Document Security Systems, Inc. Announces 2013 Second Quarter Financial Results

 

Will Hold Earnings Conference Call on August 13, 2013 at 4:30 pm ET

 

ROCHESTER, NY--August 13, 2013 — Document Security Systems, Inc. (NYSE MKT: DSS), which merged with Lexington Technology Group, Inc. (“LTG”) on July 1, 2013 and is a leading developer of anti-counterfeiting, anti-fraud and authentication technologies for governments, corporations and financial institutions, today announced its 2013 second quarter financial results.

 

Highlights for 2Q13: 

·

Revenue of $4.3 million increased 17% year over year

·

29% year-over-year growth in packaging, plastics and licensing and digital revenue

·

Gross profit of $1.6 million increased 22% year over year

 

Revenues for the second quarter of 2013 were $4.3 million, a 17% increase over the second quarter of 2012. During the quarter, the Company experienced strong revenue growth for its packaging and plastics products, which were partially offset by a decline in the Company’s printing revenues.

 

Gross profit for the second quarter of 2013 was $1.6 million, a 22% increase over the second quarter of 2012. The growth was driven by gross profits for packaging and printing with improvements in sales mix and reductions in production costs as the driving factors for both divisions.

 

Operating expenses increased 53% in the second quarter of 2013 compared to the second quarter of 2012 primarily due to a 222% increase in professional fees, including legal, accounting and filing fees, and $723,000 of stock based compensation costs associated with the Company’s merger with LTG which closed on July 1, 2013. Absent merger related costs, operating expenses would have remained relatively flat compared to the second quarter of 2012.

 

 

Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, stock based compensation and other non-recurring items, including professional fees and stock based compensation incurred for the Company’s merger with LTG) for the second quarter of 2013 was a loss of $171,000, a 65% improvement over the adjusted EBITDA loss of $493,000 for the second quarter of 2012.

 

The Company recorded a net loss for the second quarter of 2013 of $1,925,000, or a net loss of $0.09 per share compared to a net loss of $995,000 or $0.05 per share in the second quarter of 2012. Absent merger related costs, net loss would have been approximately $723,000 a 27% improvement over the net loss in the second quarter of 2012.

 

Revenues for the first half of 2013 were $8.1 million, a 7% increase over the first half of 2012, primarily driven by sales increases in the Company’s plastics group and technology. Gross profit for the first half of 2013 reached $3.1 million, a 19% increase over the first half of 2012.

 

Operating expenses increased 40% in the first half of 2013 compared to the first half of 2012 primarily due to a 171% increase in professional fees, including legal, accounting and filing fees, and $723,000 of stock based compensation costs associated with the Company’s merger with LTG. Absent merger related costs, operating expenses would have reflected a 9% increase during the first half of 2013 compared the total operating expenses for the first half of 2012.

 

Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, stock based compensation and other non-recurring items, including professional fees and stock based compensation incurred for the Company’s merger with LTG) for the first half of 2013 was a loss of $570,000, a 43% improvement over the adjusted EBITDA loss of $973,000 for the first half of 2013.

 

The Company recorded a net loss for the first half of 2013 of $3.1 million, or a net loss of $0.14 per share compared to a loss of $2.1 million or $0.10 per share in the first half of 2012. Absent merger related costs, net loss for the first half of 2013 would have been approximately $1.7 million, a 16% improvement over the net loss in the first half of 2012.

 

The Company’s balance sheet as of June 30, 2013 does not reflect the cash balance in excess of the $6.25 million held by LTG on the Merger date of July 1, 2013. The Company expects to report post-Merger pro-forma financial statements on Form 8-K for the combined Company as of and for the six months ended June 30, 2013 no later than September 13, 2013.

 

“I am very pleased with the progress of the legacy DSS operating groups during the second quarter. Despite the decline in printing revenue, our efforts to reduce costs resulted in a 22% year-over-year increase in gross profit for the printing group” said Robert Bzdick, President of Document Security Systems. “The strong performance of the packaging, plastics, and licensing and digital groups helped drive business-wide improvements in revenue and gross profit. As I transition to the role of President of DSS, I am confident that we will be able to maintain these positive trends.”

