Document Security Systems Reports 167% Revenue Growth in Second Quarter 2006; Security Printer Acquisition and Distributor Sales Drive Growth; Organic Sales Grow 33%; Gross Profit Increases 156%.ROCHESTER Rochester (rŏch`ĕstər, –ĭstər). 1 City (1990 pop. 70,745), seat of Olmsted co., SE Minn.; inc. 1858. , N.Y. -- Document Security Systems, Inc. (AMEX AMEX See: American Stock Exchange : DMC DMC Devil May Cry (video game) DMC Detroit Medical Center DMC Darryl McDaniels (rapper) DMC Destination Management Company DMC Del Mar College (Corpus Christi, TX) ) ("DSS (1) (Digital Signature Standard) A National Security Administration standard for authenticating an electronic message. See RSA and digital signature. (2) (Digital Satellite S "), a leader in proven, patented protection against counterfeiting counterfeiting, manufacturing spurious coins, paper money, or evidences of governmental obligation (e.g., bonds) in the semblance of the true. There must be sufficient resemblance to the genuine article to deceive a person using ordinary caution. and unauthorized copying, scanning and photo imaging, today reported results for the second quarter ended June June: see month. 30, 2006. Revenue increased 167% to $1,310,000 for the second quarter of 2006 compared with $491,000 for the same period in 2005. On a sequential basis, revenue increased $447,000, or 52%, from $863,000 in the first quarter 2006. Organic sales for the second quarter 2006 increased $162,000, or 33%, from the second quarter of 2005 and $206,000, or 46%, from the first quarter of 2006. Organic sales, a non-GAAP measure, exclude sales generated by P3, the Company's security print subsidiary, which was acquired on February 7, 2006. The increase in revenue was primarily the result of the following: --$656,000 in sales by DSS's P3 division, --An initial $157,000 order for AuthentiGuard(TM) Security Paper by one of DSS's major distributors, PaperlinX Limited, and --Increased order volume. Mr. Patrick White Noun 1. Patrick White - Australian writer (1912-1990) Patrick Victor Martindale White, White , Chairman and Chief Executive Officer of DSS, noted, "We are hitting stride in the execution of our long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. growth strategy. We are driving revenue growth both by increasing our P3 manufacturing capabilities, strengthening our direct sales and channel partner activities, and selectively licensing our technologies to large and established companies with broad market reach. During the quarter, we executed licensing agreements with leading security printers, Banknote Corporation of America (BCA BCA Business Case Analysis BCA Building Code of Australia BCA Boeing Commercial Airplanes BCA Board of Contract Appeals BCA Boston Center for the Arts BCA Billiard Congress of America BCA Bureau of Criminal Apprehension BCA Breast Cancer Action ) and RR Donnelley
See: New York Stock Exchange : RRD RRD R.R. Donnelley RRD Round Robin Database (a system to store and display time-series data) RRD Removable Rigid Disk RRD Rhegmatogenous Retinal Detachment RRD Radio Regulatory Department RRD Regimental Reconnaissance Detachment ). We also established relationships with Barcode Technology, Inc. (BTI BTI Beverage Testing Institute BTI Boyce Thompson Institute BTI British American Tobacco (stock symbol) BTI Boston Theological Institute Bti Bacillus Thuringiensis Israelensis BTI BioTechnology Institute BTI Binding Tariff Information ) and ProdoSafe Security Solutions. For several of these agreements, we are in the development phase and expect revenue to begin to ramp up Ramp Up To increase a company's operations in anticipation of increased demand. Notes: A company might 'ramp up' operations if they just signed a contract creating substantially more demand for their product. See also: Demand, Economies of Scale in the first quarter of next year. We are seeing increasing order volume from our state government customers for our AuthentiGuard(TM) Security Paper product. We have developed solid, new market opportunities in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. , China, Turkey and around the world. We are confident that we are on the right track to capitalize on Cap´i`tal`ize on` v. t. 1. To turn (an opportunity) to one's advantage; to take advantage of (a situation); to profit from; as, to capitalize on an opponent's mistakes s>. our valuable intellectual property and become a global leader for optical security technology." SECOND QUARTER HIGHLIGHTS --Signed a two-year licensing agreement with BCA, the largest high security printer in the United States. Its products include checks, stamps, and other sensitive and critical documents. BCA is a leading provider of personal identification documents for the U.S. Government. --Renewed and extended, with significantly better pricing and terms, a licensing agreement with RR Donnelley, the largest printer in North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. . A three-year contract, the renewed agreement includes royalties on the usage of DSS's SecureScan(TM) technology. The Company estimates potential annual revenue from this contract of approximately $1.4 million. The contract became effective August 1, 2006. --Signed an exclusive licensing agreement with BTI to market and