	%
Cost of sales		25,946,117			23,559,181			2,386,936	10.1	%
Gross Profit	$	14,757,141		$	13,378,626		$	1,378,515	10.3	%
Gross Profit %		36.3	%		36.2	%

Net sales increased $3,765,451, or 10.2% (10.8% adjusted for exchange) in 2014 versus 2013. Advanced wound care sales increased $1,765,750, or 11.5%, to $17,164,748 in 2014 from $15,398,998 in 2013. Traditional wound care sales increased $1,999,701 or 9.3%, to $23,538,510 in 2014 from $21,538,809 in 2013.

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Sales from U.S. operating entities increased $1,371,601, or 4.4%, to $32,216,127 in 2014 from $30,844,526 in 2013. The increase was driven by higher advanced wound care sales of $1,045,196, or 7.6%, and traditional wound care sales of $326,405, or 1.9%. The U.S. advanced wound care sales increase was led by Medihoney, Total Contact Casting (“TCC”), and Xtrasorb. The traditional wound care sales increase was driven by higher first aid division sales. Sales from the Canadian subsidiary increased $1,688,976, or 35.8% (43.3% adjusted for exchange), to $6,400,896 in 2014 from $4,711,920 in 2013. This increase was driven by an increase in sales to our exclusive distributor of $2,040,933 to support an increase in its inventory partially offset by unfavorable foreign exchange of $351,957. Sales from the international operating subsidiary increased $704,874, or 51.0% (42.8% adjusted for exchange), to $2,086,235 in 2014 from $1,381,361 in 2013. The increase was driven by higher advanced wound care sales.

Gross profit increased $1,378,515, or 10.3%, in 2014 versus 2013. Advanced wound care gross profit increased $805,753, or 10.6%, to $8,373,050 in 2014 from $7,567,297 in 2013. Traditional wound care gross profit increased $572,762, or 9.9%, to $6,384,091 in 2014 from $5,811,329 in 2013. The overall gross profit margin percentage increased to 36.3% in 2014 from 36.2% in 2013. The increase in gross profit dollars reflected higher overall sales, coupled with the increase in sales of higher margin products. The higher gross margin percentage principally reflected favorable sales mix towards higher margined products partially offset by higher manufacturing costs.

Selling, General and Administrative Expenses

The following table highlights selling, general and administrative expenses by type for the six months ended June 30, 2014 versus 2013:

	Six Months Ended June 30,				Variance
	2014		2013
Distribution	$	1,225,439	$	1,119,692	$	105,747		9.4	%
Marketing		4,302,569		2,716,159		1,586,410		58.4	%
Sales		12,057,274		8,680,046		3,377,228		38.9	%
General and administrative		8,095,861		8,160,558		(64,697	)	(0.8	)%
Total	$	25,681,143	$	20,676,455	$	5,004,688		24.2	%

Selling, general and administrative expenses increased $5,004,688, or 24.2% (24.7% adjusted for exchange) in 2014 versus 2013.

Distribution expense increased $105,747, or 9.4% (10.7% adjusted for exchange), in 2014 versus 2013. The increase reflected higher operating costs, principally compensation due to an increase in warehouse personnel, as well as repairs and maintenance on warehouse buildings and equipment, in support of our growing base of sales.

Marketing expense increased $1,586,410, or 58.4% (58.5% adjusted for exchange), in 2014 versus 2013. The increase was attributable to higher compensation expense associated with the addition of five marketing, two clinical and one product development positions added in the second half of 2013 and 2014 along with travel and recruiting fees associated with the addition of the new positions, and higher product development and consulting costs.

Sales expense increased $3,377,228, or 38.9% (38.8% adjusted for exchange), in 2014 versus 2013. The increase was principally attributable to incremental costs consisting of compensation and benefits, commissions, equity based compensation, travel and recruiting expenses to support the expansion of the advanced wound care sales force in the U.S. along with the incremental investment in a sales management position to support our international growth, as well as higher trade shows and samples expense.

General and administrative expenses decreased $64,697, or (0.8)% (0.4% adjusted for exchange), in 2014 versus 2013. This decrease primarily reflected lower legal fees resulting from litigation incurred in 2013 but not in 2014, and lower board of directors retirement associated costs, partially offset by higher compensation and benefits due to the addition of new positions, and higher public relations expense.

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Research and Development Expense

Research and development expense increased $2,313,103 to $8,548,868 in 2014 from $6,235,765 in 2013. The increase reflected the ongoing DSC127 Phase 3 related expenses, together with incremental pre-clinical DSC127 scar prevention and AWC clinical studies.

Other (Income) Expense, net

Other (income) expense, net increased $344,372 to income of $272,300 in 2014 from an expense of $72,072 in 2013 due principally to a dividend received from Comvita of $183,258 and favorable changes in foreign currency exchange.

Income Tax Benefit

Income tax benefit increased $227,539 to $243,753 in 2014 from $16,214 in 2013 principally due to a U.S. deferred income tax benefit related to a reduction in the Company’s U.S. valuation allowance to offset the tax impact of the unrealized gain on equity securities included in accumulated other comprehensive income.

Net Loss

We generated a net loss of $18,956,817, or $0.79 per share (basic and diluted) in 2014, compared to a net loss of $13,589,452, or $0.81 per share (basic and diluted), in 2013.

Liquidity and Capital Resources

Cash Flow and Working Capital

At June 30, 2014 and December 31, 2013, we had cash and cash equivalents of $57,089,886 and $6,501,586, respectively. The $50,588,300 increase in cash and cash equivalents reflected net cash provided by financing activities of $82,740,196 partially offset by cash used in operating activities of $15,069,463 and investing activities of $17,002,436, as well as the exchange rate effect on cash which decreased cash by $79,997.

Net cash provided by financing activities of $82,740,196 includes net proceeds of $80,616,032 from the sale of common stock and $2,245,782 from the exercise of warrants and stock options partially offset by the payment of payroll withholding taxes related to stock compensation of $121,618 in connection with net share settlements.

Net cash used in operating activities of $15,069,463 resulted from $13,689,428 cash used in operations (net loss plus non-cash items) together with $1,380,035 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, and lower accrued expenses partially offset by lower prepaid and other current assets and higher accounts payable were the main drivers behind the net cash used in the change in operating assets and liabilities. The increase in inventory reflected a build-up to support new products, growth of the international business and improved customer service levels. The increase in receivables reflected a higher level of current sales while the decrease in accrued expenses and other current liabilities principally reflected payment of 2013 accrued bonus compensation and related taxes. The decrease in prepaid expenses and other current assets reflected timing of advance payments for the Phase 3 clinical trial and other operating expenditure payments. The increase in accounts payable reflected the increase in business.

Net cash used in investing activities of $17,002,436 includes cash used for the net purchase of investments of $15,019,000, $1,250,000 for the payment of the initial BioDLogics, LLC (“BioD”) license fee and $733,436 for capital expenditures. 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.

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Working capital increased $67,949,811 at June 30, 2014 to $107,989,813 from $40,040,002 at December 31, 2013. This increase principally reflected the net cash inflow from the sale of common stock. 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, acquiring, 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 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, issuance of debt, the sale of licensing rights of DSC127, jointly developing products with third parties and/or selling a portion of our existing business.

The launch of a number of advanced wound product line extensions in recent years, the acquisition of the MedEfficiency line of TCC products in April 2012 and the licensing of the BioD human placental products in January 2014 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. In January 2014, we hired a Vice President of Marketing to direct our marketing programs in the U.S. and throughout the rest of the world. Also, in 2014, we added additional sales representatives and product specialists to the sales management team already in place in the U.S. and one additional sales representative in Canada.  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 the Asia Pacific and Latin American international markets.  We have an established 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. 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 during the first quarter of 2013 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.  At this time, we are working towards completion of the last trial by the end of 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 $55 to $60 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 have initiated pre-clinical activities for scar prevention, and anticipate having initial data in the second half of 2014 to help determine whether or not to progress towards an Investigational New Drug application.

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·      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. 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 cash on hand as of June 30, 2014, 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.

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, 2014, we had no off-balance sheet arrangements.

Critical Accounting Policies

There have been no changes in critical accounting policies from those disclosed in the 2013 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

We have investments in certificates of deposit with maturities of up to one year. It is our intention to hold these investments to maturity and therefore we have no exposure to fluctuations in interest rates.

Equity Investment Risk

We presently have a long term investment in a foreign public company, with whom we have a business relationship, which is subject to foreign market and exchange risk. This investment is classified as an available-for-sale investment carried at fair value, with the resulting unrealized gains and/or losses included in accumulated other comprehensive income in our Consolidated Balance Sheet. We presently do not foresee the need or the desire to liquidate this investment.

Foreign Exchange Risk

In 2014, we generated approximately 77 percent of our net sales inside the United States. We have wholly owned foreign subsidiaries in Canada and the United Kingdom. Our Canadian subsidiary has a wholly owned Chinese subsidiary. Each of these subsidiaries has their own functional currencies. Each may conduct business with each other, third parties and/or the Company in other than its functional currency, within the normal course of business. Where possible, we manage foreign currency exposures on a consolidated basis, which allows us to take advantage of any natural offsets; therefore, weakness in one currency might be offset by strengths in other currencies over time. Exchange gains and losses are recognized as incurred in our Consolidated Statement of Comprehensive Loss, which historically have not been material. Fluctuations in exchange rates affect our results of operations, financial position and cash flows. We currently do not hedge our exposure to fluctuations in exchange rates.

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Commodity Price Risk

A significant portion of our business is exposed to the price of cotton and directly and indirectly to the price of oil. Fluctuations in the price of these commodities affect our results of operations, financial position and cash flows. We monitor our commodity price risk on an ongoing basis. Steps have been, and will continue to be, taken to manage the adverse impact of price increases on our business relative to the market. We currently do not hedge commodity price risk.

At present, we do not believe our operations are subject to significant market risks for interest rates, equity investment, foreign currency exchange, commodity prices or other relevant market price risks of a material nature.

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 defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of June 30, 2014. 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 Exchange Act, within the time periods specified in the Commission’s rules and forms, and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. However, a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

During the three months ended June 30, 2014, 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.

None

Item 1A. Risk Factors.

The following risk factors update the related risk factors set forth in the 2013 Form 10-K:

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

We incurred losses of $18,956,817 in the six months ended June 30, 2014 (unaudited), $23,964,053 for the year ended December 31, 2013, and additional losses in previous years. At June 30, 2014, we had an accumulated deficit of $83,127,628 (unaudited). 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, 2014, up to 5,336,102 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 25,236,582 shares of common stock outstanding as of June 30, 2014.

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.

The results of preclinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidates may not have favorable results in later studies or trials.

Preclinical studies and Phase 1 and Phase 2 clinical trials are not primarily designed to test the efficacy of a drug candidate, but rather to test safety, to study pharmacokinetics and pharmacodynamics, and to understand the drug candidate’s side effects at various doses and schedules. Favorable results in early studies or trials may not be repeated in later studies or trials, including continuing preclinical studies and large-scale Phase 3 clinical trials, and our drug candidates in later-stage trials may fail to show desired safety and efficacy despite having progressed through earlier-stage trials. Unfavorable results from ongoing preclinical studies or clinical trials could result in delays, modifications or abandonment of ongoing or future clinical trials, or abandonment of a clinical program. Preclinical and clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals or commercialization. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be delayed, repeated or terminated, or a clinical program to be abandoned.

We rely on third parties to conduct our clinical trials and many of our preclinical studies. If those parties do not successfully carry out their contractual duties or meet expected deadlines, our drug candidates may not advance in a timely manner or at all.

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In the course of our preclinical testing and clinical trials, we rely on third parties, including laboratories, investigators, clinical contract research organizations (“CROs”), and manufacturers, to perform critical services for us. For example, we rely on third parties to conduct our clinical trials and many of our preclinical studies. CROs are responsible for many aspects of the trials, including finding and enrolling subjects for testing and administering the trials. Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and foreign regulatory authorities require us to comply with regulations and standards, commonly referred to as good clinical practices, (“GCP”s), for conducting, monitoring, recording, and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these responsibilities and requirements. These third parties may not be available when we need them or, if they are available, may not comply with all regulatory and contractual requirements or may not otherwise perform their services in a timely or acceptable manner, and we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated. These independent third parties may also have relationships with other commercial entities, some of which may compete with us. In addition, if such third parties fail to perform their obligations in compliance with our GCPs, our clinical trials may not meet regulatory requirements or may need to be repeated. As a result of our dependence on third parties, we may face delays or failures outside of our direct control. These risks also apply to the development activities of collaborators, and we do not control their research and development, clinical trial or regulatory activities.

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 2009 through 2013 and the first six months of 2014 are set forth in the table below:

Derma Sciences, Inc.

Trading Range – Common Stock

Year	Low		High
2009	$	1.92	$	6.80
2010	$	4.40	$	9.00
2011	$	4.50	$	12.72
2012	$	6.94	$	11.89
2013	$	9.93	$	15.45
2014*	$	8.45	$	15.51

(*) January 1 through June 30.

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

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Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit	Description
3.01	Certificate of Incorporation of Derma Sciences, Inc., as amended on June 6, 2014
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

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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 6, 2014	By:	/s/ John E. Yetter
		John E. Yetter, CPA
		Chief Financial Officer

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EX-3.01

Exhibit 3.01

CERTIFICATE OF INCORPORATION

OF

DERMA SCIENCES, INC.

