EX-99.1 2 v122950_ex99-1.htm
 
For Immediate Release
 

 
Document Security Systems Reports Second Quarter 2008 Financial Results

 
ROCHESTER, NY, August 11, 2008 — Document Security Systems, Inc. (AMEX: DMC), a leader in patented protection against counterfeiting and unauthorized copying, scanning and photo imaging, reported results for the second quarter ended June 30, 2008.
 
Revenue from continuing operations for the second quarter of 2008 was $2.2 million, an increase of 71% from the $1.3 million reported in the second quarter of 2007. The increase in revenue included a 40% increase in sales of the company’s printed products, including safety paper and secure id products, and a 203% increase in royalty revenue, which included approximately $542,000 of previously deferred revenue from the Ergonomic Group.
 
“Our performance this quarter reflects the progress we are making towards our goal of expanding the applications of our security products and broadening our customer base to drive revenue growth,” commented Patrick White, CEO of Document Security Systems. “The demand for our security technology and the strength in our core secure printing business is reflected in the wide range of products we delivered during the quarter, including shipments of Medicaid-ready prescription paper under our continued relationship with Boise Cascade, two separate foreign country orders for drivers licenses, and a large secure coupon paper order. In addition, we are already realizing the benefits of the cost reduction program we implemented in March of this year to remove $1.5 million in costs on an annualized basis,” added White.
 
OPERATING RESULTS
 
Gross profit from continuing operations for the second quarter increased 101% to $1.3 million compared with gross profit of $653,000 in the second quarter of 2007. Gross profit margin was 61% compared with 50% in the second quarter of 2007.
 
Operating expenses for continuing operations for the second quarter of 2008 were $2.6 million compared with $2.4 million in 2007, an increase of 11%. The increase was due in part to $322,000 in higher stock based compensation cost, primarily the result of the company’s separation agreement with its former President, and $104,000 in higher patent amortization cost. Otherwise, the company’s operating expenses decreased by 9% during the second quarter as the company began to realize savings from the cost reduction program it initiated in March 2008. Specifically, the company realized reductions from 2007 levels for general and administrative compensation costs (5% reduction), professional fees (43% reduction) and sales and marketing expenses (24% reduction). These reductions were partially offset by increases in research and development costs and for other operating expenses, including higher rent, insurance and utilities costs associated with the company’s larger facility for its plastic printing division in California.
 
Adjusted EBITDA for the second quarter of 2008 was $164,000 compared with a loss of $951,000 for the comparable period in 2007. (See Reconciliation of GAAP to Non-GAAP Financial Measures table below). The improvement in Adjusted EBITDA reflects the company’s revenue growth, which was coupled with a reduction in the company’s cash based operating expenses, and the recognition of $542,000 of previously deferred revenue as discussed above. In addition, the company recorded other income of approximately $126,000 as a result of court ordered judgment in the company’s favor in June 2008.
 
 
-MORE-
 
 
Net loss for the second quarter of 2008 was $1.3 million, or $(0.09) per share, a 28% decrease compared with a net loss of $1.7 million, or $(0.12) per share, for the second quarter of 2007.
 
As of June 30, 2008, the company had approximately $961,000 in cash and an aggregate of $1.7 million available to it under two revolving credit facilities. During the second quarter of 2008, the company reached agreements to sell a total of 500,000 shares of DMC’s common stock to Walton Invesco, Inc. for an aggregate purchase price of $2.0 million, $700,000 of which was received on June 27, 2008 with the remaining $1.3 million payable in six-month installments over two years. Additionally, the company continues negotiations with a third party to invest substantial resources in the company’s litigation against the European Central Bank.
 
 
Robert Fagenson, Chairman of the Board of Directors of Document Security Systems, commented, “At our annual meeting last May, I said that 2008 is the year in which we plan to increase sales dramatically, reduce expenses, separate the ECB litigation from our normal operations, and execute an agreement for the development and proliferation of our Authentiguard DX software, a digital application of our patented technologies. We have made progress in each of these areas. We have already seen significant sales increases of our core security printing products, achieved many of our goals in expense reductions, and have terminated relationships where we felt company resources were being wasted with little possibility of success and return. In addition, we have executed a new agreement with the Ergonomic Group and are in the final stages of developing our new digital technologies.
 
