EX-99.1 2 v058655_ex99-1.htm
 
 
 News Release
Document Security Systems, Inc.
First Federal Plaza
28 East Main Street
Rochester, NY 14614
Investor contact:
Deborah K. Pawlowski
Kei Advisors LLC
716.843.3908
Email: dpawlowski@keiadvisors.com
 Media contact:
Kim Waver
Dixon Schwabl Advertising
585.899.3273
Email: kim@dixonschwabl.com
 
For Immediate Release  
 

 
Document Security Systems Reports 239% Revenue Growth in
 
Third Quarter 2006 and First Quarter of Positive Operating Cash Flow
 
·  
Security printer sales and technology fees drive growth
 
·  
Organic revenue grows 80%
 
·  
Gross profit increases 220%
 
·  
Generates first quarterly positive cash flow from operations
 

 
ROCHESTER, NY, November 14, 2006 — Document Security Systems, Inc. (AMEX: DMC; "DSS"), a leader in proven, patented protection against counterfeiting and unauthorized copying, scanning and photo imaging, today reported results for the third quarter ended September 30, 2006.
 
Revenue increased $890,000, or 239%, to $1,264,000 for the third quarter of 2006 compared with $373,000 for the same period in 2005. A primary contributor to the increase was sales of $593,000 from the addition of P3, the Company’s security printer that was acquired February 7, 2006. Organic sales for the third quarter 2006 increased 80%, or $297,000, over third quarter 2005 revenue, seasonally the weakest quarter for the Company. Organic sales, a non-GAAP (Generally Accepted Accounting Principles) measure, exclude sales generated by P3. Driving the growth of organic revenue was $219,000 from new, recurring license fees.
 
Not reflected in third quarter 2006 revenue results were cash receipts of approximately $590,000 for technology licenses and services for which revenue recognition is deferred in accordance with GAAP, which requires revenue for upfront licensing fees to be recognized evenly over the terms of the licensing agreements.
 
Mr. Patrick White, Chairman and Chief Executive Officer of DSS, noted, “During the third quarter, we reached an important milestone of generating positive cash from operations which was achievable in large part because of the partnership we established with The Ergonomics Group. We received $500,000 in the third quarter for technology licensing from them and will receive an additional $500,000 in the fourth quarter. This is the start of an important partnership that we believe will only expand in 2007. During the quarter, we also benefited from of a few of our significant licensing agreements, such as RR Donnelley & Sons Company (NYSE: RRD) with initial royalty usage reports showing impressive results from this major printing ally.”
 
He added, “Our challenge has been the length of the sales cycle for many of our business development efforts. However, as evidenced by our growing relationship with RR Donnelley, our previously announced agreements are beginning to result in direct revenue. In addition, we continue to establish future revenue growth opportunities and expand our market potential by forging additional strong relationships with key partners. We believe that our revenue stream will continue to expand as we increase our manufacturing capacity, strengthen our direct sales and channel partner activities, and selectively license our technologies to large and established companies with broad market reach.”
 
THIRD QUARTER HIGHLIGHTS
 
·  
Executed a letter of agreement with The Ergonomic Group (EGI) providing it the exclusive, limited right to use and market DSS's extensive portfolio of security technologies in the high technology, aerospace, financial and healthcare industries. The agreement guarantees that the Company will receive a minimum of $1,000,000 over the contract term of which $500,000 was received in the third quarter of 2006 and $500,000 is expected to be received in the fourth quarter of 2006.
 
·  
Established a licensing contract with Nampak Flexible, a division of Nampak Limited ("Nampak") and a leading flexible packaging manufacturer in South Africa. This is the Company's first licensing agreement with a packaging business, and the agreement is a royalty-based contract for one year with automatic annual renewals for up to an additional four years.
 
·  
Implemented a joint marketing agreement with Assa Abloy HID Global ("HID") to market DSS’s select technologies to enhance the security of HID's contactless smartcards and proximity cards. Assa Abloy HID is owned by parent ASSA ABLOY (ASZAF.PK), which is headquartered in Stockholm, Sweden. ASSA ABLOY is the world's leading manufacturer and supplier of locking and security access solutions.
 