(as amended on June 6, 2014)

I, the undersigned, for the purpose of creating and organizing a corporation under the provisions of and subject to the requirements of the General Corporation Law of the State of Delaware (the “ DGCL ”), certify as follows:

Article I

NAME

The name of the corporation is Derma Sciences, Inc. (the “Corporation”).

Article II

REGISTERED OFFICE AND AGENT

The address of the registered office of the Corporation in the State of Delaware is 901 N. Market Street, Suite 705, Wilmington, County of New Castle, Delaware 19801 and the name of its registered agent at such address is Delaware Corporate Services, Inc.

Article III

CORPORATE PURPOSE

The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL.

Article IV

CAPITAL STOCK

Section 1. The Corporation shall be authorized to issue two classes of shares of capital stock to be designated, respectively, the “Common Stock” and the “Preferred Stock”; the total number of shares of capital stock which the Corporation shall have the authority to issue is 51,468,750, comprised of 50,000,000 shares of Common Stock, par value $0.01 and 1,468,750 shares of Preferred Stock, par value $0.01 with such designations, voting rights, preferences, limitations and special rights as set forth in Sections 3 and 4 of this Article IV, or as the board of directors of the Corporation may designate pursuant to Section 2 of this Article IV.

Section 2. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article IV, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, rights and privileges of the shares of each such series and the qualifications, limitations or restrictions thereof.

Section 3. There is hereby established series of preferred stock of the Corporation, par value $.01 per share, to be designated “Series A Convertible Preferred Stock” (the “Series A Preferred Stock”) and to consist of 218,750, with the voting powers, designations, preferences and relative, participating, optional or other rights and the qualifications, limitations or restrictions thereon as follows:

1.         VOTING RIGHTS.  The holders of Series A Preferred Stock shall have the right to vote, together with the holders of all the outstanding shares of Common Stock and not by classes, except as otherwise required by applicable law on all matters on which holders of Common Stock are entitled to vote. Each holder of shares of Series A Preferred Stock shall have the right to cast one vote for each share.

2.          LIQUIDATION OR DISSOLUTION.  Subject to the prior rights of the Corporation’s creditors and holders of securities senior to the Series A Preferred Stock in respect of distributions upon liquidation, dissolution or winding-up of the Corporation, in the event of the voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, the holders of Series A Preferred Stock shall be entitled to receive the purchase price per share (the “Liquidation Preference”), together with accrued and unpaid dividends payable thereon to the date fixed for payment of such distribution, if any, which shall be payable on a pro rata basis among holders of Preferred and Common Stock, all of which shall be paid in cash. If, upon any such liquidation, dissolution or winding-up of the Corporation, the assets distributable among the holders of Series A Preferred Stock (and any series of preferred stock ranking in parity with the Series A Preferred Stock in respect of distributions upon liquidation, dissolution or winding-up of the Corporation) shall be insufficient to permit the payment in full to such holders of the preferential amount payable to such holders determined as aforesaid, then the holders of Series A Preferred Stock will share ratably in any distribution of the Corporation’s assets in proportion to the respective preferential amounts that would have been payable if such assets were sufficient to permit payment in full of all such amounts. After payment of the full amount of the liquidating distribution to which they are entitled, the holders of Series A Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. Under this Section 2, a distribution of assets in any dissolution, winding-up, liquidation or reorganization shall include (a) any consolidation or merger of the Corporation with or into any other corporation in which the Corporation is not the surviving corporation, (b) a sale or other disposition of all or substantially all of the Corporation’s assets in consideration for cash and/or the issuance of equity securities of another corporation, or (c) a Change of Control of the Company. Under this Section 2, a distribution of assets in any dissolution, winding-up, liquidation or reorganization shall not include any dissolution, liquidation, winding-up or reorganization of the Corporation immediately followed by reincorporation of a successor corporation, provided that the dissolution, liquidation, winding-up or reorganization does not amend, alter, or change the preferences or rights of the Series A Preferred Stock or the qualifications, limitations or restrictions thereof in a manner that adversely affects the Series A Preferred Stock.

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3.          CONVERSION RIGHTS.

(a)        Conversion of Series A Preferred Stock. Each share of Series A Preferred Stock shall be convertible at the option of the holder thereof into one fully paid and non-assessable share of Common Stock, (“Conversion Share(s)”) subject to the provisions set forth herein.

(b)        Mechanics of Conversion. The holder of any shares of Series A Preferred Stock may exercise the conversion right as to any part thereof by delivering to the Corporation during regular business hours, at the office of the Corporation at 214 Carnegie Center, Suite 300, Princeton, New Jersey 08540, a conversion notice in the form attached to the purchase agreement pursuant to which the Series A Preferred Stock is issued (the “Conversion Notice”). The Conversion Notice shall state that the holder elects to convert its share subject to applicable securities laws, (i) the name(s) in which the certificate(s) representing the Conversion Shares to which such holder is entitled are to be issued, and (ii) the telecopier number or e-mail address to which the Corporation shall telecopy or send its confirmation described below. Notice given by telecopier to telecopier number (609) 514-8554, Attention: Edward J. Quilty or sent by e-mail as a PDF to mthomaier@dermasciences.com, Attention: Mary Jean Thomaier, shall be deemed notice for purposes of this paragraph and shall be deemed given when receipt is acknowledged by transmit confirmation report. Immediately upon receipt of any Conversion Notice, the Corporation shall, by telecopier or e-mail, confirm receipt thereof at the telecopier number or e-mail address included thereon, which confirmation shall set forth the number of Conversion Shares to be issued by the Corporation as a result of such conversion. The Conversion Notice shall be deemed accepted by the Corporation provided the holder surrenders, or causes any agent for the holder to surrender, the certificate(s) for the Series A Preferred Stock to be converted, duly endorsed or assigned in blank or to the Corporation, at any location set forth above, within seven (7) business days after delivery of the Conversion Notice. Provided that the certificate(s) are delivered in accordance with the preceding sentence, the conversion shall be deemed to have been effected on the date of delivery of the Conversion Notice by telecopier or by e-mail as a PDF, and such date is referred to herein as the “Conversion Date.” Within three (3) business days of receipt by the Corporation of the certificate(s) representing the Series A Preferred Stock, the Corporation shall issue to such holder a certificate or certificates representing the number of full Conversion Shares which such holder is entitled to receive. Unless (i) such Conversion Shares have been held long enough to satisfy the holding period set forth in Rule 144(k) (or any successor provision) promulgated under the Securities Act, (ii) such shares become freely tradeable pursuant to another exemption under the Securities Act, or (iii) the converting holder purchased such shares pursuant to a current prospectus under an effective registration statement covering the purchase and sale of such shares, the certificate(s) representing the Conversion Shares will bear the following legend:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF EITHER AN EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. THESE SHARES ARE SUBJECT TO CERTAIN REGISTRATION RIGHTS AS SET FORTH IN A REGISTRATION RIGHTS AGREEMENT, A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION.

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If the Registration Statement as hereinafter defined shall have been declared effective by the Securities and Exchange Commission, the certificate(s) evidencing the Conversion Shares will bear the following legend:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES MAY BE SOLD PURSUANT TO THE REGISTRATION STATEMENT PROVIDED THAT THE HOLDER COMPLIES WITH THE PROSPECTUS DELIVERY REQUIREMENTS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SALE IS IN COMPLIANCE WITH THE PLAN OF DISTRIBUTION AS SET FORTH IN THE PROSPECTUS. THESE SHARES ARE SUBJECT TO CERTAIN REGISTRATION RIGHTS AS SET FORTH IN A REGISTRATION RIGHTS AGREEMENT, A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION.

The person in whose name the certificate(s) for the Conversion Shares are to be issued shall be deemed to have become a stockholder of record on the applicable Conversion Date unless the transfer books of the Corporation are closed on that date, in which event he or she shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open, but the Conversion Ratio shall be that in effect on the Conversion Date. Upon conversion of only a portion of the number of whole shares covered by a certificate representing shares of Series A Preferred Stock surrendered for conversion, the Corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of Series A Preferred Stock representing the unconverted portion of the certificate so surrendered, which new certificate shall entitle in all respects the holder thereof to the rights of Series A Preferred Stock represented thereby to the same extent as if the certificate theretofore covering such unconverted shares had not been surrendered for conversion.

(c)        Fractional Shares. No fractional shares of Common Stock or scrip shall be issued upon conversion of shares of Series A Preferred Stock. If more than one share of Series A Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Series A Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount determined on the basis of the then Current Market Price per share of Common Stock. Fractional interests shall not be entitled to dividends, and the holders thereof shall not be entitled to any rights as stockholders of the Corporation in respect of such fractional interests.

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(d)          Adjustments to Conversion Ratio for Certain Events. The number of Conversion Shares underlying each Preferred Share (the “Conversion Ratio”) shall be subject to adjustment from time to time as set forth in this subsection (d).

(i)        In case at any time, or from time to time, the Corporation shall: (A) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution payable in shares of capital stock; (B) subdivide its outstanding shares of Common Stock into a larger number of shares; (C) combine its outstanding shares of Common Stock into a smaller number of shares; or (D) issue by reclassification or recapitalization of its Common Stock any other class or series of shares of the Corporation (including any such reclassification or recapitalization in connection with a consolidation or merger in which the Corporation is the continuing corporation), the Conversion Ratio in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination, reclassification or recapitalization shall be proportionately adjusted so that the holder of any Series A Preferred Stock surrendered for conversion after such time shall be entitled to receive the aggregate number and kind of shares which, if such Series A Preferred Stock had been converted immediately prior to such time, such holder would have owned or have been entitled to receive. Such adjustment shall be made successively whenever any event listed above shall occur. In the event that such dividend or distribution is not so made, the Conversion Ratio shall again be adjusted to be the Conversion Ratio which would then be in effect if such record date has not been fixed.

(ii)       In case at any time, or from time to time, the Corporation shall (except as hereinafter provided) issue or sell any Additional Shares of Common Stock for a consideration per share of Common Stock less than the Current Market Price, then the Conversion Ratio shall, on the date specified below for determining the Current Market Price, be adjusted to that number determined by multiplying the Conversion Ratio in effect immediately prior to such adjustment by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of the Additional Shares of Common Stock (including shares deemed to have been issued pursuant to subsection (d)(iii) below) plus the number of shares of Common Stock which the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at the Current Market Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Shares of Common Stock plus the number of such Additional Shares of Common Stock so issued (including shares deemed to have been issued pursuant to subsection (d)(iii) below). For the purposes of this subsection (d)(ii), the date as of which the Current Market Price per share of Common Stock shall be computed shall be the earlier of (A) the date on which the Corporation shall enter into a legally binding contract for the issuance or sale of such Additional Shares of Common Stock or (B) the date of the actual issuance of such Additional Shares of Common Stock. The provisions of this subsection (d)(ii) shall not apply to any issuance of Additional Shares of Common Stock for which an adjustment is provided under subsection (i) hereof. No adjustment shall be made under this subsection (d)(ii) upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to subsection (d)(iii) hereof. Adjustments shall be made successively whenever such an issuance of Additional Shares of Common Stock shall occur. In the event that such Additional Shares of Common Stock are not so issued or sold, the Conversion Ratio shall again be adjusted to be the Conversion Ratio which would then be in effect if such issuance had not occurred.

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(iii)      In case at any time, or from time to time, the Corporation shall take a record of the holders of the Common Stock for the purpose of entitling them to receive a distribution of, or shall otherwise issue, any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities and the consideration per share for which Additional Shares of Common Stock may at any time thereafter be issuable pursuant to such warrants or other rights or pursuant to the terms of such Convertible Securities shall be less than the Current Market Price, then the Conversion Ratio immediately thereafter shall be adjusted as provided in subsection (d)(ii) hereof on the basis that (a) the maximum number of Additional Shares of Common Stock issuable pursuant to all such warrants or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued as of the date for the determination of the Current Market Price per share of Common Stock as hereinafter provided, and (b) the aggregate consideration for such maximum number of Additional Shares of Common Stock shall be deemed to be the minimum consideration received and receivable by the Corporation for the issuance of such Additional Shares of Common Stock pursuant to such warrants or other rights or pursuant to the terms of such Convertible Securities. For the purposes of this subsection (d)(iii), the date as of which the Current Market Price per share of Common Stock shall be computed shall be the earliest of (i) the date on which the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any such warrants or other rights, (ii) the date on which the Corporation shall enter into a legally binding contract for the issuance of such warrants or other rights or (iii) the date of actual issuance of such warrants or other rights. Such reduction shall be made successively whenever such a record date is fixed. In the event that such rights or warrants are not so issued or (if issued) to the extent not exercised, the Conversion Ratio shall again be adjusted to be the Conversion Ratio, as the case may be, which would then be in effect if such record date had not been fixed or such unexercised rights or warrants had not been issued.

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(iv)      In case at any time, or from time to time, the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution, by dividend or otherwise, of evidences of its indebtedness or assets (including securities, but excluding (A) any dividend or distribution referred to in subsection (d)(i) hereof and (B) any dividend or distribution paid in cash out of funds legally available therefor of the Corporation), then in each such case the Conversion Ratio in effect after such record date shall be determined by multiplying the Conversion Ratio, in effect immediately prior to such record date by a fraction, of which the numerator shall be the total number of outstanding shares of Common Stock multiplied by the Current Market Price on such record date, less the fair market value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so to be distributed, and of which the denominator shall be the total number of outstanding shares of Common Stock multiplied by such Current Market Price. Such adjustment shall be made successively whenever such a record date is fixed. In the event that such distribution is not so made, the Conversion Ratio shall again be adjusted to be the Conversion Ratio which would then be in effect if such record date had not been fixed.

