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

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

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ROCHESTER, N.Y., Aug. 13, 2013 /PRNewswire/ -- 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.

Total operating expenses increased 53% in the second quarter of 2013 to $3.5 million 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.

Total operating expenses increased 40% in the first half of 2013 to $6.0 million 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 to 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 41% 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. 

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:










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 extinguishment 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 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

    extinguishment


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 merger with

    Lexington Technology Group


479,000

-

100%



587,000

-

100%











Adjusted EBITDA


(171,000)

(493,000)

-65%



(570,000)

(973,000)

-41%











SOURCE Document Security Systems, Inc.



RELATED LINKS
http://www.documentsecurity.com

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