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Document Security Systems Reports 24% Revenue Growth in Q3 '07

Thursday, November 15, 2007

Press release from the issuing company

ROCHESTER, NY, November 14, 2007 - Document Security Systems, Inc., a leader in patented protection against counterfeiting and unauthorized copying, scanning and photo imaging, today reported results for the third quarter and nine-month period ended September 30, 2007.
Revenue from continuing operations for the quarter was $1.4 million, up 24% year-over-year and up 9% sequentially compared to the $1.1 million reported for the third quarter of 2006 and $1.3 million for the second quarter of 2007. Driving the growth was increased sales of security printing and increases in royalty revenue from the licensing of the Company's patented technology. Sales of security printing, after factoring in discontinued operations, increased 31% from the prior year's quarter which reflected increased demand driven by shipments on a foreign driver's license project through its P3 subsidiary, the Company's plastic printing unit, along with increases in sales of its security paper products.
Mr. Patrick White, Chairman and CEO of Document Security Systems, commented, "The tremendous progress we have made in creating and enlarging our sales channel contributed to a solid increase in sales and continues to deliver an increasing pipeline of opportunities. In the last year, we have doubled the size of our internal, direct sales force and expanded the number of licensees and distributors. The additional 'feet on the street' are just beginning to translate into revenue and the size, quantity and quality of qualified opportunities we are pursuing is substantially improved."
Mr. White continued, "To be clear, we are focused on accelerating our overall commercialization effort and the current duration of our typical sales cycle, while frustrating, is not atypical of company working in such senior levels of an enterprise or government. These potential customers and the partners who target them are recognizing the compelling benefits of our technology and we're deep within the sales and marketing cycle in several key markets. By way of example, we recognized a significant increase in orders for secure prescription paper based on recent U.S. Federal legislation originally slated for October 1, 2007 (re-scheduled to April 1, 2008) that requires secure paper to be used in prescriptions in order to receive Medicaid reimbursements."
"In this case, the change in legislation provided the 'tipping point' for our partner and galvanized their sales efforts," added Mr. White. "We are focused on identifying these catalysts throughout our key markets and educating our direct and indirect sales force to accelerate sales and reduce the duration of the sales cycle. This is not a short-term initiative, and is a challenging endeavor, but it is one we are well-prepared for. Moreover, the improvements in our channels to market completed during the last year give us many more opportunities for success than we enjoyed just one year ago."
THIRD QUARTER HIGHLIGHTS
- Announced that Boise Cascade has selected DSS to develop new secure, tamper-proof Medicaid prescription paper for prescription pads and related paperwork. The offering exceeds standards recently set forth in Medicaid legislation regarding paper-based anti-copy/anti-scan security features required in Medicaid papers starting in October 2007 (re-scheduled to April 1, 2008). DSS will work to provide anti-counterfeiting technology enhancements to its current security paper product, which is sold through Boise Cascade under the brand name, Boise BEWARE.
- Introduced, with its Premier Partner, The Ergonomic Group, Inc., a strategic expansion of AuthentiGuard On-Demand that allows variable data printing of AuthentiGuard Prism technologies on high-end digital printing presses, which hide a unique anti-counterfeiting and brand protection marker embedded in a file. This second product in our On-Demand suite targets large enterprise customers in the lottery industry and commercial printers to produce secure variable data documents, significantly expanding the overall opportunity for On-Demand.
- Continued growth of direct sales force including the addition of Terry Carlisano, Sales Vice President to focus on increasing DSS' market penetration in key verticals, developing comprehensive national and international sales strategies, and creating new opportunities specifically for DSS' AuthentiGuard On-Demand product suite.
- Announced second delay in French Patent Validity Decision to November, 14, 2007. And received notice today of third delay to January 9, 2008.
- Launched AuthentiGuard On-Demand in New York City on September 17, 2007.
- As entry into the credentialing market with key distributors, received wins proving the acceptance and viability of our technologies through our P3 distributor base including the implementation of AuthentiGuard technologies on Major League Baseball and The U.S. Poker Tour credentials.
OPERATING RESULTS
Gross profit from continuing operations for the third quarter of 2007 increased 27% to $687,000 compared with $540,000 in the third quarter of 2006. Gross profit margin increased to 49% compared with 47% in the third quarter of 2006.