“Finally, we continue to make progress on strategic acquisitions and have made significant strides in separating the costs of the ECB litigation from the normal operating budget of the company, although there can be no assurance that our negotiations with a strategic partner for the prosecution of our ECB litigation will be successful. I am very proud of the accomplishments of our management team and the progress they have made toward the company’s strategic objectives.”
 
 
About Document Security Systems, Inc.
 
A rapidly growing security technology company, Document Security Systems is a world leader in the development of optical deterrent technologies that help prevent counterfeiting and brand fraud from the use of the most advanced scanners, copiers and imaging systems in the market. The company’s patented and patent-pending technologies protect valuable documents and printed products from counterfeiters and identity thieves. Document Security Systems’ customers, which include international governments, major corporations and world financial institutions, use its covert and overt technologies to protect a number of applications including, but not limited to, currency, vital records, brand protection, ID Cards, internet commerce, passports and gift certificates. Document Security Systems’ strategy is to become the world’s leading producer of cutting-edge security technologies for paper, plastic and electronically generated printed assets. More information about Document Security Systems can be found at its websites: www.documentsecurity.com and www.plasticprintingprofessionals.com.
 
Safe Harbor Statement
 
This release contains forward-looking statements regarding expectations for future financial performance, which involve uncertainty and risk. It is possible the company's future financial performance may differ from expectations due to a variety of factors including, but not limited to, changes in economic and business conditions in the world, increased competitive activity, achieving sales levels to fulfill revenue expectations, consolidation among its competitors and customers, technology advancements, unexpected costs and charges, adequate funding for plans, changes in interest and foreign exchange rates, regulatory and other approvals and failure to implement all plans, for whatever reason. It is not possible to foresee or identify all such factors. Any forward-looking statements in this report are based on current conditions; expected future developments and other factors it believes are appropriate in the circumstances. Prospective investors are cautioned that such statements are not a guarantee of future performance and actual results or developments may differ materially from those projected. The company makes no commitment to update any forward-looking statement included herein, or disclose any facts, events or circumstances that may affect the accuracy of any forward-looking statement.
 
TABLES FOLLOW.
 
###

 
 
 
 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
 Consolidated Balance Sheets
As of
 
   
June 30,
  
December 31,
  
   
2008
  
2007
  
   
(unaudited)
  
(audited)
  
ASSETS
          
           
Current assets:
          
 Cash and cash equivalents
  
$
960,898
  
$
742,468
  
 Restricted cash
    
173,784
    
-
  
 Accounts receivable, net of allowance of $82,000
    
966,742
    
617,320
  
 Inventory
    
243,945
    
259,442
  
 Loans to employees
    
117,022
    
120,732
  
 Prepaid expenses and other current assets
    
250,794
    
487,715
  
               
 Total current assets
    
2,713,185
    
2,227,677
  
               
Restricted cash
    
-
    
177,345
  
Fixed assets, net
    
1,391,273
    
1,494,540
  
Other assets
    
272,255
    
147,958
  
Goodwill
    
1,396,734
    
1,396,734
  
Other intangible assets, net
    
5,548,007
    
6,149,530
  
               
Total assets
  
$
11,321,454
  
$
11,593,784
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
              
               
Current liabilities:
              
 Accounts payable
  
$
1,821,875
  
$
1,795,085
  
 Accrued expenses & other current liabilities
    
1,190,390
    
818,606
  
 Short term credit facilities
    
500,000
    
-
  
 Deferred revenue & customer deposits
    
195,911
    
732,355
  
 Current portion of capital lease obligations
    
84,315
    
79,948
  
               
 Total current liabilities
    
3,792,491
    
3,425,994
  
               
Revolving notes from related parties
    
1,858,000
    
300,000
  
               
Long-term capital lease obligations
    
234,387
    
294,821
  
               
Long-term deferred revenue
    
7,448
    
15,938
  
               
Deferred tax liability
    
198,659
    
200,000
  
               
Commitments and contingencies
              
               
Stockholders' equity
              
 Common stock, $.02 par value;
              