produce DSS's technology, both independently and in combination with BTI's technology in China. DSS expects revenue from the agreement to commence in the first quarter of 2007. --Signed a two-year agreement with ProdoSafe Security Solutions, Turkey's largest supplier of anti-counterfeiting technology. With its recently awarded contracts, ProdoSafe will apply DSS's technology in two metropolitan areas in Turkey. --Signed licensing agreement with The Reynolds and Reynolds Company (NYSE: REY REY Religious Education for Youth ), a leading software and services provider for the automotive retailing market in the United States and Canada for the protection of checks and forms. OPERATING RESULTS Gross profit increased 156% to $591,000 in the second quarter 2006 compared with $231,000 for the same period last year. Gross margins were 45.1% compared with 47.1% in the prior year's quarter. The lower margin primarily reflects the change in mix of manufactured product sales and technology licenses due to the addition of P3. Operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. for the second quarter of 2006 were $1.8 million compared with $802,000 for the same time last year, an increase of $998,000, or 124%. The increase in operating expenses included an increase of $138,000 in amortization of intangible assets Intangible Asset An asset that is not physical in nature. Notes: Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. and an increase of $243,000 in stock-based compensation, which are non-cash expenses Noun 1. non-cash expense - an expense (such as depreciation) that is not paid for in cash disbursal, disbursement, expense - amounts paid for goods and services that may be currently tax deductible (as opposed to capital expenditures) . Intangible assets include DSS's vast and deep intellectual technology portfolio and the resulting amortization expense is a necessary by-product by·prod·uct or by-prod·uct n. 1. Something produced in the making of something else. 2. A secondary result; a side effect. by-product Noun 1. of the Company's aggressive intellectual property strategy. Selling, general and administrative expenses in the second quarter of 2006 increased $854,000 to $1.4 million compared with $591,000 in the second quarter of 2005. The increase included $160,000 in operating costs operating costs npl → gastos mpl operacionales associated with DSS's P3 division, as well as a non-cash expense of $223,000 in stock-based compensation expense from warrants issued to BTI as part of DSS's long-term partnership to expedite ex·pe·dite tr.v. ex·pe·dit·ed, ex·pe·dit·ing, ex·pe·dites 1. To speed up the progress of; accelerate. 2. its entry into the Chinese market for secure documents. In addition, sales and marketing expenses increased due to higher travel costs associated with more aggressive direct sales activities, as well as an expansion of the Company's sales and marketing materials for presentations and trade events. For the second quarter, Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become improved to a negative $635,000, or $0.05 per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share compared with negative $713,000, or $0.06 per diluted share, for the first quarter of 2006. The improvement in Adjusted EBITDA reflects the Company's growth in revenue and gross profits at a pace greater than expansion of its operating expenses, including stock based compensation and amortization of intangible assets, which are non-cash expenses. While DSS expects to continue to invest in its sales and marketing resources, its core administrative and corporate governance Corporate Governance The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. costs have begun to stabilize stabilize See peg. . (See Reconciliation of GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). to Non-GAAP Financial Measures table) Net loss for the second quarter was $1.2 million, or $0.09 per basic and diluted share, compared with a net loss of $553,000, or $0.05 per basic and diluted share, for the second quarter of 2005. Mr. White, stated, "Through our direct sales activities and by driving market awareness with our indirect sales channel relationships, we are proactively meeting with customers and prospects to further grow our pipeline of opportunities. We recently hosted technology conferences on the east and west coasts to showcase and demonstrate the power of our portfolio of technologies to print and security dealers. We are already seeing initial orders from new customers and requests for quotes from prospects as a result of our efforts. Although it impacts near-term margins, we are investing in our sales infrastructure in order to accelerate the commercialization of our technologies." At June 30, 2006, cash and cash equivalents were $1.7 million compared with $2.5 million in the first quarter of 2006 and $4.0 million at the same time last year. The decrease was mainly due to $1.25 million in cash used to purchase the assets of P3 in the first quarter and the use of cash to fund operations. EARLY THIRD QUARTER HIGHLIGHTS --For DSS's infringement The encroachment, breach, or violation of a right, law, regulation, or contract. The term is most frequently used in reference to the invasion of rights secured by Copyright, patent, or