OPERATING RESULTS
 
Gross profit increased 220% to $596,000 in the third quarter 2006 compared with $186,000 for the same period last year. Gross margin declined slightly to 47% compared with 50% in the prior year’s third quarter. The lower margin primarily reflects the change in mix of manufactured product sales and technology license and royalty fees due to the acquisition of P3 in February 2006.
 
Operating expenses for the third quarter of 2006 were $1.8 million compared with $888,000 for the same time last year, an increase of $916,000, or 103%. The increase in operating expenses includes $199,000 in operating costs associated with DSS's P3 division, increases in non-cash expenses of $140,000 in amortization of intangible assets and $301,000 in stock based payments primarily due to warrants issued to BTI, a bar code technology company, as part of DSS's long-term partnership with BTI that was formed to expedite DSS’s entry into the Chinese market for secure documents. After taking into account these incremental costs items, the remaining expense increase of $272,000 primarily reflects increases in personnel and consulting resources in the areas of operations, sales and management which are considered key to the company’s continued future growth.
 
Continuing the trend established in the second quarter of 2006, Adjusted EBITDA improved during the third quarter of 2006 to a loss of $576,000, or $0.04 per basic and diluted share, compared with a loss of $635,000, or $0.05 per basic and diluted share, for the second quarter of 2006. The improvement in Adjusted EBITDA reflects that growth in revenue more than offset the Company's investments to grow the organization and expand its operating structure, and that net income results reflect substantial non-cash expenses, including stock based compensation and amortization of intangible assets. (See Reconciliation of GAAP to Non-GAAP Financial Measures table)
 
Net loss for the third quarter was $1.2 million, or $0.09 per basic and diluted share, compared with a net loss of $678,000, or $0.06 per basic and diluted share, for the third quarter of 2005.
 
FOURTH QUARTER EVENTS
 
¨  
Authorized TransTech Systems, Inc. as the exclusive distributor of DSS technology for large format event identification badges and cards. TransTech is a leading distributor in the ID badge and access control markets and services a network of over 700 security products dealers throughout the United States.
 
¨  
Expanding outreach and coordinating distributor training programs and trade shows to improve the promotion of DSS technologies. Naming premier distributors, building marketing alliances, and expanding sales opportunities with European paper merchant PaperlinX.
 
¨  
Participating in the largest Gaming Industry trade show in the U.S., the Global Gaming Expo, to unveil new technology applications with Identification Data and Imaging (IDI). IDI specializes in security products such as patented state-of-the-art anti-counterfeiting and anti-fraud technologies for all paper and plastic documents including ID badges, room keys and promotional cards.
 
¨  
Expecting a second consecutive quarter of positive operating cash flow with the cash received from the partnership with Ergonomics.
 
Mr. White concluded, "We are beginning to see the fruition of our past 18-month effort to build our sales channel, acquire strong partners and manufacture our own security products. The reception we are getting from potential partners and customers is very strong. We are encouraged by the foothold we are gaining in the marketplace and believe that the demand for security technology will continue to accelerate.”
 
TELECONFERENCE
 
The Company invites you to join Patrick White, Chairman and CEO and Peter Ettinger, President on a teleconference to discuss the quarter and its sales and marketing activities on Tuesday, November 21, 2006 at 10:00 a.m. Eastern Time. To access the call you may dial 1-913-312-1267. It is recommended that you dial in approximately 10 to 15 minutes prior to the scheduled start time. Alternatively, you may listen to a live webcast of the call on the Company’s website: www.documentsecurity.com.
 
A replay of the call will be available until December 5, 2006 at midnight Eastern Time by dialing 1-719-457-0820, and entering PIN number 1338841. The archive will be made available on the website for approximately 60 days.
 