 200,000,000 shares authorized,
              
 14,225,198 shares issued and outstanding (13,654,364
              
 in 2007) (325,000 subscribed in 2008)
    
284,504
    
273,087
  
 Additional paid-in capital
    
33,979,169
    
31,298,571
  
 Subscriptions receivable
    
(1,300,000
)
  
-
  
 Accumulated deficit
    
(27,733,204
)
  
(24,214,627
)
               
 Total stockholders' equity
    
5,230,469
    
7,357,031
  
Total liabilities and stockholders' equity
  
$
11,321,454
  
$
11,593,784
  
 

 
###
 
 
 
 

 DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
 Consolidated Statements of Operations
  (unaudited)
 
 
   
 Three Months
  
 Three Months
                
   
  Ended June 30,
  
 Ended June 30,
  
 % change
    
 Six Months Ended Six Months Ended
  
 % change vs.
  
   
2008
  
2007
  
vs. 2007
    
June 30, 2008
  
June 30, 2007
  
2007
  
Revenue
                             
 Security printing & products
  
$
1,155,000
  
$
827,000
    
40
%
  
$
2,087,000
  
$
1,818,000
    
15
%
 Royalties
    
892,000
    
294,000
    
203
%
    
1,220,000
    
593,000
    
106
%
 Digital solutions
    
8,000
    
12,000
    
-33
%
    
16,000
    
175,000
    
-91
%
 Legal products
    
159,000
    
162,000
    
-2
%
    
332,000
    
337,000
    
-1
%
 Total Revenue
    
2,214,000
    
1,295,000
    
71
%
    
3,655,000
    
2,923,000
    
25
%
                                         
Costs of revenue
                                        
 Security printing & products
  
$
796,000
  
$
548,000
    
45
%
  
$
1,392,000
  
$
1,056,000
    
32
%
 Digital solutions
    
4,000
    
3,000
    
33
%
    
7,000
    
37,000
    
-81
%
 Legal products
    
74,000
    
91,000
    
-19
%
    
171,000
    
194,000
    
-12
%
 Total cost of revenue
    
874,000
    
642,000
    
36
%
    
1,570,000
    
1,287,000
    
22
%
                                         
Gross profit
                                        
 Security printing & products
    
359,000
    
279,000
    
29
%
    
695,000
    
762,000
    
-9
%
 Royalties
    
892,000
    
294,000
    
203
%
    
1,220,000
    
593,000
    
106
%
 Digital solutions
    
4,000
    
9,000
    
-56
%
    
9,000
    
138,000
    
-93
%
 Legal products
    
85,000
    
71,000
    
20
%
    
161,000
    
143,000
    
13
%
 Total gross profit
    
1,340,000
    
653,000
    
105
%
    
2,085,000
    
1,636,000
    
27
%
                                         
Selling, general and administrative
                                        
 General and administrative compensation
  
$
508,000
  
$
534,000
    
-5
%
  
$
1,084,000
  
$
947,000
    
14
%
 Stock based payments
    
619,000
    
297,000
    
108
%
    
1,026,000
    
633,000
    
62
%
 Professional Fees
    
207,000
    
364,000
    
-43
%
    
574,000
    
684,000
    
-16
%
 Sales and marketing
    
299,000
    
391,000
    
-24
%
    
687,000
    
910,000
    
-25
%
 Depreciation and amortization
    
42,000
    
20,000
    
110
%
    
84,000
    
40,000
    
110
%
 Other
    
288,000
    
205,000
    
40
%
    
583,000
    
395,000
    
48
%
Research and development
    
134,000
    
109,000
    
23
%
    
249,000
    
203,000
    
23
%
Impairment of patent defense costs
    
-
    
-
            
292,000
    
-
        
Amortization of intangibles
    
537,000
    
433,000
    
24
%
    
1,064,000
    
779,000
    
37
%
 Total Operating Expenses
    
2,634,000
    
2,353,000
    
12
%
    
5,643,000
    
4,591,000
    
23
%
                                         
Operating loss
    
(1,294,000
)
  