(v)       No adjustment in the Conversion Ratio shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in such Conversion Ratio; provided, however, that any adjustment which by reason of this paragraph (v)(d) is not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this subsection (d) shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be.

(e)        No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock against impairment.

(f)          Notice Provisions.

(i)        Whenever the Conversion Ratio shall be adjusted pursuant to subsection (d) hereof, the Corporation shall forthwith obtain a certificate signed by the Corporation’s chief financial officer, setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which the Corporation’s independent public accountants determined the fair value of any evidences of indebtedness, shares of stock, other securities or property or assets or warrants or other subscription or purchase rights referred to in subsections (d)(ii) through (d)(v) hereof) and specifying the new Conversion Ratio and (if applicable) describing the amount and kind of common stock, securities, property or assets or cash which may be received upon conversion of the Series A Preferred Stock, after giving effect to such adjustment. The Corporation shall promptly cause a signed copy of such certificate to be delivered to each holder of Series A Preferred Stock.

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(ii)       In case the Corporation shall propose (A) to pay any dividend payable in stock of any class to the holders of its Common Stock or to make any other distribution to the holders of its Common Stock, (B) to offer to the holders of its Common Stock rights to subscribe for or to purchase any Convertible Securities or Additional Shares of Common Stock or shares of stock of any class or any other securities, rights or options, (C) to effect any reclassification of its Common Stock (other than a reclassification involving only the subdivision or combination of outstanding shares of Common Stock), (D) to effect any capital reorganization, (E) to effect any consolidation, merger or sale, transfer or other distribution of all or substantially all its property, assets or business, or (F) to effect the liquidation, dissolution or winding-up of the Corporation, then in each such case, the Corporation shall give to each holder of Series A Preferred Stock a notice of such proposed action, which shall specify the date on which a record is to be taken for the purposes of such stock dividend, distribution or rights, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, disposition, liquidation, dissolution or winding-up is to take place and the date of participation therein by the holders of Common Stock, if any such date is to be fixed, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Common Stock and the Conversion Ratio after giving effect to any adjustment which will be required as a result of such action. Such notice shall be so given in the case of any action covered by (A) or (B) above at least 20 days prior to the record date for determining holders of the Common Stock for purposes of such action and, in the case of any other such action, at least 20 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of Common Stock, whichever shall be the earlier.

(g)        Treasury Stock. The sale or other disposition of any issued shares of Common Stock owned or held by or for the account of the Corporation shall be deemed an issuance thereof for purposes of subsection (d) hereof, but until so issued such shares shall not be deemed to be outstanding.

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(h)        Computation of Consideration. To the extent that any Additional Shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities shall be issued for a cash consideration, the consideration received by the Corporation therefor shall be deemed to be the amount of the cash received by the Corporation therefor, or, if such Additional Shares of Common Stock or Convertible Securities are offered by the Corporation for subscription, the subscription price, or, if such Additional Shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price, in any such case excluding any amounts paid or receivable for accrued interest or accrued dividends and without deduction of any compensation, discounts or expenses paid or incurred by the Corporation for and in the underwriting of, or otherwise in connection with, the issue thereof. To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined by the Board of Directors of the Corporation. The consideration for any Additional Shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Corporation for issuing such warrants or other rights, plus the additional consideration payable to the Corporation upon the exercise of such warrants or other rights. The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by the Corporation for issuing any warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Corporation in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Corporation upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any Additional Shares of Common Stock or Convertible Securities in payment or satisfaction of any dividend upon any class of stock other than Common Stock or in payment of any debt, the Corporation shall be deemed to have received for such Additional Shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend or debt so paid or satisfied.

(i)         Fractional Interests. In computing adjustments under this Section 3, fractional interests in Common Stock shall be taken into account to the nearest one-hundredth of a share.

(j)         Antidilution Provisions. No adjustment shall be made as a result of any increase in the number of Additional Shares of Common Stock issuable or any decrease in the consideration payable upon any issuance of Additional Shares of Common Stock, pursuant to any provisions intended solely to avoid dilution contained in any warrants, rights or Convertible Securities.

(k)        When Adjustment Not Required.

(i)         If the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled.

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(ii)        If the Corporation declares or makes any dividend or distribution with respect to Common Stock, other than regular cash dividends or dividends payable solely in shares of Common Stock, and each holder of Series A Preferred Stock concurrently receives dividends or distributions equal in amount and in the same kind of property (whether cash, securities or other property) as such holder would be entitled to receive if all of the outstanding Series A Preferred Stock were converted into Common Stock as of the record date of such dividend or distribution with respect to Common Stock, then thereafter no adjustment shall be required with respect to such dividend or distribution.

(l)         Other Action Affecting Common Stock. If a state of facts shall occur which, without being specifically controlled by the other provisions of this Section 3, would not fairly protect the conversion rights of the Series A Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors of the Corporation shall in good faith make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such conversion rights.

(m)       Necessary Corporate Action. Before taking any action which would result in an adjustment in the Conversion Ratio, the Corporation shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

(n)        Taxes Upon Conversion. The Corporation shall pay all documentary, stamp or other transaction taxes attributable to the issuance or delivery of shares of Common Stock upon conversion of any shares of Series A Preferred Stock.

(o)        Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of shares of Series A Preferred Stock, the full number of whole shares of Common Stock then deliverable upon the conversion of all shares of Series A Preferred Stock at the time outstanding. All shares of Common Stock which shall be so issuable shall, when issued upon conversion of all or any portion of the Series A Preferred Stock, be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. Upon conversion of Series A Preferred Stock, the shares of Series A Preferred Stock so converted shall have the status of authorized and unissued Preferred Stock, and the number of shares of Series A Preferred Stock which the Corporation shall have authority to issue shall be decreased by any such conversion.

(p)        Dividends Constitute Corporate Debt. All dividends accrued and unpaid on Series A Preferred Stock to and including the date of conversion, whether or not declared by the Board of Directors, shall constitute a debt of the Corporation payable without interest to the converting holders and shall be paid by the Corporation on the Conversion Date, in its option, either in cash or by the issuance of Dividend Shares as provided in Section 4 hereof.

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4.          NO PREEMPTIVE RIGHTS.  No holder of Series A Preferred Stock shall have anypreemptive or preferential right of subscription to any shares of stock of the Corporation, or to options, warrants or other interests therein or therefor, or to any obligations convertible into stock of the Corporation, issued or sold, or any right of subscription to any thereof other than such, if any, as the Board of Directors, in its discretion, from time to time may determine and at such price or prices as the Board of Directors from time to time may fix pursuant to the authority conferred by the Corporation’s Certificate of Incorporation.

5.          CERTAIN RESTRICTIONS.  So long as any Series A Preferred Stock is outstanding, the Corporation shall not, without the consent of holders of a majority of the outstanding shares of Series A Preferred Stock, (i) purchase, redeem or otherwise acquire any shares of any class of the Corporation’s outstanding capital stock, (ii) issue any class or series of any class of capital stock which ranks prior to or pari passu with the Series A Preferred Stock with respect to dividend rights or rights on liquidation, winding-up or dissolution of the Corporation, (iii) amend, alter or change the preferences or rights of any series or class of capital stock of the Corporation (including the Series A Preferred Stock) or the qualifications, limitations or restrictions thereof if such amendment, alteration or change adversely affects the Series A Preferred Stock, (iv) increase the authorized number of shares of Series A Preferred Stock, (v) take any action which results in the liquidation, acquisition, merger or sale of the Company or all or substantially all of its assets, (vi) take any action which results in a change in the principal business of the Company, or (vii) take any action which results in the repurchase of equity securities, other than the repurchase of equity securities from Company employees.

6.          DEFINITIONS.

(a)        “Additional Shares of Common Stock” shall mean all shares of Common Stock issued by the Corporation after November 10, 1997, except Common Stock which may be issued pursuant to: (i) the conversion of the Series A Preferred Stock; (ii) the exercise by the holders thereof of the Corporation’s common stock purchase warrants (the “Warrants”); (iii) the exercise by the holders thereof of any options which may be granted pursuant to the Corporation’s Stock Option Plan; (iv) the exercise by the holders thereof of any currently issued options; and (v) the exercise by employees of the Corporation or any of its subsidiaries of options granted pursuant to any stock option plan which may hereafter be adopted by the Corporation where the exercise price of such options is not less than the fair market value of a share of Common Stock on the date of grant thereof.

(b)        “Change in Control” shall mean a merger or consolidation of the Corporation with any other corporation, other than a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total of the voting power represented by the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation or, except as provided under Section 2 hereof, the closing of a sale or disposition by the Corporation of all or substantially all of the Corporation’s assets (other than to a subsidiary or subsidiaries of the Corporation).

(c)        “Common Stock” shall mean the shares of common stock of the Corporation, par value $.01 per share, and any stock into which such Common Stock may hereinafter be changed.

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(d)        “Conversion Date” shall have the meaning such term is given in Section 3(b) hereof.

(e)        “Conversion Notice” shall have the meaning such term is given in Section 3(b) hereof.

(f)         “Conversion Ratio” shall have the meaning such term is given in Section 3(d) hereof.

(g)        “Conversion Shares” shall have the meaning such term is given in Section 3(a) hereof.

(h)        “Convertible Securities” shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exercisable or exchangeable for, with or without payment of additional consideration in cash or property, for Additional Shares of Common Stock, either immediately or upon the arrival of a specified date or the happening of a specified event.

(i)         “Current Market Price” per share of Common Stock at any date herein specified shall mean the average of the daily market prices for 5 consecutive Trading Days ending on the last trading day prior to such date, except that for purposes of Section 3(c) hereof, the “Current Market Price” per share of Common Stock shall mean the market prices on the Trading Day therein specified.

(j)         The market price for each such Trading Day shall be (i) if the Common Stock is quoted on the Nasdaq National Market or Nasdaq Small Cap Market, the reported last sales price, or (ii) if the Common Stock is listed or admitted to trading on a national securities exchange, the last reported sales prices regular way, or (iii) if the Common Stock is quoted on the NASD OTC Bulletin Board, the average of the closing bid and asked prices regular way, or (iv) if the Common Stock is not so quoted, as reasonably determined by the Board of Directors of the Corporation.

(k)        “Liquidation Preference” shall have the meaning such term is given in Section 2 hereof.

(l)         “Person” shall mean any individual, corporation, association, company, business trust, partnership, joint venture, joint-stock company, trust, unincorporated organization or association or government or any agency or political subdivision thereof.

(m)       “Securities Act” shall mean the Securities Act of 1933, as amended.

(n)        “Trading Day” shall mean any day on which trading takes place (a) in the over-the-counter-market and prices reflecting such trading are published by the National Association of Securities Dealers Automated Quotation System or (b) if the Common Stock is then listed or admitted to trading on a national securities exchange, on the principal national securities exchange on which the Common Stock is then listed or admitted to trading.

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Section 4. There is hereby created a series of preferred stock of the Corporation, par value $.01 per share, to be designated “Series B Convertible Preferred Stock” (the “Series B Preferred Stock”) and to consist of 416,668, with the voting powers, designations, preferences and relative, participating, optional or other rights and the qualifications, limitations or restrictions thereon as follows:

1.         VOTING RIGHTS. The holders of Series B Preferred Stock shall have the right to vote, together with the holders of all the outstanding shares of Common Stock and not by classes, except as otherwise required by applicable law, on all matters on which holders of Common Stock are entitled to vote. Each holder of shares of Series B Preferred Stock shall have the right to cast one vote for each share.

2.         LIQUIDATION OR DISSOLUTION.  Subject to the prior rights of the Corporation’s creditors and holders of securities equal or senior to the Series B Preferred Stock in respect of distributions upon liquidation, dissolution or winding-up of the Corporation, in the event of the voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, the holders of Series B Preferred Stock shall be entitled to receive the purchase price per share (the “Liquidation Preference”), together with accrued and unpaid dividends payable thereon to the date fixed for payment of such distribution, if any, which shall be payable on a pro rata basis among holders of Preferred and Common Stock, all of which shall be paid in cash. If, upon any such liquidation, dissolution or winding-up of the Corporation, the assets distributable among the holders of Series B Preferred Stock (and any series of preferred stock ranking in parity with the Series B Preferred Stock in respect of distributions upon liquidation, dissolution or winding-up of the Corporation) shall be insufficient to permit the payment in full to such holders of the preferential amount payable to such holders determined as aforesaid, then the holders of Series B Preferred Stock will share ratably in any distribution of the Corporation’s assets in proportion to the respective preferential amounts that would have been payable if such assets were sufficient to permit payment in full of all such amounts. For purposes of the foregoing, the Corporation’s Series A Convertible Preferred Stock shall rank in parity with the Series B Preferred. After payment of the full amount of the liquidating distribution to which they are entitled, the holders of Series B Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. Under this Section 2, a distribution of assets in any dissolution, winding-up, liquidation or reorganization shall include (a) any consolidation or merger of the Corporation with or into any other corporation in which the Corporation is not the surviving corporation, (b) a sale or other disposition of all or substantially all of the Corporation’s assets in consideration for cash and/or the issuance of equity securities of another corporation, or (c) a Change of Control of the Company. Under this Section 2, a distribution of assets in any dissolution, winding-up, liquidation or reorganization shall not include any dissolution, liquidation, winding-up or reorganization of the Corporation immediately followed by reincorporation of a successor corporation, provided that the dissolution, liquidation, winding-up or reorganization does not amend, alter, or change the preferences or rights of the Series B Preferred Stock or the qualifications, limitations or restrictions thereof in a manner that adversely affects the Series B Preferred Stock.