trademark. suit against the European Central Bank European Central Bank (ECB) Bank created to monitor the monetary policy of the countries that have converted to the Euro from their local currencies. The original 11 countries are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, (ECB See electronic code book. ), the judge has not made a ruling on the court of venue. Attorneys will be discussing settlement mediation mediation, in law, type of intervention in which the disputing parties accept the offer of a third party to recommend a solution for their controversy. Mediation has long been a part of international law, frequently involving the use of an international commission, in the fall. Hearings begin in January 2007 regarding the ECB's countersuit coun·ter·sue tr.v. coun·ter·sued, coun·ter·su·ing, coun·ter·sues Law To bring proceedings against (a plaintiff) in direct opposition to a suit brought against onself. . The process is expected to take no more than two years including an appeal process if necessary. The suit was originally filed in August 2005. --DSS's agreement with RR Donnelley took effect on August 1, 2006. It is a three-year royalty-based contact. Based on historical usage, DSS expects potential annual sales in the range of $1.4 million. The agreement includes a minimum annual fee paid quarterly of $200,000. --DSS is testing its AuthentiGuard(TM) Online technology with a top global bank's Latin American subsidiary to provide an internet delivery system for creating secure, verifiable documents that can be transmitted and printed over the internet. The Company is also conducting initial discussions regarding the expansion of its internet security ''This article or section is being rewritten at Internet security is the process of protecting data and privacy of devices connected to internet from information robbery, hacking, malware infection and unwanted software. service through AuthentiGuard(TM) Online. --Dutko Worldwide, a multi-disciplinary government affairs strategy and management firm, was appointed to represent the Company's interest in federal & state government applications, as well as homeland security Noun 1. Homeland Security - the federal department that administers all matters relating to homeland security Department of Homeland Security executive department - a federal department in the executive branch of the government of the United States . --DSS is developing PaperlinX's sales channels and training its salesforce on AuthentiGuard(TM) technology. PaperlinX, selling under the SecurelinX brand, has nonexclusive rights to sell AuthentiGuard(TM) Security Paper in Europe, Australia and New Zealand New Zealand (zē`lənd), island country (2005 est. pop. 4,035,000), 104,454 sq mi (270,534 sq km), in the S Pacific Ocean, over 1,000 mi (1,600 km) SE of Australia. The capital is Wellington; the largest city and leading port is Auckland. . Mr. White concluded, "We are only in the early stages of realizing the benefits of our P3 subsidiary, which provide us with manufacturing capabilities to offer customized and layered security Layered security is a new term used by information protection and online security vendors that describes the practice of leveraging several different point security solutions to protect the digital identities and information of consumer, enterprise or government environments. products that combine our print technologies, and in some cases, selected security technologies of our partners. As a result, we are exploring our options to expand the facility and its equipment to increase production. We expect this approach will accelerate revenue growth in the second half of 2006 and beyond." About Document Security Systems, Inc. Document Security Systems, Inc. (AMEX: DMC) is a leader in proven patented protection against counterfeiting and unauthorized copying, scanning and photo imaging. The company offers a broad portfolio of anti-counterfeiting technologies, processes and products, and provides consulting for customized document security printing solutions. Its various anti-scanning technologies and products are used for currency, vital records, packaging, labels, tickets, ID Cards, passports The following is a list of passports: By country and territory
1. the act or process of doubling, or the state of being doubled. 2. . Its strategy is to become the world's leading producer of cutting-edge security technologies for printed products. More information about Document Security Systems can be found at its websites: www.documentsecurity.com and www.plasticprintingprofessionals.com. Safe Harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. Statement This release contains forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. 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 ful·fill also ful·fil tr.v. ful·filled, ful·fill·ing, ful·fills also ful·fils 1. To bring into actuality; effect: fulfilled their promises. 2. 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 fore·see tr.v. fore·saw , fore·seen , fore·see·ing, fore·sees To see or know beforehand: foresaw the rapid increase in unemployment. 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 CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . 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.