(1,700,000
)
  
-24
%
    
(3,558,000
)
  
(2,955,000
)
  
20
%
                                         
Other income (expense):
                                        
 Interest income
    
-
    
34,000
    
-100
%
    
-
    
75,000
    
-100
%
 Gain/(Loss) on foreign currency adjustments
    
(12,000
)
  
(1,000
)
  
1100
%
    
(23,000
)
  
(4,000
)
  
475
%
 Interest expense
    
(33,000
)
  
(1,000
)
  
3200
%
    
(54,000
)
  
(2,000
)
  
2600
%
 Other income
    
126,000
    
-
            
126,000
    
-
        
Other income (expense), net
    
81,000
    
32,000
    
153
%
    
49,000
    
69,000
    
-29
%
                                         
Loss from continuing operations before income taxes
    
(1,213,000
)
  
(1,668,000
)
  
-27
%
    
(3,509,000
)
  
(2,886,000
)
  
22
%
                                         
Income taxes
    
5,000
    
5,000
    
-
      
10,000
    
9,000
    
-
  
                                         
Loss from continuing operations
    
(1,218,000
)
  
(1,673,000
)
  
-27
%
    
(3,519,000
)
  
(2,895,000
)
  
22
%
                                         
Loss from discontinued operations:
                                        
                                         
 Loss from operations of discontinued operations
    
-
    
(27,000
)
  
-100
%
    
-
    
(15,000
)
  
-100
%
Loss on discontinued operations
    
-
    
(27,000
)
  
-100
%
    
-
    
(15,000
)
  
-100
%
Net loss
  
$
(1,218,000
)
$
(1,700,000
)
  
-28
%
  
$
(3,519,000
)
$
(2,910,000
)
  
21
%
                                         
Net loss per share, basic and diluted
  
$
(0.09
)
$
(0.12
)
  
-29
%
  
$
(0.26
)
$
(0.21
)
  
20
%
 
                                        
Weighted average common shares outstanding, basic and diluted
    
13,690,545
    
13,625,408
    
0
%
    
13,672,555
    
13,605,327
    
0
%
 
 
###
 
 
 
 
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
 Consolidated Statements of Cash Flows
 For the Six Months Ended June 30,
(unaudited)
 
   
2008
  
2007
  
Cash flows from operating activities:
          
 Net loss
  
$
(3,518,577
)
$
(2,910,281
)
 
              
 Adjustments to reconcile net loss to net cash used by operating activities:
              
 Depreciation and amortization expense
    
1,222,084
    
870,247
  
 Stock based compensation
    
1,056,018
    
633,040
  
 Impairment of patent defense costs
    
291,581
    
-
  
 Increase in restricted cash
    
3,561
    
-
  
 (Increase) decrease in assets:
              
 Accounts receivable
    
(349,422
)
  
(75,175
)
 Inventory
    
15,497
    
(61,743
)
 Prepaid expenses and other assets
    
(164,027
)
  
(238,656
)
 Increase (decrease) in liabilities:
              
 Accounts payable
    
164,343
    
360,023
  
 Accrued expenses and other liabilities
    
186,802
    
(49,754
)
 Deferred revenue
    
(544,934
)
  
(164,299
)
               
Net cash used by operating activities
    
(1,637,075
)
  
(1,636,598
)
               
Cash flows from investing activities:
              
 Purchase of fixed assets
    
(189,802
)
  
(70,705
)
 Restricted cash- patent litigation guarantee
              
 Acquisition of business
    
-
        
 Purchase of other intangible assets
    
(756,626
)
  