3.          CONVERSION RIGHTS.

(a)        Conversion of Series B Preferred Stock.  Each share of Series B Preferred Stock shall be convertible at the option of the holder thereof into one fully paid and non-assessable share of Common Stock, (“Conversion Share(s)”) subject to the provisions set forth herein.

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(b)        Mechanics Of Conversion.  The holder of any shares of Series B Preferred Stock may exercise the conversion right as to any part thereof by delivering to the Corporation during regular business hours, at the office of the Corporation at 214 Carnegie Center, Suite 300, Princeton, New Jersey 08540, a conversion notice in the form attached to the purchase agreement pursuant to which the Series B Preferred Stock is issued (the “Conversion Notice”). The Conversion Notice shall state that the holder elects to convert its share subject to applicable securities laws, (i) the name(s) in which the certificate(s) representing the Conversion Shares to which such holder is entitled are to be issued, and (ii) the telecopier number or e-mail address to which the Corporation shall telecopy or send its confirmation described below. Notice given by telecopier to telecopier number (609) 514-8554, Attention: Edward J. Quilty or sent by e-mail as a PDF to mthomaier@dermasciences.com, Attention: Mary Jean Thomaier, shall be deemed notice for purposes of this paragraph and shall be deemed given when receipt is acknowledged by transmit confirmation report. Immediately upon receipt of any Conversion Notice, the Corporation shall, by telecopier or e-mail, confirm receipt thereof at the telecopier number or e-mail address included thereon, which confirmation shall set forth the number of Conversion Shares to be issued by the Corporation as a result of such conversion. The Conversion Notice shall be deemed accepted by the Corporation provided the holder surrenders, or causes any agent for the holder to surrender, the certificate(s) for the Series B Preferred Stock to be converted, duly endorsed or assigned in blank or to the Corporation, at any location set forth above, within seven (7) business days after delivery of the Conversion Notice. Provided that the certificate(s) are delivered in accordance with the preceding sentence, the conversion shall be deemed to have been effected on the date of delivery of the Conversion Notice by telecopier or by e-mail as a PDF, and such date is referred to herein as the “Conversion Date.” Within three (3) business days of receipt by the Corporation of the certificate(s) representing the Series B Preferred Stock, the Corporation shall issue to such holder a certificate or certificates representing the number of full Conversion Shares which such holder is entitled to receive. Unless (i) such Conversion Shares have been held long enough to satisfy the holding period set forth in Rule 144(k) (or any successor provision) promulgated under the Securities Act, (ii) such shares become freely tradeable pursuant to another exemption under the Securities Act, or (iii) the converting holder purchased such shares pursuant to a current prospectus under an effective registration statement covering the purchase and sale of such shares, the certificate(s) representing the Conversion Shares will bear the following legend:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF EITHER AN EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. THESE SHARES ARE SUBJECT TO CERTAIN REGISTRATION RIGHTS AS SET FORTH IN A REGISTRATION RIGHTS AGREEMENT, A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION.

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If the Registration Statement as hereinafter defined shall have been declared effective by the Securities and Exchange Commission, the certificate(s) evidencing the Conversion Shares will bear the following legend:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES MAY BE SOLD PURSUANT TO THE REGISTRATION STATEMENT PROVIDED THAT THE HOLDER COMPLIES WITH THE PROSPECTUS DELIVERY REQUIREMENTS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SALE IS IN COMPLIANCE WITH THE PLAN OF DISTRIBUTION AS SET FORTH IN THE PROSPECTUS. THESE SHARES ARE SUBJECT TO CERTAIN REGISTRATION RIGHTS AS SET FORTH IN A REGISTRATION RIGHTS AGREEMENT, A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION.

The person in whose name the certificate(s) for the Conversion Shares are to be issued shall be deemed to have become a stockholder of record on the applicable Conversion Date unless the transfer books of the Corporation are closed on that date, in which event he or she shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open, but the Conversion Ratio shall be that in effect on the Conversion Date. Upon conversion of only a portion of the number of whole shares covered by a certificate representing shares of Series B Preferred Stock surrendered for conversion, the Corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of Series B Preferred Stock representing the unconverted portion of the certificate so surrendered, which new certificate shall entitle in all respects the holder thereof to the rights of Series B Preferred Stock represented thereby to the same extent as if the certificate theretofore covering such unconverted shares had not been surrendered for conversion.

(c)        Fractional Shares.  No fractional shares of Common Stock or scrip shall be issued upon conversion of shares of Series B Preferred Stock. If more than one share of Series B Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series B Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Series B Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount determined on the basis of the then Current Market Price per share of Common Stock. Fractional interests shall not be entitled to dividends, and the holders thereof shall not be entitled to any rights as stockholders of the Corporation in respect of such fractional interests.

(d)        Adjustments To Conversion Ratio For Certain Events.  The number of Conversion Shares underlying each Preferred Share (the “Conversion Ratio”) shall be subject to adjustment from time to time as set forth in this subsection (d).

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(i)        In case at any time, or from time to time, the Corporation shall: (A) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution payable in shares of capital stock; (B) subdivide its outstanding shares of Common Stock into a larger number of shares; (C) combine its outstanding shares of Common Stock into a smaller number of shares; or (D) issue by reclassification or recapitalization of its Common Stock any other class or series of shares of the Corporation (including any such reclassification or recapitalization in connection with a consolidation or merger in which the Corporation is the continuing corporation), the Conversion Ratio in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination, reclassification or recapitalization shall be proportionately adjusted so that the holder of any Series B Preferred Stock surrendered for conversion after such time shall be entitled to receive the aggregate number and kind of shares which, if such Series B Preferred Stock had been converted immediately prior to such time, such holder would have owned or have been entitled to receive. Such adjustment shall be made successively whenever any event listed above shall occur. In the event that such dividend or distribution is not so made, the Conversion Ratio shall again be adjusted to be the Conversion Ratio which would then be in effect if such record date has not been fixed.

(ii)       In case at any time, or from time to time, the Corporation shall (except as hereinafter provided) issue or sell any Additional Shares of Common Stock for a consideration per share of Common Stock less than the Current Market Price, then the Conversion Ratio shall, on the date specified below for determining the Current Market Price, be adjusted to that number determined by multiplying the Conversion Ratio in effect immediately prior to such adjustment by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of the Additional Shares of Common Stock (including shares deemed to have been issued pursuant to subsection (d)(iii) below) plus the number of shares of Common Stock which the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at the Current Market Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Shares of Common Stock plus the number of such Additional Shares of Common Stock so issued (including shares deemed to have been issued pursuant to subsection (d)(iii) below). For the purposes of this subsection (d)(ii), the date as of which the Current Market Price per share of Common Stock shall be computed shall be the earlier of (A) the date on which the Corporation shall enter into a legally binding contract for the issuance or sale of such Additional Shares of Common Stock or (B) the date of the actual issuance of such Additional Shares of Common Stock. The provisions of this subsection (d)(ii) shall not apply to any issuance of Additional Shares of Common Stock for which an adjustment is provided under subsection (d)(i) hereof. No adjustment shall be made under this subsection (d)(ii) upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to subsection (d)(iii) hereof. Adjustments shall be made successively whenever such an issuance of Additional Shares of Common Stock shall occur. In the event that such Additional Shares of Common Stock are not so issued or sold, the Conversion Ratio shall again be adjusted to be the Conversion Ratio which would then be in effect if such issuance had not occurred.

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(iii)      In case at any time, or from time to time, the Corporation shall take a record of the holders of the Common Stock for the purpose of entitling them to receive a distribution of, or shall otherwise issue, any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities and the consideration per share for which Additional Shares of Common Stock may at any time thereafter be issuable pursuant to such warrants or other rights or pursuant to the terms of such Convertible Securities shall be less than the Current Market Price, then the Conversion Ratio immediately thereafter shall be adjusted as provided in subsection (d)(ii) hereof on the basis that (A) the maximum number of Additional Shares of Common Stock issuable pursuant to all such warrants or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued as of the date for the determination of the Current Market Price per share of Common Stock as hereinafter provided, and (B) the aggregate consideration for such maximum number of Additional Shares of Common Stock shall be deemed to be the minimum consideration received and receivable by the Corporation for the issuance of such Additional Shares of Common Stock pursuant to such warrants or other rights or pursuant to the terms of such Convertible Securities. For the purposes of this subsection (d)(iii), the date as of which the Current Market Price per share of Common Stock shall be computed shall be the earliest of (I) the date on which the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any such warrants or other rights, (II) the date on which the Corporation shall enter into a legally binding contract for the issuance of such warrants or other rights or (III) the date of actual issuance of such warrants or other rights. Such reduction shall be made successively whenever such a record date is fixed. In the event that such rights or warrants are not so issued or (if issued) to the extent not exercised, the Conversion Ratio shall again be adjusted to be the Conversion Ratio, as the case may be, which would then be in effect if such record date had not been fixed or such unexercised rights or warrants had not been issued.

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(iv)      In case at any time, or from time to time, the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution, by dividend or otherwise, of evidences of its indebtedness or assets (including securities, but excluding (A) any dividend or distribution referred to in subsection (d)(i) hereof and (B) any dividend or distribution paid in cash out of funds legally available therefor of the Corporation), then in each such case the Conversion Ratio in effect after such record date shall be determined by multiplying the Conversion Ratio, in effect immediately prior to such record date by a fraction, of which the numerator shall be the total number of outstanding shares of Common Stock multiplied by the Current Market Price on such record date, less the fair market value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so to be distributed, and of which the denominator shall be the total number of outstanding shares of Common Stock multiplied by such Current Market Price. Such adjustment shall be made successively whenever such a record date is fixed. In the event that such distribution is not so made, the Conversion Ratio shall again be adjusted to be the Conversion Ratio which would then be in effect if such record date had not been fixed.

(v)       No adjustment in the Conversion Ratio shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in such Conversion Ratio; provided, however, that any adjustment which by reason of this paragraph subsection (d)(v) is not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this subsection (d) shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be.

(e)        No Impairment.  The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series B Preferred Stock against impairment.

(f)         Notice Provisions.

(i)        Whenever the Conversion Ratio shall be adjusted pursuant to subsection (d) hereof, the Corporation shall forthwith obtain a certificate signed by the Corporation’s chief financial officer, setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which the Corporation’s independent public accountants determined the fair value of any evidences of indebtedness, shares of stock, other securities or property or assets or warrants or other subscription or purchase rights referred to in subsections (d)(ii) through (d)(v) hereof) and specifying the new Conversion Ratio and (if applicable) describing the amount and kind of common stock, securities, property or assets or cash which may be received upon conversion of the Series B Preferred Stock, after giving effect to such adjustment. The Corporation shall promptly cause a signed copy of such certificate to be delivered to each holder of Series B Preferred Stock.

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(ii)       In case the Corporation shall propose (A) to pay any dividend payable in stock of any class to the holders of its Common Stock or to make any other distribution to the holders of its Common Stock, (B) to offer to the holders of its Common Stock rights to subscribe for or to purchase any Convertible Securities or Additional Shares of Common Stock or shares of stock of any class or any other securities, rights or options, (C) to effect any reclassification of its Common Stock (other than a reclassification involving only the subdivision or combination of outstanding shares of Common Stock), (D) to effect any capital reorganization, (E) to effect any consolidation, merger or sale, transfer or other distribution of all or substantially all its property, assets or business, or (F) to effect the liquidation, dissolution or winding-up of the Corporation, then in each such case, the Corporation shall give to each holder of Series B Preferred Stock a notice of such proposed action, which shall specify the date on which a record is to be taken for the purposes of such stock dividend, distribution or rights, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, disposition, liquidation, dissolution or winding-up is to take place and the date of participation therein by the holders of Common Stock, if any such date is to be fixed, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Common Stock and the Conversion Ratio after giving effect to any adjustment which will be required as a result of such action. Such notice shall be so given in the case of any action covered by (A) or (B) above at least 20 days prior to the record date for determining holders of the Common Stock for purposes of such action and, in the case of any other such action, at least 20 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of Common Stock, whichever shall be the earlier.

(g)        Treasury Stock.  The sale or other disposition of any issued shares of Common Stock owned or held by or for the account of the Corporation shall be deemed an issuance thereof for purposes of subsection (d) hereof, but until so issued such shares shall not be deemed to be outstanding.

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(h)       Computation Of Consideration.  To the extent that any Additional Shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities shall be issued for a cash consideration, the consideration received by the Corporation therefor shall be deemed to be the amount of the cash received by the Corporation therefor, or, if such Additional Shares of Common Stock or Convertible Securities are offered by the Corporation for subscription, the subscription price, or, if such Additional Shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price, in any such case excluding any amounts paid or receivable for accrued interest or accrued dividends and without deduction of any compensation, discounts or expenses paid or incurred by the Corporation for and in the underwriting of, or otherwise in connection with, the issue thereof. To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined by the Board of Directors of the Corporation. The consideration for any Additional Shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Corporation for issuing such warrants or other rights, plus the additional consideration payable to the Corporation upon the exercise of such warrants or other rights. The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by the Corporation for issuing any warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Corporation in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Corporation upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any Additional Shares of Common Stock or Convertible Securities in payment or satisfaction of any dividend upon any class of stock other than Common Stock or in payment of any debt, the Corporation shall be deemed to have received for such Additional Shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend or debt so paid or satisfied.