 

“With the closing of the Merger on July 1, we are excited to have begun a new era at DSS” said Jeff Ronaldi, CEO of Document Security Systems. “In the newly created DSS Technology Management group, we have several exciting IP milestones, including the tentatively scheduled Virtual Agility Markman hearing in April 2014, and investment opportunities on the horizon. Combined with the positive operational trends that Bob and our DSS management team have underway, I believe that the overall future looks very bright.”

 

CONFERENCE CALL AND WEBCAST DETAILS:

 

Time: 4:30 p.m. ET
Date: Tuesday, August 13, 2013
Investor Dial In (Toll Free): 877-407-9205
Investor Dial In (International): 201-689-8054

Live Webcast URL: http://www.investorcalendar.com/IC/CEPage.asp?ID=171430

A replay of the teleconference will be available until August 28, 2013 which can be accessed by dialing (877) 660-6853 if calling within the U.S. or (201) 612-7415 if calling internationally. Please enter conference ID # 418897 to access the replay.

 

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About DSS (Document Security Systems, Inc.)

 

Document Security Systems, Inc.’s (NYSE MKT: DSS) products and solutions are used by governments, corporations and financial institutions to defeat fraud and to protect brands and digital information from the expanding world-wide counterfeiting problem.

DSS continually invests in technology to meet the ever-changing security needs of its clients and implements these patented solutions through the Company’s operating groups: DSS Plastics Group, DSS Secure Printing Group, DSS Packaging Group and DSS Digital Group.

 

DSS Technology Management, which includes all of the assets and operations of Lexington Technology Group, is the licensing and intellectual property management unit of DSS. Effective July 1, 2013, Lexington Technology Group, Inc. (“LTG”) became a wholly-owned subsidiary of Document Security Systems, Inc. (“DSS” or “Company”). Effective on August 2, 2013, LTG changed its name to DSS Technology Management, Inc. DSS Technology Management provides strategy for DSS’s IP portfolio, as well as legal expertise and investment capital for pioneering inventions.

 

Through these divisions, DSS provides counterfeit deterrence and authentication technology coupled with licensing and IP monetization solutions. When implemented, DSS technologies help ensure the authenticity of both digital and physical financial instruments, identification documents, sensitive publications and brand packaging.

 

For more information on DSS and its subsidiaries, please visit www.DSSsecure.com .

Follow DSS on Facebook, click HERE.

 

For more information:

 

Investor Relations

Document Security Systems

(585) 325-3610

Email: ir@documentsecurity.com

 

 

 

Forward Looking Statements

 

Forward-looking statements that may be contained in this press release, including, without limitation, statements related to the Company’s plans, strategies, objectives, expectations, potential value, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act and contain words such as “believes”, “anticipates”, “expects”, “plans”, “intends” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those disclosed in the “Risk Factors” section of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, filed with the Securities and Exchange Commission on August 13, 2013. Forward-looking statements that may be contained in this press release are being made as of the date of its release, and the Company assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements.

 

FINANCIAL TABLES FOLLOW

 

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

 