Operating expenses for continuing operations for the third quarter were $2.6 million compared with $1.7 million in 2006, an increase of 48%. The cost increase generally reflects increases in executive management, and sales and operations personnel integral to the company's sales growth strategy, a 74% in increase intangible asset amortization expense, increases in rental and related costs associated with the relocation and expansion of the Company's plastic printing operations, and increases in professional fees associated with the Company's Sarbanes Oxley related compliance efforts.
The third quarter 2007 Adjusted EBITDA was a loss of $1.0 million, or $(0.08) per basic and diluted share, compared with a loss of $576,000, or $(0.04) per basic and diluted share, for the comparable period in 2006, an increased loss per share of 78%. (See Reconciliation of GAAP to Non-GAAP Financial Measures table).
In the third quarter of 2007, the net loss was $1.9 million, or $(0.14) per basic and diluted share based on 13.6 million fully diluted shares, compared with a net loss of $1.2 million or $(0.09) per basic and diluted share based on 12.9 million fully diluted shares, for the third quarter of 2006.
"We achieved a 24% increase in sales compared to last year despite a much longer sales cycle then we anticipated in some of our key product areas," added Peter Ettinger, the Company's President. "The On-Demand offering has been well-received in the marketplace and high-level discussions are ongoing with potential customers. In addition, we completed sales training with 53 representatives at The Ergonomic Group during October 2007, and early indications demonstrate improved traction as a result. In addition, we booked our initial order from large German-based auto manufacturer, the first order for our Stuttgart sales office."
For the first nine months of 2007, the Company reported revenue from continuing operations of $4.3 million, a 44.0% increase compared to revenue of $3.0 million for the first nine months of 2006. Revenues increased in all major product categories, including increases in royalty revenue from the licensing of the Company's patented technology, an increase in sales of security products and documents, including initial shipments on a foreign driver license project and increased demand for the Company's security paper and for initial sales of the Company's On-Demand product which was introduced in early 2007. In addition, the security printing revenue increase reflects the effect of the Company's acquisition in February 2006 of Plastic Printing Professionals.
Gross profit from continuing operations was $2.3 million, an increase of 73% compared to gross profit of $1.3 million for the first nine months of last year. Gross profit margin increased to 54% compared with 45% in the first nine months of 2006. Operating expenses for continuing operations for the period were $7.1 million compared with $4.7 million in 2006, an increase of 52%, including a 149% increase in sales and marketing expenses related to the expansion of the Company's internal (direct) sales force, a 64% increase in stock-based payments, a 65% increase in amortization of intangibles, and a 19% increase in research and development expenses as the Company continues to focus on innovation. The Adjusted EBITDA for the nine months of 2007 was a loss of $2.5 million compared with a loss of $1.9 million for the comparable period in 2006, an increase of 30%. (See Reconciliation of GAAP to Non-GAAP Financial Measures table). For the first nine months of 2007, the net loss was $4.8 million, or $(0.35) per basic and diluted share (based on 13.6 million fully diluted shares), compared with a net loss of $3.4 million or $(0.26) per basic and diluted share (based on 12.9 million fully diluted shares), for the first nine months of 2006.
The Company ended the quarter with $1.4 million in cash and $352,000 in working capital. The decrease in the cash position is primarily due to the payment of legal fees associated with its patent applications, patent defense costs and use of cash for the Company's expansion of its plastic printing facility, as well as cash used for operations including the move of its P3 operations to a larger facility. As of September 30, 2007, depending on product mix, the Company believes that it will need to reach an annual revenue level of approximately $9.0 - $12.5 million based on its product mix of revenue in order to achieve positive operating cash flow.
Total stockholders' equity decreased 15.1% to $9.5 million from $11.2 million as of December 31, 2006.
Teleconference
The Company invites you to third quarter earnings teleconference and webcast will occur on November 14, 2007 at 4:30 p.m. Eastern Time. To access the call you may dial, toll free 1-866-225-8754 and toll/international 1-480-629-9562.
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 November 21, 2007 at midnight Eastern Time by dialing, toll free 1-800-406-7325, and toll/international 1-303-590-3030 and typing in the pin number 3797732. The archive will be made available on the DSS website for approximately 60 days.

 

 

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