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 Reports 239% Revenue Growth in Third Quarter 2006
November 14, 2006
Page 5 of 8
 
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
 Consolidated Balance Sheets
 
   
 September 30,
  
December 31,
  
   
2006
  
2005
  
   
(unaudited)
  
(audited)
  
ASSETS
          
Current assets:
          
 Cash and cash equivalents
  
$
1,520,360
  
$
3,953,482
  
 Accounts receivable, net of allowance
              
 of $25,000 ($13,000 -2005)
    
719,941
    
164,726
  
 Inventory
    
249,438
    
148,804
  
 Prepaid expenses and other current assets
    
124,974
    
225,114
  
 Total current assets
    
2,614,713
    
4,492,126
  
Restricted cash
    
-
    
240,000
  
Fixed assets, net
    
623,700
    
451,195
  
Other assets
    
159,862
    
229,050
  
Goodwill
    
1,396,734
    
711,785
  
Other intangible assets, net
    
4,994,754
    
4,208,962
  
Total Assets
  
$
9,789,763
  
$
10,333,118
  
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Current liabilities:
              
 Accounts payable
  
$
1,298,827
  
$
547,512
  
 Accrued expenses & other current liabilities
    
229,692
    
212,559
  
 Deferred revenue
    
595,783
        
Current portion of long-term debt
    
-
    
50,891
  
Current portion of capital lease obligations
    
34,817
    
33,374
  
Total current liabilities
    
2,159,119
    
844,336
  
Long-term debt
    
-
    
167,309
  
Long-term capital lease obligations
    
58,784
    
84,931
  
Commitments and Contingencies
              
Stockholders' equity
              
 Common stock, $.02 par value;
              
 200,000,000 shares authorized,
              
12,926,989 shares issued and outstanding
              
 (12,698,872 in 2005)
    
258,540
    
253,977
  
 Additional paid-in capital
    
23,114,276
    
21,377,996
  
 Accumulated deficit
    
(15,800,956
)
  
(12,395,431
)
 Total stockholders' equity
    
7,571,860
    
9,236,542
  
Total Liabilities and Stockholders' Equity
  
$
9,789,763
  
$
10,333,118
  
- MORE -

 
 
 
 
Document Security Systems Reports 239% Revenue Growth in Third Quarter 2006
November 14, 2006
Page 6 of 8

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
 Consolidated Statements of Operations
 (unaudited)
 
   
Three Months Ended
  
 Nine Months Ended
  
   
September 30,
  
September 30,
  
September 30,
  
 September 30,
  
   
2006
  
 2005
  
 2006
  
 2005
  
Revenue, net
                     
 Security products & printing
  
$
849,264
  
$
222,158
  
$
2,608,619
  
$
864,352
  
 Royalties
    
246,528
    
28,251
    
343,223
    
51,600
  
 Legal product sales
    
167,518
    
122,714
    
483,983
    
381,445
  
 Total Revenue
    
1,263,310
    
373,123
    
3,435,825
    
1,297,397
  
Costs of revenue
                          
 Security products & printing
    
581,370
    
123,936
    
1,665,325
    
475,285
  
 Other product sales
    
86,355
    
62,713
    
267,240
    
196,960
  
 Total costs of revenue
    
667,725
    
186,649
    
1,932,565
    
672,245
  
Gross profit
    
595,585
    
186,474
    
1,503,260
    
625,152
  
Operating expenses:
                          
 Selling, general and administrative expenses
    
1,435,016
    
674,018
    
3,919,925
    
1,956,675
  
 Research and development
    
93,693
    
79,165
    
262,577
    
239,750
  
 Amortization of intangibles
    
275,714
    
135,000
    
763,989
    
270,000
  
 Operating expenses
    
1,804,423
    
888,183
    
4,946,491
    
2,466,425
  
Operating loss
    
(1,208,838
)
  
(701,709
)
  
(3,443,231
)
  
(1,841,273
)
Other income (expense):
                          
 Interest income
    
7,200
    
29,797
    
51,338
    
67,222
  
 Interest expense
    
(2,788
)
  
(6,494
)
  
(13,632
)
  
(20,543
)
Loss before income taxes
    
(1,204,426
)
  
(678,406
)
  
(3,405,525
)
  
(1,794,594
)
Income taxes
    
-
    
-
    
-
    
-
  
Net loss
  
$
(1,204,426
)
$
(678,406
)
$
(3,405,525
)
$
(1,794,594
)
Net loss per share, basic and diluted
  