		Three Months Ended June 30, 2013				Three Months Ended June 30, 2012				% change				Six Months Ended June 30, 2013				Six Months Ended June 30, 2012				% change
Revenue
Printing		$	672,000			$	852,000				-21	%		$	1,571,000			$	1,522,000				3	%
Packaging			2,173,000				1,574,000				38	%			3,725,000				3,670,000				1	%
Plastic IDs and cards			977,000				799,000				22	%			1,805,000				1,479,000				22	%
Licensing and digital solutions			458,000				434,000				6	%			949,000				831,000				14	%
Total Revenue		$	4,280,000			$	3,659,000				17	%		$	8,050,000			$	7,502,000				7	%
Costs of revenue
Printing		$	385,000			$	632,000				-39	%		$	919,000			$	1,139,000				-19	%
Packaging			1,596,000				1,201,000				33	%			2,786,000				2,831,000				-2	%
Plastic IDs and cards			599,000				430,000				39	%			1,108,000				830,000				33	%
Licensing and digital solutions			73,000				62,000				18	%			155,000				117,000				32	%
Total cost of revenue			2,653,000				2,325,000				14	%			4,968,000				4,917,000				1	%
Gross profit
Printing			287,000				220,000				30	%			652,000				383,000				70	%
Packaging			577,000				373,000				55	%			939,000				839,000				12	%
Plastic IDs and cards			378,000				369,000				2	%			697,000				649,000				7	%
Licensing and digital solutions			385,000				372,000				3	%			794,000				714,000				11	%
Total gross profit		$	1,627,000			$	1,334,000				22	%		$	3,082,000			$	2,585,000				19	%
Gross profit percentage			38	%			36	%			4	%			38	%			34	%			10	%
Operating Expenses
Sales, general and administrative compensation		$	1,221,000			$	1,046,000				17	%		$	2,356,000			$	2,111,000				12	%
Professional Fees			602,000				187,000				222	%			1,016,000				375,000				171	%
Sales and marketing			126,000				83,000				52	%			208,000				165,000				26	%
Rent and utilities			154,000				147,000				5	%			311,000				298,000				4	%
Other			224,000				311,000				-28	%			446,000				492,000				-9	%
			2,327,000				1,774,000				31	%			4,337,000				3,441,000				26	%
Other Operating Expenses
Non-production depreciation and amortization			33,000				32,000				3	%			67,000				64,000				5	%
Research and development, including research and development costs paid by equity instruments			62,000				223,000				-72	%			121,000				371,000				-67	%
Stock based compensation			948,000				154,000				516	%			1,289,000				253,000				409	%
Amortization of intangibles			84,000				76,000				11	%			168,000				152,000				11	%
			1,127,000				485,000				132	%			1,645,000				840,000				96	%
Total Operating Expenses		$	3,454,000			$	2,259,000				53	%		$	5,982,000			$	4,281,000				40	%
Operating loss			(1,827,000	)			(925,000	)			98	%			(2,900,000	)			(1,696,000	)			71	%
Other expense:
Change in fair value of derivative liability		$	-			$	-				-				#REF!								-100	%
Interest expense			(50,000	)			(55,000	)			-9	%			(94,000	)			(126,000	)			-25	%
Amortizaton of note discount and loss on debt extinguishment			(43,000	)			(11,000	)			291	%			(54,000	)			(238,000	)			-77	%
Other expense, net		$	(93,000	)		$	(66,000	)			41	%		$	(148,000	)		$	(364,000	)			-59	%
Loss before income taxes			(1,920,000	)			(991,000	)			94	%			(3,048,000	)			(2,060,000	)			48	%
Income tax expense, net			5,000				5,000				0	%			9,000				9,000				0	%
Net loss		$	(1,925,000	)		$	(995,000	)			93	%		$	(3,057,000	)		$	(2,069,000	)			48	%
Net loss per share, basic and diluted		$	(0.09	)		$	(0.05	)			80	%		$	(0.14	)		$	(0.10	)			40	%
Weighted average common shares outstanding, basic and diluted			21,710,034				20,711,026				5	%			21,711,503				20,391,926				6	%

 

 

DOCUMENT SECURITY SYSTEMS, INC.  AND SUBSIDIARIES

Consolidated Balance Sheets

As of

 