(i)         Fractional Interests.  In computing adjustments under this Section 3, fractional interests in Common Stock shall be taken into account to the nearest one-hundredth of a share.

(j)         Antidilution Provisions.  No adjustment shall be made as a result of any increase in the number of Additional Shares of Common Stock issuable or any decrease in the consideration payable upon any issuance of Additional Shares of Common Stock, pursuant to any provisions intended solely to avoid dilution contained in any warrants, rights or Convertible Securities.

(k)        When Adjustment Not Required.

(i)        If the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled.

(ii)       If the Corporation declares or makes any dividend or distribution with respect to Common Stock, other than regular cash dividends or dividends payable solely in shares of Common Stock, and each holder of Series B Preferred Stock concurrently receives dividends or distributions equal in amount and in the same kind of property (whether cash, securities or other property) as such holder would be entitled to receive if all of the outstanding Series B Preferred Stock were converted into Common Stock as of the record date of such dividend or distribution with respect to Common Stock, then thereafter no adjustment shall be required with respect to such dividend or distribution.

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(l)        Other Action Affecting Common Stock.  If a state of facts shall occur which, without being specifically controlled by the other provisions of this Section 3, would not fairly protect the conversion rights of the Series B Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors of the Corporation shall in good faith make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such conversion rights.

(m)      Necessary Corporate Action.  Before taking any action which would result in an adjustment in the Conversion Ratio, the Corporation shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

(n)       Taxes Upon Conversion.  The Corporation shall pay all documentary, stamp or other transaction taxes attributable to the issuance or delivery of shares of Common Stock upon conversion of any shares of Series B Preferred Stock.

(o)       Reservation Of Common Stock.  The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of shares of Series B Preferred Stock, the full number of whole shares of Common Stock then deliverable upon the conversion of all shares of Series B Preferred Stock at the time outstanding. All shares of Common Stock which shall be so issuable shall, when issued upon conversion of all or any portion of the Series B Preferred Stock, be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. Upon conversion of Series B Preferred Stock, the shares of Series B Preferred Stock so converted shall have the status of authorized and unissued Preferred Stock, and the number of shares of Series B Preferred Stock which the Corporation shall have authority to issue shall be decreased by any such conversion.

(p)       Dividends Constitute Corporate Debt.  All dividends accrued and unpaid on Series B Preferred Stock to and including the date of conversion, whether or not declared by the Board of Directors, shall constitute a debt of the Corporation payable without interest to the converting holders and shall be paid by the Corporation on the Conversion Date, in its option, either in cash or by the issuance of Dividend Shares as provided in Section 4 hereof.

4.          NO PREEMPTIVE RIGHTS.  No holder of Series B Preferred Stock shall have any preemptive or preferential right of subscription to any shares of stock of the Corporation, or to options, warrants or other interests therein or therefor, or to any obligations convertible into stock of the Corporation, issued or sold, or any right of subscription to any thereof other than such, if any, as the Board of Directors, in its discretion, from time to time may determine and at such price or prices as the Board of Directors from time to time may fix pursuant to the authority conferred by the Corporation’s Certificate of Incorporation.

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5.          CERTAIN RESTRICTIONS.  So long as any Series B Preferred Stock is outstanding, the Corporation shall not, without the consent of holders of a majority of the outstanding shares of Series B Preferred Stock, (i) purchase, redeem or otherwise acquire any shares of any class of the Corporation’s outstanding capital stock, (ii) issue any class or series of any class of capital stock which ranks prior to or pari passu with the Series B Preferred Stock with respect to dividend rights or rights on liquidation, winding-up or dissolution of the Corporation, (iii) amend, alter or change the preferences or rights of any series or class of capital stock of the Corporation (including the Series B Preferred Stock) or the qualifications, limitations or restrictions thereof if such amendment, alteration or change adversely affects the Series B Preferred Stock, (iv) increase the authorized number of shares of Series B Preferred Stock, (v) take any action which results in the liquidation, acquisition, merger or sale of the Company or all or substantially all of its assets, (vi) take any action which results in a change in the principal business of the Company, or (vii) take any action which results in the repurchase of equity securities, other than the repurchase of equity securities from Company employees.

6.          DEFINITIONS.

(a)        “Additional Shares of Common Stock” shall mean all shares of Common Stock issued by the Corporation after June 15, 1998, except Common Stock which may be issued pursuant to: (i) the conversion of the Series B Preferred Stock; (ii) the exercise by the holders thereof of the Corporation’s common stock purchase warrants (the “Warrants”); (iii) the exercise by the holders thereof of any options which may be granted pursuant to the Corporation’s Stock Option Plan; (iv) the exercise by the holders thereof of any currently issued options; and (v) the exercise by employees of the Corporation or any of its subsidiaries of options granted pursuant to any stock option plan which may hereafter be adopted by the Corporation where the exercise price of such options is not less than the fair market value of a share of Common Stock on the date of grant thereof.

(b)        “Change in Control” shall mean a merger or consolidation of the Corporation with any other corporation, other than a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total of the voting power represented by the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation or, except as provided under Section 2 hereof, the closing of a sale or disposition by the Corporation of all or substantially all of the Corporation’s assets (other than to a subsidiary or subsidiaries of the Corporation).

(c)        “Common Stock” shall mean the shares of common stock of the Corporation, par value $.01 per share, and any stock into which such Common Stock may hereinafter be changed.

(d)        “Conversion Date” shall have the meaning such term is given in Section 3(b) hereof.

(e)        “Conversion Notice” shall have the meaning such term is given in Section 3(b) hereof.

(f)        “Conversion Ratio” shall have the meaning such term is given in Section 3(d) hereof.

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(g)        “Conversion Shares” shall have the meaning such term is given in Section 3(a) hereof.

(h)        “Convertible Securities” shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exercisable or exchangeable for, with or without payment of additional consideration in cash or property, for Additional Shares of Common Stock, either immediately or upon the arrival of a specified date or the happening of a specified event.

(i)         “Current Market Price” per share of Common Stock at any date herein specified shall mean the average of the daily market prices for 5 consecutive Trading Days ending on the last trading day prior to such date, except that for purposes of Section 3(c) hereof, the “Current Market Price” per share of Common Stock shall mean the market prices on the Trading Day therein specified. The market price for each such Trading Day shall be (i) if the Common Stock is quoted on the Nasdaq National Market or Nasdaq Small Cap Market, the reported last sales price, or (ii) if the Common Stock is listed or admitted to trading on a national securities exchange, the last reported sales prices regular way, or (iii) if the Common Stock is quoted on the NASD OTC Bulletin Board, the average of the closing bid and asked prices regular way, or (iv) if the Common Stock is not so quoted, as reasonably determined by the Board of Directors of the Corporation.

(j)         “Liquidation Preference” shall have the meaning such term is given in Section 2 hereof.

(k)        “Person” shall mean any individual, corporation, association, company, business trust, partnership, joint venture, joint-stock company, trust, unincorporated organization or association or government or any agency or political subdivision thereof.

(l)         “Securities Act” shall mean the Securities Act of 1933, as amended.

(m)       “Trading Day” shall mean any day on which trading takes place (i) in the over-the-counter-market and prices reflecting such trading are published by the National Association of Securities Dealers Automated Quotation System or (ii) if the Common Stock is then listed or admitted to trading on a national securities exchange, on the principal national securities exchange on which the Common Stock is then listed or admitted to trading.

Article V

NAME AND ADDRESS OF INCORPORATOR

The name and mailing address of the incorporator of the Corporation are:

Name	Address
Todd E. Mason	335 Madison Avenue, 12th Floor
	New York, New York 10017

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Article VI

DIRECTORS

Section 1. Unless and except to the extent that the by-laws of the Corporation (the “By-laws”) shall so require, the election of directors of the Corporation need not be by written ballot.

Section 2. To the fullest extent permitted by law, a director of the Corporation shall not be personally liable to the Corporation or to its stockholders for monetary damages for any breach of fiduciary duty as a director. No amendment to, modification of or repeal of Section 2 of this Article VI shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment.

Section 3. In furtherance of, and not in limitation of, the powers conferred by statute, the board of directors is expressly authorized to adopt, amend or repeal the By-laws or adopt new By-laws without any action on the part of the stockholders; provided , however , that the stockholders may make additional by-laws and may alter and repeal any by-laws whether such by-laws were originally adopted by them or otherwise by the affirmative vote of the holders of at least two-thirds of the voting power of the shares of the Corporation entitled to vote.

Article VII

INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS

Section 1. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person seeking indemnification did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

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Section 2. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection with the defense orsettlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

Section 3. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article VII, or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection therewith.

Section 4. Any indemnification under Sections 1 and 2 of this Article VII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in such Sections 1 and 2. Such determination shall be made (i) by the board of directors of the Corporation by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or (iii) by the stockholders of the Corporation.

Section 5. Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation authorized in this Article VII. Such expenses (including attorneys’ fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors of the Corporation deems appropriate.

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Section 6. The indemnification and advancement of expenses provided by, or granted pursuant to, the other sections of this Article VII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office.

Section 7. For purposes of this Article VII, references to “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article VII with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued.

Section 8. For purposes of this Article VII, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves service by, such director, officer, employee or agent with respect to any employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Article VII.

Section 9. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

Article VIII

AMENDMENT

The Corporation shall have the right, subject to any express provisions or restrictions contained in the Certificate of Incorporation of the Corporation (the “ Certificate of Incorporation ”) or the By-laws, from time to time, to amend the Certificate of Incorporation or any provision thereof in any manner now or hereafter provided by law, and all rights and powers of any kind conferred upon a direction or stockholder of the Corporation by the Certificate of Incorporation or any amendment thereof are conferred subject to such right.

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Article IX

FORUM SELECTION

Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim for breach of a fiduciary duty owed by any director, officer, employee or agent of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, the Certificate of Incorporation or the By-laws or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein.

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I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a corporation pursuant to the DGCL, do make this Certificate of Incorporation, hereby acknowledging, declaring, and certifying that the foregoing Certificate of Incorporation is my act and deed and that the facts herein stated are true, and have accordingly hereunto set my hand this 10th day of August 2012.

Incorporator
By:	/s/ Todd E. Mason
Name: Todd E. Mason

28

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; and

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 6, 2014	/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; and

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 6, 2014	/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, 2014 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 6, 2014	/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, 2014 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 6, 2014	/s/ John E. Yetter
	John E. Yetter, CPA
	Executive Vice President, Finance and Chief Financial Officer
	(Principal Financial Officer)

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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, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Segment Reporting Information [Line Items]
Net sales	$ 20,916,225	$ 18,148,061	$ 40,703,258	$ 36,937,807
Gross profit	7,844,817	6,674,161	14,757,141	13,378,626
Direct expense	(13,388,376)	(9,754,929)	(26,521,646)	(19,197,577)
Segment contribution	(5,543,559)	(3,080,768)	(11,764,505)	(5,818,951)
Indirect expenses	(3,143,243)	(4,263,905)	(7,192,312)	(7,770,501)
Net Loss	(8,686,802)	(7,344,673)	(18,956,817)	(13,589,452)
Advanced Wound Care [Member]
Segment Reporting Information [Line Items]
Net sales	8,812,685	7,910,616	17,164,748	15,398,998
Gross profit	4,446,075	3,938,156	8,373,050	7,567,297
Direct expense	(7,663,928)	(5,200,282)	(15,309,862)	(10,423,871)
Segment contribution	(3,217,853)	(1,262,126)	(6,936,812)	(2,856,574)
Traditional Wound Care [Member]
Segment Reporting Information [Line Items]
Net sales	12,103,540	10,237,445	23,538,510	21,538,809
Gross profit	3,398,742	2,736,005	6,384,091	5,811,329
Direct expense	(1,362,889)	(1,284,977)	(2,671,058)	(2,487,944)
Segment contribution	2,035,853	1,451,028	3,713,033	3,323,385
Pharmaceutical Wound Care [Member]
Segment Reporting Information [Line Items]
Net sales
Gross profit
Direct expense	(4,361,559)	(3,269,670)	(8,540,726)	(6,285,762)
Segment contribution	(4,361,559)	(3,269,670)	(8,540,726)	(6,285,762)
Other [Member]
Segment Reporting Information [Line Items]
Net sales
Gross profit
Direct expense
Segment contribution
Indirect expenses	$ (3,143,243)	$ (4,263,905)	$ (7,192,312)	$ (7,770,501)

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Stockholders' Equity (Summary of Stock Option Activity) (Details) (USD $)	6 Months Ended
	Jun. 30, 2014
Number of Shares
Outstanding - beginning balance	1,814,233
Granted	628,661
Forfeited	(12,662)
Exercised	(102,178)
Expired	(3,500)
Outstanding - ending balance	2,324,554
Expected to vest	2,301,308
Exercisable	1,557,590
Weighted Average Exercise Price Per Share
Outstanding - beginning balance	$ 7.67
Granted	$ 13.04
Forfeited	$ 12.13
Exercised	$ 6.95
Expired	$ 12.28
Outstanding - ending balance	$ 9.12
Expected to vest	$ 9.12
Exercisable	$ 7.53

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Cash and Cash Equivalents and Investments (Narrative) (Details) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Cash and Cash Equivalents and Investments [Abstract]
Equity securities		2,272,277
Ownership percentage		7.30%
Payments to acquire equity securities		$ 7,000,000
Fair value of equity investment	7,565,683	6,862,140
Unrealized gain recorded in accumulated other comprehensive income	565,683
Amount of taxes on unrealized gain on available-for-sale investment	$ 217,533

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Accumulated Other Comprehensive Income (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance			$ 1,080,148
Current period - other comprehensive (loss) gain	980,435	(169,419)	401,148	(219,100)
Ending balance	1,481,296		1,481,296
Foreign Currency Translation Adjustments [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance			1,218,008
Current period - other comprehensive (loss) gain			(84,862)
Ending balance	1,133,146		1,133,146
Unrealized (Loss) Gain on Equity Securities, Net of Tax [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance			(137,860)
Current period - other comprehensive (loss) gain			486,010
Ending balance	$ 348,150		$ 348,150

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BioDLogics, LLC License Agreement

6 Months Ended

Jun. 30, 2014

BioDLogics, LLC License Agreement [Abstract]

BioDLogics, LLC License Agreement

4. BioDLogics, LLC License Agreement

On January 14, 2014, the Company entered into a license, market development and commercialization agreement (the “Agreement”) with BioDLogics, LLC (“BioD”) relating to BioD's human placental based products (the “Licensed Products”) and intellectual property related thereto.

