DSS DSS Inc

  

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

 

FORM 8-K

 

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): November 13, 2014

 

DOCUMENT SECURITY SYSTEMS, INC.

 

(Exact name of registrant as specified in its charter)

 

New York		001-32146		16-1229730
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)

 

First Federal Plaza, Suite 1525 28 East Main Street Rochester, NY		14614
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (585) 325-3610

 

Not Applicable

 

(Former name or former address, if changed since last report.)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

Item 2.02 Results of Operations and Financial Condition

 

On November 13, 2014, Document Security Systems, Inc. (“Company”) issued a press release disclosing the Company’s unaudited financial results for the third quarter ended September 30, 2014. A copy of the Company’s press release is attached as Exhibit 99.1 to this Current Report on Form 8-K.

 

The information in this Item 2.02 (including Exhibit 99.1) shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set forth by specific reference in such a filing.

 

Item 9.01 Financial Statements and Exhibits

 

(d)        Exhibits

 

Exhibit No.		Description
99.1		Document Security Systems, Inc. Press Release dated November 13, 2014.

  

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

		DOCUMENT SECURITY SYSTEMS, INC.
Dated: November 13, 2014		By:		/s/ Jeffrey Ronaldi
				Jeffrey Ronaldi
				Chief Executive Officer

 

  

Exhibit 99.1

 

 

 

Document Security Systems Reports Third Quarter of 2014 Financial Results

 

ROCHESTER, NY — November 13, 2014 — Document Security Systems, Inc. (NYSE MKT: DSS), (DSS), a leader in anti-counterfeiting and authentication solutions, reported results for the third quarter ended September 30, 2014.

 

Q3 2014 Financial Highlights

Revenue for the third quarter of 2014 increased 17% to a record $5.0 million from $4.3 million in the same year-ago quarter. The increase was primarily driven by a 22% increase in printed product revenue, which includes sales of packaging, printing and plastics, to $4.5 million from $3.7 million in the same year-ago period. Revenue growth was offset by an 18% decrease in technology sales, services and licensing revenues to $475,000 from $578,000 in the year-ago period.

 

Costs of goods and expenses totaled $18.7 million, an increase of 170% from $6.9 million in the same year-ago period. The increase was primarily due to a non-recurring and non-cash $11.8 million impairment charge, which is described below. Excluding the impairment charge, costs of goods and expenses for the third quarter of 2014 totaled $6.9 million, which was essentially flat from the same year-ago period.

 

Cost of goods sold, excluding depreciation and amortization, increased 24% to $3.1 million compared to $2.5 million in the same year-ago period. This increase was driven by a higher portion of packaging sales as a percentage of total printed products sales in the third quarter of 2014.

 

Adjusted EBITDA loss, a non-GAAP metric defined as earnings before interest, taxes, depreciation, amortization, and stock-based compensation, as well as other non-recurring items, totaled $362,000 compared to an adjusted EBITDA loss of $556,000 in the same year-ago period (see further discussion about the use of adjusted EBITDA, below). The improvement reflected the increase in sales and cost control initiatives.

 

Net loss totaled $8.1 million or $(0.19) per basic and diluted share, as compared to net income of $6.5 million or $0.15 per basic and diluted share in the third quarter of 2013. The increased net loss was primarily due to the $11.8 million impairment charge, of which $4.7 million was attributable to a 40% non-controlling interest held by another entity, related to DSS’ investment in the intellectual property of VirtualAgility. In September 2014, VirtualAgility received an adverse decision in its infringement suit against Salesforce.com, which triggered the impairment charge.

 

The net impairment expense, net of a $1.0 million tax benefit, of $6.1 million significantly impacted net loss for the third quarter of 2014. In addition, during the third quarter of 2013, a $9.2 million one-time deferred tax benefit was recorded, which significantly improved net income. Excluding the impairment charge in the third quarter of 2014 and the tax benefit in the year-ago quarter, net loss in the third quarter of 2014 decreased to $2.0 million from $2.7 million last year.

 

Management Commentary

“The third quarter and first nine months of 2014 marked strong revenue periods for DSS,” said Jeff Ronaldi, the company’s CEO. “This was driven by growth in our anti-counterfeiting and authentication solutions, as well as continued demand for our printed products. In fact, our focus on topline growth and cost controls in our printed products division resulted in a 22% increase in revenue and a 160% increase in adjusted EBITDA profitability for that division.

 

  

“We continue to execute on our long-term plan to build a more diversified, higher-growth, and profitable company. Along those lines, we continue to target cost savings companywide to further optimize our organization. This includes rationalizing our headcount and G&A expenses, while maintaining our current level of sales and marketing expenses in order to capitalize on the significant opportunities we’re pursuing with AuthentiGuard.”

 

“While the write-down of our VirtualAgility investment impacted our GAAP results in Q3, we recently achieved important milestones in our IP division, including the resumption of our Bascom Research case following a lengthy stay, as well as the scheduling of Markman hearings in three of our IP disputes,” added Ronaldi.

 

“Over the last two years, we have amassed a diversified patent portfolio that aligns with our technology roadmap and supports our operating divisions, product innovations and licensing programs. Our diversified strategy provides highly predictable and valuable revenue and cash flow streams from our core printed products division, while maximizing the potential returns on our IP investments through product commercialization and licensing.

 

“Altogether, our expectations for the future remain high and we see a widening pipeline of opportunities ahead. We plan to build on our progress in the fourth quarter and through 2015 to deliver revenue growth and consistent core financial performance while continuing to seek significant returns from our IP investments.”

 

Conference Call

DSS management will hold a conference call later today (November 13, 2014) to discuss these results. The company’s CEO, Jeff Ronaldi, and CFO, Phil Jones, will host the presentation, followed by a question and answer period.