		June 30, 2013				December 31, 2012
ASSETS		(unaudited)
Current assets:
Cash		$	559,286			$	1,887,163
Accounts receivable, net of allowance
of  $60,000 ($60,000- 2012)			2,117,681				2,123,019
Inventory			815,219				817,685
Prepaid expenses and other current assets			325,152				290,402
Total current assets			3,817,338				5,118,269
Property, plant and equipment, net			4,217,482				3,723,908
Other assets			222,605				232,815
Goodwill			3,322,799				3,322,799
Other intangible assets, net			1,736,931				1,852,677
Total assets		$	13,317,155			$	14,250,468
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	1,389,469			$	1,417,460
Accrued expenses and other current liabilities			1,473,450				1,223,244
Revolving lines of credit			69,993				238,240
Short-term debt, net of unamortized discount of $64,000			786,320				-
Current portion of long-term debt, net of unamortized discount of $0 ($44,000-2012)			333,744				864,514
Total current liabilities			4,052,976				3,743,458
Long-term debt			2,012,869				1,527,906
Interest rate swap hedging liabilities			51,775				127,883
Deferred tax liability			137,149				127,675
Commitments and contingencies (see Note 6)
Stockholders' equity
Common stock, $.02 par value;  200,000,000 shares authorized, 21,753,007 shares issued and outstanding
(21,705,969 in 2012)			435,060				434,118
Additional paid-in capital			57,191,771				55,872,917
Accumulated other comprehensive loss			(51,775	)			(127,883	)
Accumulated deficit			(50,512,670	)			(47,455,606	)
Total stockholders' equity			7,062,386				8,723,546
Total liabilities and stockholders' equity		$	13,317,155			$	14,250,468

 

 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Six Months Ended June 30,

(unaudited)

 

		2013				2012
Cash flows from operating activities:
Net loss		$	(3,057,064	)		$	(2,068,731	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization			454,129				390,884
Stock based compensation			1,288,689				331,526
Amortization of note discount			27,570				237,700
Loss on extinquishment of debt			26,252				-
Change in deferred tax provision			9,474				9,474
(Increase) decrease in assets:
Accounts receivable			5,338				(52,173	)
Inventory			2,466				31,171
Prepaid expenses and other assets			(69,859	)			(73,469	)
Increase (decrease) in liabilities:
Accounts payable			124,863				(64,066	)
Accrued expenses and other liabilities			250,206				(171,286	)
Net cash used by operating activities			(937,936	)			(1,428,970	)
Cash flows from investing activities:
Purchase of property, plant and equipment			(82,312	)			(105,782	)
Purchase of other intangible assets			(52,506	)			(106,775	)
Net cash used by investing activities			(134,818	)			(212,557	)
Cash flows from financing activities:
Net (payments) borrowings on revolving lines of credit			(168,247	)			4,158
Payment of short-term loan from related party			-				(150,000	)
Payments of long-term debt			(166,876	)			(185,835	)
Payments of capital lease obligations			-				(55,228	)
Issuance of common stock, net of issuance costs			80,000				2,828,669
Net cash (used) provided by financing activities			(255,123	)			2,441,764
Net  (decrease) increase in cash			(1,327,877	)			800,237
Cash beginning of period			1,887,163				717,679
Cash end of period		$	559,286			$	1,517,916

 

 

Adjusted EBITDA: Non-GAAP Financial Performance Measure

 

The Company uses Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by the Company by adding back to net loss interest, income taxes, depreciation and amortization expense as further adjusted to add back stock-based compensation expense and non-recurring items, such as gain on the change in fair value of derivative liability and costs related to the Company’s potential merger with Lexington Technology Group. Adjusted EBITDA is provided to investors to supplement the results of operations reported in accordance with GAAP. 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 operations 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. The Company 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. The Company 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 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. The following is a reconciliation of Net Loss to Adjusted EBITDA loss:

 

		Three Months Ended June 30												Six Months Ended June 30
		2013				2012				% change				2013				2012				% change
		(unaudited)				(unaudited)								(unaudited)				(unaudited)
Net Loss		$	(1,925,000	)		$	(995,000	)			93	%		$	(3,057,000	)		$	(2,069,000	)			48	%
Add back:
Depreciation & Amortization			229,000				198,000				16	%			454,000				391,000				16	%
Stock based compensation			948,000				233,000				307	%			1,289,000				332,000				288	%
Interest expense			50,000				55,000				-9	%			94,000				126,000				-25	%
Amortization of note discount and loss on debt extinquishment			43,000				11,000				291	%			54,000				238,000				-77	%
Income Taxes			5,000				5,000				0	%			9,000				9,000				0	%
Professional fees and other costs incurred in conjunction with the proposed Merger with Lexington Technology Group			479,000				-				100	%			587,000				-				100	%
Adjusted EBITDA			(171,000	)			(493,000	)			-65	%			(570,000	)			(973,000	)			-41	%