(661,709
)
               
Net cash used by investing activities
    
(946,428
)
  
(732,414
)
               
Cash flows from financing activities:
              
 Borrowing on revolving note- related parties
    
2,058,000
    
-
  
 Repayments of capital lease obligations
    
(56,067
)
  
(18,115
)
 Payment of stock issuance costs
    
-
    
(519,619
)
 Issuance of common stock
    
800,000
    
355,225
  
Net cash provided (used) by financing activities
    
2,801,933
    
(182,509
)
               
Net increase (decrease) in cash and cash equivalents
    
218,430
    
(2,551,521
)
Cash and cash equivalents beginning of period
    
742,468
    
5,802,615
  
Cash and cash equivalents end of period
  
$
960,898
  
$
3,251,094
  
 
###
 
 
 
Adjusted EBITDA: Non-GAAP Financial Performance Measure
 

   
Three Months Ended June 3o,
  
 Six Months Ended June 30,
  
            
% change vs.
            
% change
  
   
2008
 
 2007
 
2007
 
 2008
 
 2007
 
vs. 2007
  
   
(unaudited)
  
 (unaudited)
      
 (unaudited)
  
 (unaudited)
      
                                       
Net Loss
  
$
(1,218,000
)
$
(1,700,000
)
  
-28
%
$
(3,519,000
)
$
(2,910,000
)
  
21
%
                                       
Add back:
                                      
                                       
 Depreciation
    
158,000
    
47,000
    
236
%
  
158,000
    
91,000
    
74
%
 Amortization of Intangibles
    
537,000
    
433,000
    
24
%
  
1,064,000
    
779,000
    
37
%
 Stock based payments
    
649,000
    
297,000
    
119
%
  
1,056,000
    
633,000
    
67
%
 Interest Income
    
-
    
(34,000
)
  
-100
%
  
-
    
(75,000
)
  
-100
%
 Interest Expense
    
33,000
    
1,000
    
3200
%
  
54,000
    
2,000
    
2600
%
 Income Taxes
    
5,000
    
5,000
    
-
    
10,000
    
9,000
    
-
  
                                       
Adjusted EBITDA
    
164,000
    
(951,000
)
  
-117
%
  
(1,177,000
)
  
(1,471,000
)
  
-20
%
 
The Company uses Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adding back to net income (loss) interest, income taxes, depreciation, amortization, and stock-based compensation expense. Adjusted EBITDA is provided to investors to supplement the results of operations reported in accordance with GAAP. Management believes Adjusted EBITDA is useful to help investors analyze the operating trends of the business before and after the adoption of SFAS 123(R) and to assess the relative underlying performance of businesses with different capital and tax structures. Management believes that Adjusted EBITDA provides an additional tool for investors to use in comparing its financial results with other companies in the industry, many of which also use Adjusted EBITDA in their communications to investors. By excluding non-cash charges such as amortization, depreciation and stock-based compensation, as well as non-operating charges for interest and income taxes, investors can evaluate the Company's operations and its ability to generate cash flows from operation and can compare its results on a more consistent basis to the results of other companies in the industry. Management also uses Adjusted EBITDA to evaluate potential acquisitions, establish internal budgets and goals, and evaluate performance of its business units and management.
 
 
Document Security Systems considers Adjusted EBITDA to be an important indicator of the Company's operational strength and performance of its business and a useful measure of the Company's historical and prospective operating trends. However, there are significant limitations to the use of Adjusted EBITDA since it excludes interest income and expense and income taxes, all of which impact the Company's profitability and operating cash flows, as well as depreciation, amortization and stock based compensation. Document Security Systems believes that these limitations are compensated by clearly identifying the difference between the two measures. Consequently, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) presented in accordance with GAAP. Adjusted EBITDA as defined by the Company may not be comparable with similarly named measures provided by other entities.
 
 

 
Investor Contact
Lippert /Heilshorn & Associates
212-838-3777
Amy Gibbons
agibbons@lhai.com

###