$
(0.09
)
$
(0.06
)
$
(0.26
)
$
(0.15
)
Weighted average common shares outstanding,
                          
basic and diluted
    
12,920,315
    
12,285,029
    
12,868,887
    
11,856,511
  

- MORE -

 
 
 
 
Document Security Systems Reports 239% Revenue Growth in Third Quarter 2006
November 14, 2006
Page 7 of 8
 
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

 Consolidated Statements of Cash Flows  
 For the Nine Months Ended September 30,  
 
   
2006
  
 2005
  
   
 (unaudited)
  
 (unaudited)
  
Cash flows from operating activities:
           
 Net loss
  
$
(3,405,525
)
$
(1,794,594
)
Adjustments to reconcile net loss to net cash used by operating activities:
              
 Depreciation and amortization expense
    
927,635
    
404,960
  
 Stock based compensation
    
591,684
    
29,521
  
 (Increase) decrease in assets:
              
 Accounts receivable
    
(389,22Z
)
  
235,226
  
 Inventory
    
(30,487
)
  
(77,176
)
 Prepaid expenses and other assets
    
(20,541
)
  
(73,238
)
 Increase in liabilities:
              
 Accounts payable and accrued expenses
    
234,719
    
58,179
  
 Deferred revenue
    
595,783
    
-
  
Net cash used by operating activities
    
(1,495,961
)
  
(1,217,122
)
Cash flows from investing activities:
              
 Purchase of fixed assets
    
(78,204
)
  
(83,941
)
 Acquisition
    
(1,301,670
)
  
-
  
 Purchase of other intangible assets
    
(453,542
)
  
(185,283
)
Net cash used by investing activities
    
(1,833,416
)
  
(269,224
)
Cash flows from financing activities:
              
 Repayment of long-term debt
    
(218,200
)
  
(35,663
)
 Decrease in restricted cash
    
240,000
    
51,000
  
 Repayment of capital lease obligations
    
(24,704
)
  
(22,714
)
 Issuance of common stock, net
    
899,159
    
2,555,664
  
Net cash provided by financing activities
    
896,255
    
2,548,287
  
Net increase (decrease) in cash and cash equivalents
    
(2,433,122
)
  
1,061,941
  
Cash and cash equivalents beginning of period
    
3,953,482
    
2,657,865
  
Cash and cash equivalents end of period
  
$
1,520,360
  
$
3,719,806
  

- MORE -

 
 
 

Document Security Systems Reports 239% Revenue Growth in Third Quarter 2006
          
November 14, 2006
                        
Page 8 of 8
                        
 DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
 Reconciliation of GAAP and Non-GAAP Financial Measures
 (unaudited)
  
                   
   
 Three Months Ended
  
Nine Months Ended
  
   
September 30,
  
September 30,
  
September 30,
  
September 30,
  
   
2006
  
2005
  
2006
  
 2005
  
Net Loss
  
$
(1,204,426
)
$
(678,406
)
$
(3,405,525
)
$
(1,794,594
)
Add back:
                          
 Depreciation
    
44,511
    
44,609
    
163,646
    
134,960
  
Amortization of Intangibles
    
275,714
    
135,000
    
763,989
    
270,000
  
Stock Based payments
    
311,234
    
9,201
    
591,684
    
29,521
  
 Interest Income
    
(7,200
)
  
(29,797
)
  
(51,338
)
  
(67,222
)
 Interest Expense
    
2,788
    
6,494
    
13,632
    
20,543
  
 Income Taxes
    
-
    
-
    
-
    
-
  
Adjusted EBITDA
  
$
(577,379
)
$
(512,899
)
$
(1,923,912
)
$
(1,406,792
)
 

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Reconciliation of GAAP and Non-GAAP Financial Measures
Adjusted EBITA
(unaudited)
Three Months Ended  
June 30
 
 
   
2006
  
Net Loss
  
$
(1,206,537
)
Add back:
        
 Depreciation
    
62,488
  
 Amortization of Intangibles
    
268,275
  
 Stock Based Compensation
    
253,121
  
 Interest Income
    
(17,242
)
 Interest Expense
    
5,381
  
 Income Taxes
    
-
  
Adjusted EBITDA
  
$
(634,514
)

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