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Sales, net $ 1,309,805 $ 491,074 $ 2,172,515 $ 924,274
Costs of sales 718,643 259,612 1,264,840 485,596
----------- ----------- ----------- -----------
Gross profit 591,162 231,462 907,675 438,678
Selling, general
and
administrative
expenses 1,445,003 590,876 2,484,909 1,282,657
Research and
development 96,282 80,473 168,884 160,585
Amortization of
intangibles 268,275 130,500 488,275 135,000
----------- ----------- ----------- -----------
Operating
expenses 1,809,560 801,849 3,142,068 1,578,242
----------- ----------- ----------- -----------
Operating Loss (1,218,398) (570,387) (2,234,393) (1,139,564)
Other income
(expense):
Interest income 17,242 24,471 44,138 37,425
Interest
expense (5,381) (6,850) (10,844) (14,049)
----------- ----------- ----------- -----------
Loss before
income taxes (1,206,537) (552,766) (2,201,099) (1,116,188)
Income taxes - - - -
----------- ----------- ----------- -----------
Net loss $(1,206,537) $ (552,766) $(2,201,099) $(1,116,188)
=========== =========== =========== ===========
Net loss per
share, basic
and diluted $ (0.09) $ (0.05) $ (0.17) $ (0.10)
----------- ----------- ----------- -----------
Weighted average
common shares
outstanding,
basic and
diluted 12,850,491 12,100,413 12,824,935 11,636,333
----------- ----------- ----------- -----------
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of
June 30, December 31,
2006 2005
(unaudited) (audited)
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,703,240 $ 3,953,482
Accounts receivable, net 692,724 164,726
Inventory 276,551 148,804
Prepaid expenses and other current
assets 275,404 225,114
------------ ------------
Total current assets 2,947,919 4,492,126
Restricted cash 240,000 240,000
Fixed assets, net 659,894 451,195
Other assets 159,948 229,050
Goodwill 1,396,734 711,785
Other intangible assets, net 5,005,828 4,208,962
------------ ------------
Total Assets $ 10,410,323 $ 10,333,118
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,505,606 $ 547,512
Accrued expenses & other current
liabilities 285,957 212,559
Current portion of long-term debt 52,458 50,891
Current portion of capitalized lease
obligations 34,817 33,374
------------ ------------
Total current liabilities 1,878,838 844,336
Long-term debt 140,667 167,309
Long-term capital lease obligations 67,155 84,931
------------ ------------
Total liabilities 2,086,660 1,096,576
Stockholders' equity:
Common stock, $.02 par value;
200,000,000 shares authorized,
12,897,929 shares issued and
outstanding (12,698,872 in 2005) 257,959 253,977
Additional paid-in capital 22,662,234 21,377,996
Accumulated deficit (14,596,530) (12,395,431)
------------ ------------
Total stockholders' equity 8,323,663 9,236,542
------------ ------------
Total liabilities and stockholders'
equity $ 10,410,323 $ 10,333,118
============ ============
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
2006 2005
(unaudited) (unaudited)
------------ ------------
Cash flows from operating activities:
Net loss $(2,201,099) $(1,116,188)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization expense 607,410 225,351
Stock based compensation 280,450 20,320
(Increase) decrease in assets:
Accounts receivable (362,012) 150,751
Inventory (57,600) (72,118)
Prepaid expenses and other assets (8,385) (103,435)
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses 224,030 4,199
----------- -----------
Net cash used by operating activities (1,517,206) (891,120)
Cash flows from investing activities:
Purchase of fixed assets (69,887) (67,182)
Acquisition (1,301,670) -
Purchase of other intangible assets (77,841) (122,306)
----------- -----------
Net cash used by investing activities (1,449,398) (189,488)
Cash flows from financing activities:
Repayment of long-term debt (25,075) (23,598)
Repayment of capital lease obligations (16,333) (15,005)
Issuance of common stock, net 757,770 2,243,854
----------- -----------
Net cash provided by financing activities 716,362 2,205,251
----------- -----------
Net increase (decrease) in cash and cash
equivalents (2,250,242) 1,124,643
Cash and cash equivalents beginning of
period 3,953,482 2,657,865
----------- -----------
Cash and cash equivalents end of period $ 1,703,240 $ 3,782,508
=========== ===========
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Reconciliation of GAAP and Non-GAAP Financial Measures
Adjusted EBITA
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net Loss $(1,206,537) (552,766) $(2,201,099) (1,116,188)
Add back:
Depreciation 62,488 50,512 119,135 90,351
Amortization of
Intangibles 268,275 130,500 488,275 135,000
Stock Based
Compensation 253,121 9,201 280,450 20,320
Interest Income (17,242) (24,471) (44,138) (37,425)
Interest Expense 5,381 6,850 10,844 14,049
Income Taxes - - - -
----------- ----------- ----------- -----------
Adjusted EBITDA $ (634,514) (380,174) $(1,346,533) (893,893)
----------- ----------- ----------- -----------
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