Under the Agreement, BioD granted to the Company an exclusive, perpetual, royalty-bearing license to use, offer for sale and sell, the Licensed Products in North America (the “Territory”), including the rights to sublicense solely as provided in the Agreement, for a broad range of dermal applications, (the “Field”). During the term of the Agreement, the Company will be responsible for the sale and marketing of the Licensed Products in the Field throughout the Territory. As part of its commercialization efforts, the Company is required to fund clinical studies up to $2,000,000 in support of the Field pursuant to the Agreement.

The Company paid BioD an initial license fee of $1,250,000 and granted BioD a warrant to purchase 100,000 shares of the Company's common stock. One quarter (25%) of the warrant was exercisable immediately at a price of $11.81, while the remaining 75% of the warrant becomes exercisable, if at all, upon the achievement of certain milestones. The warrant expires five years from the date of issuance in January 2019 (note 5). The warrant has been valued at $129,750 using the Black-Scholes option pricing model. Total consideration paid to BioD of $1,379,750 has been recorded as an intangible asset and is being amortized to cost of sales over an estimated useful life of seven years. In addition to the initial license fee and warrant, royalties are payable to BioD based upon a sliding scale of the Company's net sales of Licensed Products within the Territory and declining as net sales increase. Royalty rates range from the low double digits and decline to the mid-single digits. The Agreement also requires the Company to make milestone payments to BioD of up to $19,750,000 based upon the achievement of certain development events and annual net sales levels.

The Agreement may be terminated as follows: (i) upon mutual agreement of the parties; (ii) by BioD if the Company challenges certain BioD patents or trade secrets; (iii) by BioD if the Company fails to meet the annual minimum net sales requirement under the Agreement, unless the Company pays the difference between the amount of royalties that would have been due had the minimum annual net sales for such year been achieved and royalty payments made by the Company with respect to net sales during such year plus any milestone payments payable; or (iv) by either party in the event of a material breach or certain events of bankruptcy.

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BioDLogics, LLC License Agreement (Details) (Licensing Agreements [Member], USD $)	6 Months Ended
	Jun. 30, 2014
Finite-Lived Intangible Assets [Line Items]
Commitment to fund clinical studies	$ 2,000,000
License fee	1,250,000
Shares called by warrant	100,000
Exercise price of warrant issued	11.81
Expiration period	5 years
Fair value of warrants	129,750
Consideration paid for agreement	1,379,750
Estimated useful life	7 years
Maximum milestone payments	$ 19,750,000
Immediately [Member]
Finite-Lived Intangible Assets [Line Items]
Vesting rate	25.00%
Milestones [Member]
Finite-Lived Intangible Assets [Line Items]
Vesting rate	75.00%

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Inventories (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Inventories [Abstract]
Finished goods	$ 12,380,839	$ 11,044,746
Work in process	667,773	1,009,315
Packaging materials	1,369,982	1,408,521
Raw materials	3,181,086	3,010,058
Total inventory	$ 17,599,680	$ 16,472,640

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Stockholders' Equity (Narrative) (Details) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Stockholders' Equity [Abstract]
Convertible preferred stock, shares outstanding	73,332		73,332
Number of common stock shares issuable for preferred stock	123,114
Additional shares issuable	49,782
Conversion of preferred stock, shares issued	1,397
Proceeds from the sale of common stock, net of costs	$ 80,616,032
Issuance costs	5,633,968
Number of shares sold	7,500,000
Common stock, price per share	$ 11.50
Number of common shares authorized	50,000,000		35,000,000
Shares issued during the period	7,889,511
Amount received upon the exercise of stock purchase warrants and options	2,245,782
Shares of common stock issued in connection with the vesting of restricted common stock	62,493
Shares of restricted common stock vested	71,800
Shares of common stock issued upon the exercise of stock purchase warrants and options	325,621
Shares issued for options	65,510
Intrinsic value of options exercised	467,604
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized	6,000,000		4,500,000
Shares available for grant	2,235,035
Granted	628,661
Weighted average fair value per share of options granted	$ 7.64
Stock options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expiration period	10 years
Restricted share units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation cost	4,237,494
Remaining weighted average vesting period	1 year 3 months 25 days
Shares withheld in satisfaction of employee tax withholding obligations	9,307
Fair value of shares withheld in satisfaction of employee tax withholding obligations	121,618
Service based options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Granted	443,335
Unrecognized compensation cost	3,429,722
Remaining weighted average vesting period	2 years 2 months 12 days
Performance based options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Granted	185,326
Unrecognized compensation cost	$ 498,503
Remaining weighted average vesting period	6 months

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Stockholders' Equity (Schedule of Warrants Outstanding) (Details)	6 Months Ended
	Jun. 30, 2014
Class of Warrant or Right [Line Items]
Number of Warrants	2,143,584
Warrants exercised	261,688
Warrants exercised, shares issued	260,111
L [Member]
Class of Warrant or Right [Line Items]
Warrants exercised	6,250
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	102,734
Exercise Price	5.50
Expiration Date	Feb. 22, 2015
Warrants exercised	128,166
P [Member]
Class of Warrant or Right [Line Items]
Number of Warrants	2,187
Exercise Price	6.25
Expiration Date	Feb. 16, 2015
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	1,705,330
Exercise Price	9.90
Expiration Date	Jun. 22, 2016
Warrants exercised	127,272
S [Member]
Class of Warrant or Right [Line Items]
Number of Warrants	100,000
Exercise Price	11.81
Expiration Date	Jan. 14, 2019

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Inventories

6 Months Ended

Jun. 30, 2014

Inventories [Abstract]

Inventories

3. 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, 2014		December 31, 2013
Finished goods	$	12,380,839	$	11,044,746
Work in process		667,773		1,009,315
Packaging materials		1,369,982		1,408,521
Raw materials		3,181,086		3,010,058
Total inventory	$	17,599,680	$	16,472,640

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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, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Stockholders' Equity [Abstract]
Risk free interest rate	1.97%	1.16%	1.79%	1.22%
Volatility factor	61.90%	70.20%	63.20%	70.00%
Dividend yield	0.00%	0.00%	0.00%	0.00%
Expected option life (years)	6 years 3 months	6 years 3 months	5 years 10 months 21 days	6 years 3 months
Forfeiture rate	1.00%	1.00%	1.00%	1.00%

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Operating Segments (Schedule of Net Sales by Geographic Region) (Details) (Net sales [Member], Geographic Concentration Risk [Member])	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Unites States [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration percentage	75.00%	80.00%	74.00%	79.00%
Canada [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration percentage	16.00%	11.00%	16.00%	13.00%
Other [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration percentage	9.00%	9.00%	10.00%	8.00%

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Consolidated Balance Sheets (USD $)	Jun. 30, 2014	Dec. 31, 2013
Current Assets
Cash and cash equivalents	$ 57,089,886	$ 6,501,586
Short-term investments	31,493,000	15,478,000
Accounts receivable, net	7,860,975	7,332,756
Inventories	17,599,680	16,472,640
Prepaid expenses and other current assets	3,065,618	3,746,753
Total current assets	117,109,159	49,531,735
Long-term investments	7,565,683	7,858,140
Equipment and improvements, net	3,231,956	2,953,469
Identifiable intangible assets, net	14,534,750	14,635,998
Goodwill	13,457,693	13,457,693
Other assets	147,310	139,318
Total Assets	156,046,551	88,576,353
Current Liabilities
Accounts payable	4,625,433	4,522,508
Accrued expenses and other current liabilities	4,493,913	4,969,225
Total current liabilities	9,119,346	9,491,733
Long-term liabilities	232,977	242,325
Deferred tax liability	1,735,859	1,694,147
Total Liabilities	11,088,182	11,428,205
Contingencies (note 9)
Stockholders' Equity
Convertible preferred stock, $.01 par value; shares authorized 1,468,750; issued and outstanding 73,332 at June 30, 2014 and December 31, 2013 (liquidation preference of $3,222,368 at June 30, 2014)	733	733
Common stock, $.01 par value; shares authorized 50,000,000; issued and outstanding 25,236,582 at June 30, 2014 and 17,347,071 at December 31, 2013	252,366	173,471
Additional paid-in capital	226,351,602	140,064,607
Accumulated other comprehensive income	1,481,296	1,080,148
Accumulated deficit	(83,127,628)	(64,170,811)
Total Stockholders' Equity	144,958,369	77,148,148
Total Liabilities and Stockholders' Equity	$ 156,046,551	$ 88,576,353

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Organization and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

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 tissue regeneration 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 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, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. Information included in the consolidated balance sheet as of December 31, 2013 has been derived from the consolidated financial statements and footnotes thereto for the year ended December 31, 2013, 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, 2014 and 2013 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,
	2014	2013
Excluded dilutive shares:
Convertible preferred stock	73,332	73,332
Additional stock issuable related to conversion of preferred stock	49,782	73,566
Restricted share units	744,850	802,800
Stock options	2,324,554	1,853,805
Warrants	2,143,584	2,305,593
Total dilutive shares	5,336,102	5,109,096

Recently Issued Accounting Pronouncements– In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

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Stockholders' Equity (Summary of Restricted Share Unit Activity) (Details) (USD $)	6 Months Ended
	Jun. 30, 2014
Number of Shares
Unvested beginning balance	720,550
Granted	101,100
Vested	(71,800)
Cancelled	(5,000)
Unvested ending balance	744,850
Weighted Average Fair Value
Unvested beginning balance	$ 9.03
Granted	$ 10.05
Vested	$ 13.48
Cancelled	$ 10.74
Unvested ending balance	$ 8.82

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Income Taxes (Tables)

6 Months Ended

Jun. 30, 2014

Income Taxes [Abstract]

Income Tax Benefit and Effective Tax Rate

	Three Months Ended June 30,
		2014			2013
Current tax benefit	$	(17,093	)	$	(72,832	)
Deferred tax (benefit) expense		(215,095	)		42,430
Income tax benefit	$	(232,188	)	$	(30,402	)
Effective tax rate		2.6	%		0.4	%

	Six Months Ended June 30,
	2014			2013
Current tax benefit	$	(24,239	)	$	(90,853	)
Deferred tax (benefit) expense		(219,514	)		74,639
Income tax benefit	$	(243,753	)	$	(16,214	)
Effective tax rate		1.3	%		0.1	%

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Stockholders' Equity (Common Stock Shares Reserved for Future Issuance) (Details)	Jun. 30, 2014
Class of Stock [Line Items]
Common stock shares reserved for future issuance	7,571,137
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	49,782
Common stock options outstanding [Member]
Class of Stock [Line Items]
Common stock shares reserved for future issuance	2,324,554
Common stock warrants outstanding [Member]
Class of Stock [Line Items]
Common stock shares reserved for future issuance	2,143,584
Restricted share units outstanding [Member]
Class of Stock [Line Items]
Common stock shares reserved for future issuance	744,850
Common stock equivalents available for grant [Member]
Class of Stock [Line Items]
Common stock shares reserved for future issuance	2,235,035

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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, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive shares	5,336,102	5,109,096	5,336,102	5,109,096
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	49,782	73,566	49,782	73,566
Restricted share units [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive shares	744,850	802,800	744,850	802,800
Warrants [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive shares	2,143,584	2,305,593	2,143,584	2,305,593
Stock options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive shares	2,324,554	1,853,805	2,324,554	1,853,805

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Cash and Cash Equivalents and Investments

6 Months Ended

Jun. 30, 2014

Cash and Cash Equivalents and Investments [Abstract]

Cash and Cash Equivalents and Investments

2. Cash and Cash Equivalents and Investments

Cash and Cash Equivalents

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. Money market mutual funds consist of funds deposited into mutual funds investing in U.S. government and non-government obligations. The Company maintains cash and cash equivalents and money market mutual funds with various domestic and foreign financial institutions within the ordinary course of business, which at times may exceed jurisdictional insurance limits.

Investments in Debt Securities

Investments in debt securities includes certificates of deposit purchased with an original maturity greater than three months which are deposited in various U.S. financial institutions and are fully insured by the Federal Deposit Insurance Corporation. The Company intends to hold the certificates of deposit to maturity and accordingly these investments are carried at amortized cost. Investments in debt securities with maturities greater than one year from the balance sheet date are classified as a long-term asset.

Investment in Equity Securities

In 2013, the Company purchased 2,272,277 shares of Comvita Limited (“Comvita”) common stock for $7,000,000. The equity investment represented 7.3% of Comvita's outstanding shares on the date of purchase. In conjunction with this investment, the Company's chairman and chief executive officer was named to Comvita's board of directors. Comvita will use the proceeds from this investment to purchase additional apiaries and upgrade and expand its Manuka honey processing capabilities. This investment will assist Comvita in its effort to better ensure supply for the Company's medical-grade honey requirements in an environment of growing global demand for Manuka honey.

The investment in Comvita common stock is classified as an available-for-sale investment carried at fair value, with any unrealized gains and losses associated with the investment included in accumulated other comprehensive income and any dividends received recorded in other income. The investment is classified as a long term asset. As of June 30, 2014, the fair value of the Comvita common stock was $7,565,683 as determined by the quoted market price of the outstanding stock on the New Zealand stock exchange. The cumulative increase in fair value from cost of $565,683, net of taxes of $217,533, has been recorded in accumulated other comprehensive income.

Cash and cash equivalents and investments at June 30, 2014 and December 31, 2013 consisted of the following:

	June 30, 2014		December 31, 2013
Cash	$	6,775,752	$	5,265,903
Money market mutual funds		50,314,134		1,235,683
Cash and cash equivalents		57,089,886		6,501,586
Investments in debt securities		31,493,000		16,474,000
Investment in equity securities		7,565,683		6,862,140
Total investments		39,058,683		23,336,140
Total cash and cash equivalents and investments	$	96,148,569	$	29,837,726

The following table provides fair value information as of June 30, 2014:

			Fair Value Measurements, Using
	Total carrying value as of June 30, 2014		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash and cash equivalents	$	57,089,886	$	57,089,886	$	-	$	-
Investments in debt securities		31,493,000		31,489,965		-		-
Investment in equity securities		7,565,683		7,565,683		-		-
Total investments		39,058,683		39,055,648		-		-
Total	$	96,148,569	$	96,145,534	$	-	$	-

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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Consolidated Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2014	Dec. 31, 2013
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	50,000,000	35,000,000
Common stock, shares issued	25,236,582	17,347,071
Common stock, shares outstanding	25,236,582	17,347,071

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Cash and Cash Equivalents and Investments (Tables)

6 Months Ended

Jun. 30, 2014

Cash and Cash Equivalents and Investments [Abstract]

Schedule of Cash and Cash Equivalents and Investments

Cash and cash equivalents and investments at June 30, 2014 and December 31, 2013 consisted of the following:

	June 30, 2014		December 31, 2013
Cash	$	6,775,752	$	5,265,903
Money market mutual funds		50,314,134		1,235,683
Cash and cash equivalents		57,089,886		6,501,586
Investments in debt securities		31,493,000		16,474,000
Investment in equity securities		7,565,683		6,862,140
Total investments		39,058,683		23,336,140
Total cash and cash equivalents and investments	$	96,148,569	$	29,837,726

Fair Value of Cash and Cash Equivalents and Investments

The following table provides fair value information as of June 30, 2014:

			Fair Value Measurements, Using
	Total carrying value as of June 30, 2014		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash and cash equivalents	$	57,089,886	$	57,089,886	$	-	$	-
Investments in debt securities		31,493,000		31,489,965		-		-
Investment in equity securities		7,565,683		7,565,683		-		-
Total investments		39,058,683		39,055,648		-		-
Total	$	96,148,569	$	96,145,534	$	-	$	-

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Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 05, 2014
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	2014
Document Period End Date	Jun. 30, 2014
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		25,248,398

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Inventories (Tables)

6 Months Ended

Jun. 30, 2014

Inventories [Abstract]

Schedule of 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, 2014		December 31, 2013
Finished goods	$	12,380,839	$	11,044,746
Work in process		667,773		1,009,315
Packaging materials		1,369,982		1,408,521
Raw materials		3,181,086		3,010,058
Total inventory	$	17,599,680	$	16,472,640

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Consolidated Statements of Comprehensive Loss (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Consolidated Statements of Comprehensive Loss [Abstract]
Net Sales	$ 20,916,225	$ 18,148,061	$ 40,703,258	$ 36,937,807
Cost of sales	13,071,408	11,473,900	25,946,117	23,559,181
Gross Profit	7,844,817	6,674,161	14,757,141	13,378,626
Operating Expenses
Selling, general and administrative	12,631,590	10,823,370	25,681,143	20,676,455
Research and development	4,365,267	3,242,599	8,548,868	6,235,765
Total operating expenses	16,996,857	14,065,969	34,230,011	26,912,220
Operating loss	(9,152,040)	(7,391,808)	(19,472,870)	(13,533,594)
Other (income) expense, net:	(233,050)	(16,733)	(272,300)	72,072
Loss before income taxes	(8,918,990)	(7,375,075)	(19,200,570)	(13,605,666)
Income tax benefit	(232,188)	(30,402)	(243,753)	(16,214)
Net Loss	(8,686,802)	(7,344,673)	(18,956,817)	(13,589,452)
Other Comprehensive Income (Loss)
Foreign currency translation adjustment	117,750	(169,419)	(84,862)	(219,100)
Unrealized gain on equity securities, net of taxes	862,685		486,010
Total other comprehensive income (loss)	980,435	(169,419)	401,148	(219,100)
Comprehensive Loss	$ (7,706,367)	$ (7,514,092)	$ (18,555,669)	$ (13,808,552)
Net loss per common share - basic and diluted	$ (0.34)	$ (0.43)	$ (0.79)	$ (0.81)
Shares used in computing net loss per common share - basic and diluted	25,199,805	17,068,854	23,889,487	16,832,578

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Operating Segments

6 Months Ended

Jun. 30, 2014

Operating Segments [Abstract]

Operating Segments

7. 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, devices and skin substitutes 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 closure strips, catheter fasteners and skin care products. Pharmaceutical wound care products consist of DSC127, a novel, first in class angiotensin peptide for the treatment of a variety of dermal applications.

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 care providers and through retail. 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 for diabetic foot ulcers and pre-clinical work on scar prevention.

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 2014 and 2013 were as follows:

Three Months Ended June 30, 2014
	Advanced Wound Care			Traditional Wound Care			Pharmaceutical Wound Care			Other			Total Company
Net sales	$	8,812,685		$	12,103,540		$	-		$	-		$	20,916,225
Gross profit		4,446,075			3,398,742			-			-			7,844,817
Direct expense		(7,663,928	)		(1,362,889	)		(4,361,559	)		-			(13,388,376	)
Segment contribution	$	(3,217,853	)	$	2,035,853		$	(4,361,559	)		-			(5,543,559	)
Indirect expenses										$	(3,143,243	)		(3,143,243	)
Net loss													$	(8,686,802	)

Three Months Ended June 30, 2013
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	)

Six Months Ended June 30, 2014
	Advanced Wound Care			Traditional Wound Care			Pharmaceutical Wound Care			Other			Total Company
Net sales	$	17,164,748		$	23,538,510		$	-		$	-		$	40,703,258
Gross profit		8,373,050			6,384,091			-			-			14,757,141
Direct expense		(15,309,862	)		(2,671,058	)		(8,540,726	)		-			(26,521,646	)
Segment contribution	$	(6,936,812	)	$	3,713,033		$	(8,540,726	)		-			(11,764,505	)
Indirect expenses										$	(7,192,312	)		(7,192,312	)
Net loss													$	(18,956,817	)

Six Months Ended June 30, 2013
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	)

The following table presents net sales by geographic region.

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
United States		75	%		80	%		74	%		79	%
Canada		16	%		11	%		16	%		13	%
Other		9	%		9	%		10	%		8	%

For the six months ended June 30, 2014 and 2013, the Company had a major Canadian customer comprising 16% and 13%, respectively, of consolidated net sales. Due to outstanding rebate obligations, the Company was in a net liability position to this customer at June 30, 2014.

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Accumulated Other Comprehensive Income

6 Months Ended

Jun. 30, 2014

Accumulated Other Comprehensive Income [Abstract]

Accumulated Other Comprehensive Income

6. Accumulated Other Comprehensive Income

The Company's accumulated other comprehensive income as of June 30, 2014 was as follows:

	Foreign Currency Translation Adjustments			Unrealized (Loss) Gain on Equity Securities, Net of Taxes			Total
Balance at January 1, 2014	$	1,218,008		$	(137,860	)	$	1,080,148
Current period - other comprehensive (loss) gain		(84,862	)		486,010			401,148
Balance at June 30, 2014	$	1,133,146		$	348,150		$	1,481,296

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Organization and Summary of Significant Accounting Policies (Narrative) (Details)	6 Months Ended
	Jun. 30, 2014
Organization and Summary of Significant Accounting Policies [Abstract]
Number of operating segments	3

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Stockholders' Equity (Tables)

6 Months Ended

Jun. 30, 2014

Stockholders' Equity [Abstract]

Schedule of Warrants Outstanding

At June 30, 2014, 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
N		100,000	$	6.25	February 22, 2015
O		102,734	$	5.50	February 22, 2015
P		2,187	$	6.25	February 16, 2015
Q		133,333	$	5.50	February 22, 2015
R		1,705,330	$	9.90	June 22, 2016
S		100,000	$	11.81	January 14, 2019
Total		2,143,584

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

For the three and six months ended June 30, 2014 and 2013, 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,
	2014			2013			2014			2013
Risk-free interest rate		1.97	%		1.16	%		1.79	%		1.22	%
Volatility factor		61.9	%		70.2	%		63.2	%		70.0	%
Dividend yield		0	%		0	%		0	%		0	%
Expected option life (years)		6.25			6.25			5.89			6.25

Summary of Stock Option Activity

A summary of the Company's stock option activity and related information for the six months ended June 30, 2014 is as follows:

	Options			Weighted Average Exercise Price
Outstanding – January 1, 2014		1,814,233		$	7.67
Granted		628,661		$	13.04
Forfeited		(12,662	)	$	12.13
Exercised		(102,178	)	$	6.95
Expired		(3,500	)	$	12.28
Outstanding – June 30, 2014		2,324,554		$	9.12
Expected to vest – June 30, 2014		2,301,308		$	9.12
Exercisable at June 30, 2014		1,557,590		$	7.53

Allocation of Stock Option Compensation Expense

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Cost of sales	$	32,870	$	13,636	$	118,046	$	68,343
Selling, general and administrative expenses		623,336		627,186		1,836,158		1,135,792
Research and development		82,385		13,895		103,171		71,655
Total stock option compensation expense	$	738,591	$	654,717	$	2,057,375	$	1,275,790

Summary of Restricted Share Unit Activity

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

	Number of Units		Weighted Average Fair Value
Unvested–January 1,2014		720,550	$	9.03
Granted		101,100		10.05
Vested		(71,800)		13.48
Forfeited		(5,000)		10.74
Unvested–June 30, 2014		744,850	$	8.82

Common Stock Shares Reserved for Future Issuance

At June 30, 2014, the Company had reserved the following shares of common stock for future issuance:

Convertible preferred stock (series A – B)	73,332
Additional stock issuable related to conversion of preferred stock(series A – B)	49,782
Common stock options outstanding	2,324,554
Common stock warrants outstanding	2,143,584
Restricted share units outstanding	744,850
Common stock equivalents available for grant	2,235,035
Total common stock shares reserved	7,571,137

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Organization and Summary of Significant Accounting Policies (Policy)

6 Months Ended

Jun. 30, 2014

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, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. Information included in the consolidated balance sheet as of December 31, 2013 has been derived from the consolidated financial statements and footnotes thereto for the year ended December 31, 2013, 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, 2014 and 2013 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,
	2014	2013
Excluded dilutive shares:
Convertible preferred stock	73,332	73,332
Additional stock issuable related to conversion of preferred stock	49,782	73,566
Restricted share units	744,850	802,800
Stock options	2,324,554	1,853,805
Warrants	2,143,584	2,305,593
Total dilutive shares	5,336,102	5,109,096

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements– In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

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Income Taxes

6 Months Ended

Jun. 30, 2014

Income Taxes [Abstract]

Income Taxes

8. Income Taxes

The following table summarizes the income tax expense and effective tax rate for the three and six months ended June 30, 2014 and 2013:

	Three Months Ended June 30,
		2014			2013
Current tax benefit	$	(17,093	)	$	(72,832	)
Deferred tax (benefit) expense		(215,095	)		42,430
Income tax benefit	$	(232,188	)	$	(30,402	)
Effective tax rate		2.6	%		0.4	%

	Six Months Ended June 30,
	2014			2013
Current tax benefit	$	(24,239	)	$	(90,853	)
Deferred tax (benefit) expense		(219,514	)		74,639
Income tax benefit	$	(243,753	)	$	(16,214	)
Effective tax rate		1.3	%		0.1	%

The income tax benefit for the three and six months ended June 30, 2014 consisted of a U.S. deferred income tax benefit related to a reduction in the Company's U.S. valuation allowance to offset the tax impact of the unrealized gain on equity securities included in accumulated other comprehensive income and a tax benefit from foreign operations. In addition, the U.S. income tax benefit for the three and six months ended June 30, 2014 was reduced by the tax effect of differences in financial reporting and tax treatment of goodwill net of amortization for financial reporting but not for tax purposes of acquired MedEfficiency identified intangible assets.

The income tax benefit for the three and six months ended June 30, 2013 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 related to tax differences in financial reporting and tax treatment of goodwill net of amortization for financial reporting but not for tax purposes of acquired MedEfficiency identified intangible assets.

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Contingencies

6 Months Ended

Jun. 30, 2014

Contingencies [Abstract]

Contingencies

9. 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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Organization and Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2014

Organization and Summary of Significant Accounting Policies [Abstract]

Potentially Dilutive Shares Excluded as Result of Effects Being 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,
	2014	2013
Excluded dilutive shares:
Convertible preferred stock	73,332	73,332
Additional stock issuable related to conversion of preferred stock	49,782	73,566
Restricted share units	744,850	802,800
Stock options	2,324,554	1,853,805
Warrants	2,143,584	2,305,593
Total dilutive shares	5,336,102	5,109,096

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Stockholders' Equity (Allocation of Stock Option Compensation Expense) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Stock options [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock based compensation expense	$ 738,591	$ 654,717	$ 2,057,375	$ 1,275,790
Stock options [Member] | Cost of sales [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock based compensation expense	32,870	13,636	118,046	68,343
Stock options [Member] | Selling, general and administrative expenses [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock based compensation expense	623,336	627,186	1,836,158	1,135,792
Stock options [Member] | Research and development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock based compensation expense	82,385	13,895	103,171	71,655
Restricted share units [Member] | Selling, general and administrative expenses [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock based compensation expense	715,117	661,329	1,390,033	1,192,925
Additional compensation expense due to accelerated vesting			$ 48,536	$ 337,422

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Operating Segments (Tables)

6 Months Ended

Jun. 30, 2014

Operating Segments [Abstract]

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

Three Months Ended June 30, 2014
	Advanced Wound Care			Traditional Wound Care			Pharmaceutical Wound Care			Other			Total Company
Net sales	$	8,812,685		$	12,103,540		$	-		$	-		$	20,916,225
Gross profit		4,446,075			3,398,742			-			-			7,844,817
Direct expense		(7,663,928	)		(1,362,889	)		(4,361,559	)		-			(13,388,376	)
Segment contribution	$	(3,217,853	)	$	2,035,853		$	(4,361,559	)		-			(5,543,559	)
Indirect expenses										$	(3,143,243	)		(3,143,243	)
Net loss													$	(8,686,802	)

Three Months Ended June 30, 2013
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	)

Six Months Ended June 30, 2014
	Advanced Wound Care			Traditional Wound Care			Pharmaceutical Wound Care			Other			Total Company
Net sales	$	17,164,748		$	23,538,510		$	-		$	-		$	40,703,258
Gross profit		8,373,050			6,384,091			-			-			14,757,141
Direct expense		(15,309,862	)		(2,671,058	)		(8,540,726	)		-			(26,521,646	)
Segment contribution	$	(6,936,812	)	$	3,713,033		$	(8,540,726	)		-			(11,764,505	)
Indirect expenses										$	(7,192,312	)		(7,192,312	)
Net loss													$	(18,956,817	)

Six Months Ended June 30, 2013
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	)

Schedule of Net Sales by Geographic Region

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
United States		75	%		80	%		74	%		79	%
Canada		16	%		11	%		16	%		13	%
Other		9	%		9	%		10	%		8	%

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Cash and Cash Equivalents and Investments (Schedule of Cash and Cash Equivalents and Investments) (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013	Dec. 31, 2012
Cash and Cash Equivalents and Investments [Abstract]
Cash	$ 6,775,752	$ 5,265,903
Money market mutual funds	50,314,134	1,235,683
Cash and cash equivalents	57,089,886	6,501,586	21,402,603	41,616,657
Investments in debt securities	31,493,000	16,474,000
Investments in equity securities	7,565,683	6,862,140
Total Investments	39,058,683	23,336,140
Total cash and cash equivalents and investments	$ 96,148,569	$ 29,837,726

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Income Taxes (Schedule of Income Tax Rate Reconciliation) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Income Taxes [Abstract]
Current tax benefit	$ (17,093)	$ (72,832)	$ (24,239)	$ (90,853)
Deferred tax (benefit) expense	(215,095)	42,430	(219,514)	74,639
Income tax benefit	$ (232,188)	$ (30,402)	$ (243,753)	$ (16,214)
Effective tax rate	2.60%	0.40%	1.30%	0.10%

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Consolidated Statements of Cash Flows (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Operating Activities
Net loss	$ (18,956,817)	$ (13,589,452)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of equipment and improvements	450,734	467,400
Amortization of identifiable intangible assets	1,480,998	1,447,327
Provision for bad debts	9,942	14,000
Allowance for sales adjustments	(5,642)	(16,805)
Provision for inventory obsolescence	65,069	73,781
Deferred rent	(10,142)	16,945
Stock-based compensation	3,495,944	2,806,137
Deferred income taxes	(219,514)	74,639
Changes in operating assets and liabilities:
Accounts receivable	(521,797)	(349,151)
Inventories	(1,333,931)	(732,687)
Prepaid expenses and other current assets	785,061	83,236
Other assets	25,541	(431)
Accounts payable	89,676	871,362
Accrued expenses and other current liabilities	(424,585)	30,839
Net cash used in operating activities	(15,069,463)	(8,802,860)
Investing Activities
Purchase of investments	(35,000,000)	(16,475,000)
Proceeds from sale of investments	19,981,000	2,737,000
Purchase of equipment and improvements	(733,436)	(282,574)
Purchase of intangible assets	(1,250,000)	(100,000)
Net cash used in investing activities	(17,002,436)	(14,120,574)
Financing Activities
Proceeds from the sale of common stock, net of costs	80,616,032
Proceeds from exercise of stock options and warrants, net of costs	2,245,782	2,750,549
Payment of withholding taxes related to employee stock compensation	(121,618)	(76,446)
Net cash provided by financing activities	82,740,196	2,674,103
Effect of exchange rate changes on cash and cash equivalents	(79,997)	35,277
Net increase (decrease) in cash and cash equivalents	50,588,300	(20,214,054)
Cash and cash equivalents
Beginning of period	6,501,586	41,616,657
End of period	57,089,886	21,402,603
Supplemental disclosures of cash flow information:
Issuance of a warrant in connection with a licensing agreement	129,750
Cash paid during the year for interest	$ 5,442	$ 717

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Stockholders' Equity

6 Months Ended

Jun. 30, 2014

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 impact the preferred stock conversion ratios. As of June 30, 2014, current Series A and B preferred stockholders holding 73,332 preferred shares are entitled to receive an aggregate of 123,114 shares (49,782 additional 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. In the six months ended June 30, 2014, the Company issued 1,397 common shares to prior preferred stock holders based on the adjustment of the conversion ratios.

The 49,782 incremental shares associated with the conversion ratio adjustment will be recorded to common stock at par with the offset to additional paid in capital as all of the convertible preferred stock was issued prior to the November 16, 2000 effective date of certain provisions of Accounting Standards Codification 470 (formerly, EITF 00-27 Application of Issue No. 98-5 to Certain Convertible Instruments).

Common Stock

On January 29, 2014, the Company raised $80,616,032 (net of $5,633,968 in commission and other offering expenses) from the sale of 7,500,000 shares of the Company's common stock at $11.50 per share. The Company plans to use the net proceeds from the offering for the continued development of its pharmaceutical product DSC127, for sales force expansion and for general corporate purposes.

On May 20, 2014, stockholders of the Company approved the proposal to increase the number of authorized shares of common stock from 35,000,000 to 50,000,000. On June 6, 2014, the Company amended its Certificate of Incorporation to reflect the increase in the number of authorized common stock. During the six months ended June 30, 2014, the Company issued 7,889,511 shares of common stock consisting of: 7,500,000 shares in connection with the January 29, 2014 equity offering, 325,621 shares upon the exercise of stock purchase warrants and options for which the Company received $2,245,782; 62,493 shares in connection with the vesting of 71,800 restricted share units, and 1,397 shares in connection with preferred stock conversion ratio adjustments.

Stock Purchase Warrants

At June 30, 2014, 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
N		100,000	$	6.25	February 22, 2015
O		102,734	$	5.50	February 22, 2015
P		2,187	$	6.25	February 16, 2015
Q		133,333	$	5.50	February 22, 2015
R		1,705,330	$	9.90	June 22, 2016
S		100,000	$	11.81	January 14, 2019
Total		2,143,584

During the six months ended June 30, 2014, a total of 261,688 warrants were exercised on a for cash and cashless basis consisting of 128,166 Series O, 127,272 Series R, and 6,250 Series L warrants. A total of 260,111 shares of common stock were issued in connection with the 2014 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 20, 2014, stockholders of the Company approved the proposal to increase the number of authorized shares of common stock the Company can issue from 4,500,000 to 6,000,000. 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, 2014, options to purchase 2,324,554 shares and 744,850 restricted share units were issued and outstanding under the EIP Plan and 2,235,035 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, 2014 and 2013, 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,
	2014			2013			2014			2013
Risk-free interest rate		1.97	%		1.16	%		1.79	%		1.22	%
Volatility factor		61.9	%		70.2	%		63.2	%		70.0	%
Dividend yield		0	%		0	%		0	%		0	%
Expected option life (years)		6.25			6.25			5.89			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 expected option life for Company employees and directors while the 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, 2014 is as follows:

	Options			Weighted Average Exercise Price
Outstanding – January 1, 2014		1,814,233		$	7.67
Granted		628,661		$	13.04
Forfeited		(12,662	)	$	12.13
Exercised		(102,178	)	$	6.95
Expired		(3,500	)	$	12.28
Outstanding – June 30, 2014		2,324,554		$	9.12
Expected to vest – June 30, 2014		2,301,308		$	9.12
Exercisable at June 30, 2014		1,557,590		$	7.53

During 2014, the Company granted 443,335 service based options and 185,326 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, 2014 was $7.64.

During the six months ended June 30, 2014, 102,178 stock options were exercised on a for cash and cashless basis. A total of 65,510 shares of common stock were issued in connection with the 2014 stock option exercises. The intrinsic value of options exercised in 2014 was $467,604.

During the three and six months ended June 30, 2014 and 2013, stock option compensation expense was recorded as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Cost of sales	$	32,870	$	13,636	$	118,046	$	68,343
Selling, general and administrative expenses		623,336		627,186		1,836,158		1,135,792
Research and development		82,385		13,895		103,171		71,655
Total stock option compensation expense	$	738,591	$	654,717	$	2,057,375	$	1,275,790

As of June 30, 2014, there was $3,429,722 of unrecognized compensation cost related to nonvested service based awards and $498,503 related to nonvested performance based awards. These costs are expected to be recognized over the options' remaining weighted average vesting period of 2.20 years and 0.50 years for the service and performance based awards, respectively.

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 Units		Weighted Average Fair Value
Unvested–January 1,2014		720,550	$	9.03
Granted		101,100		10.05
Vested		(71,800)		13.48
Forfeited		(5,000)		10.74
Unvested–June 30, 2014		744,850	$	8.82

In connection with the vesting of restricted share unit awards during the six months ended June 30, 2014, 9,307 common stock shares with a fair value of $121,618 were withheld in satisfaction of employee tax withholding obligations.

During the three months ended June 30, 2014 and 2013, restricted share unit compensation expense was $715,117 and $661,329, and for the six months ended June 30, 2014 and 2013, restricted share unit compensation expense was $1,390,033 and $1,192,925, respectively, and included in selling, general and administrative expense.

As of June 30, 2014, there was $4,237,494 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 1.32 years.

In consideration of prior service, the Company accelerated the vesting of any unvested stock options and the restricted share units scheduled to vest in 2014 of a retiring director and extended the date to exercise vested stock options to 24 months (versus 90 days) from the date of retirement. An additional $48,536 of stock based compensation expense was recognized during the six months ended June 30, 2014 and included in selling, general and administrative expense in connection with the retirement. For the six months ended June 30, 2013, the Company recognized an additional $337,422 of stock based compensation expense associated with a director's retirement and a former director's consulting expenses which were included in selling, general and administrative expense.

Shares Reserved for Future Issuance

At June 30, 2014, the Company had reserved the following shares of common stock for future issuance:

Convertible preferred stock (series A – B)	73,332
Additional stock issuable related to conversion of preferred stock(series A – B)	49,782
Common stock options outstanding	2,324,554
Common stock warrants outstanding	2,143,584
Restricted share units outstanding	744,850
Common stock equivalents available for grant	2,235,035
Total common stock shares reserved	7,571,137

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Cash and Cash Equivalents and Investments (Fair Value of Cash and Cash Equivalents and Investments) (Details) (USD $)	Jun. 30, 2014
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	$ 57,089,886
Investments	39,058,683
Total	96,148,569
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	57,089,886
Investments	39,055,648
Total	96,145,534
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
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
Debt Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	31,493,000
Debt Securities [Member] | Quoted prices in active markets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	31,489,965
Debt Securities [Member] | Significant other observable inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments
Debt Securities [Member] | Significant unobservable inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments
Equity Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	7,565,683
Equity Securities [Member] | Quoted prices in active markets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	7,565,683
Equity Securities [Member] | Significant other observable inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments
Equity Securities [Member] | Significant unobservable inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments

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Operating Segments (Narrative) (Details) (Net sales [Member], Customer [Member])	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Net sales [Member] | Customer [Member]
Concentration Risk [Line Items]
Concentration percentage	16.00%	13.00%

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Accumulated Other Comprehensive Income (Tables)

6 Months Ended

Jun. 30, 2014

Accumulated Other Comprehensive Income [Abstract]

Schedule of Accumulated Other Comprehensive Income

	Foreign Currency Translation Adjustments			Unrealized (Loss) Gain on Equity Securities, Net of Taxes			Total
Balance at January 1, 2014	$	1,218,008		$	(137,860	)	$	1,080,148
Current period - other comprehensive (loss) gain		(84,862	)		486,010			401,148
Balance at June 30, 2014	$	1,133,146		$	348,150		$	1,481,296