 

Date: November 13, 2014

Time: 4:30 p.m. Eastern time (1:30 p.m. Pacific time)

U.S. dial-in: (877) 407-8031

International dial-in: (201) 689-8031

 

The conference call will be broadcast simultaneously and available for replay via the investor section of the company’s website at www.dsssecure.com.

 

Please call the conference telephone number 10 minutes prior to the start time. An operator will register your name and organization. If you have any difficulty connecting with the conference call, please contact Liolios Group at (949) 574-3860.

 

A replay of the call will be available after 7:30 p.m. Eastern time on the same day through November 27, 2014.

 

U.S. replay dial-in: (877) 660-6853

International replay dial-in: (201) 612-7415

Replay ID: 13594068

 

  

About Document Security Systems

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 technologies help ensure the authenticity of both digital and physical financial instruments, identification documents, sensitive publications, brand packaging and websites.

DSS continually invests in research and development to meet the ever-changing security needs of its clients and offers licensing of its patented technologies through its subsidiary, DSS Technology Management, Inc.

 

For more information on the AuthentiGuard Suite, please visit www.authentiguard.com. For more information on DSS and its subsidiaries, please visit www.DSSsecure.com. To 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 Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission, and as amended by our subsequent periodic reports. 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.

 

  

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended Sepember 30, 2014				Three Months Ended September 30, 2013				% change				Nine Months Ended Sepember 30, 2014				Nine Months Ended September 30, 2013				% change
Revenue
Printed products		$	4,489,000			$	3,672,000				22	%		$	12,060,000			$	10,773,000				12	%
Technology sales, services and licensing			475,000				578,000				-18	%			1,415,000			$	1,526,000				-7	%
Total revenue		$	4,964,000			$	4,250,000				17	%		$	13,475,000			$	12,299,000				10	%
Costs and expenses
Cost of goods sold, exclusive of depreciation and amortization		$	3,111,000			$	2,508,000				24	%		$	8,506,000			$	7,257,000				17	%
Sales, general and administrative compensation			1,168,000				1,204,000				-3	%			3,613,000				3,560,000				1	%
Depreciation and amortization			1,322,000				1,207,000				10	%			3,923,000				1,661,000				136	%
Professional fees			388,000				597,000				-35	%			1,430,000				1,613,000				-11	%
Stock based compensation			265,000				291,000				-9	%			1,105,000				1,580,000				-30	%
Sales and marketing			124,000				122,000				2	%			425,000				330,000				29	%
Rent and utilities			201,000				175,000				15	%			567,000				487,000				16	%
Other operating expenses			216,000				236,000				-8	%			668,000				681,000				-2	%
Research and development			118,000				54,000				119	%			344,000				175,000				97	%
Impairment of intangible assets and investments			11,750,000				517,000				2173	%			11,750,000				517,000				2173	%
Total costs and expenses		$	18,663,000			$	6,911,000				170	%		$	32,331,000			$	17,861,000				81	%
cash based		$	5,326,000			$	4,896,000				9	%		$	15,553,000			$	14,103,000				10	%
Operating loss			(13,699,000	)			(2,661,000	)			415	%			(18,856,000	)			(5,562,000	)			239	%
Other expenses
Interest expense			(89,000	)			(65,000	)			37	%			(252,000	)			(158,000	)			59	%
Amortizaton of note discount and loss on debt extinguishment			-				(17,000	)			-100	%			(52,000	)			(71,000	)			-27	%
Foreign currency translation gain			19,000				-				0	%			2,000				-				0	%
Other expense, net			(70,000	)			(82,000	)			-15	%			(302,000	)			(229,000	)			32	%
Loss before income taxes			(13,769,000	)			(2,743,000	)			402	%			(19,158,000	)			(5,791,000	)			231	%
Deferred tax benefit			(1,000,000	)			(9,205,000	)			-89	%			(990,000	)			(9,196,000	)			-89	%
Net income (loss) including noncontrolling interest			(12,769,000	)			6,462,000				-298	%			(18,168,000	)			3,405,000				-634	%
Less: loss attributable to noncontrolling interest			4,700,000				-				0	%			4,700,000				-				0	%
Net income (loss) to common shareholders		$	(8,069,000	)		$	6,462,000				-225	%		$	(13,468,000	)		$	3,405,000				-496	%
Earnings per share:
Basic		$	(0.19	)		$	0.15				-227	%		$	(0.32	)		$	0.12				-367	%
Diluted		$	(0.19	)		$	0.15				-227	%		$	(0.32	)		$	0.12				-367	%
Shares used in computing earnings per share:
Basic			42,213,654				41,911,569				1	%			42,060,015				28,444,037				48	%
Diluted			42,213,654				41,914,855				1	%			42,060,015				28,462,741				48	%

 

  

DOCUMENT SECURITY SYSTEMS, INC.  AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

As of

 

		September 30, 2014				December 31, 2013
		(Unaudited)
ASSETS
Current assets:
Cash		$	1,899,977			$	1,977,031
Restricted cash			391,293				500,000
Accounts receivable, net of allowance of $68,000 ($60,000- 2013)			1,855,196				2,149,123
Inventory			1,165,923				834,979
Prepaid expenses and other current assets			578,466				403,107
Deferred tax asset, net			166,491				223,323
Total current assets			6,057,346				6,087,563
Property, plant and equipment, net			5,166,713				5,157,852
Investments and other assets			774,702				11,448,008
Goodwill			15,046,197				15,046,197
Other intangible assets, net			27,343,873				29,602,591
Total assets		$	54,388,831			$	67,342,211
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	1,478,822			$	1,421,765
Accrued expenses and other current liabilities			1,691,972				1,455,629
Revolving lines of credit			-				158,087
Short-term debt			850,000				824,857
Current portion of long-term debt, net			464,066				613,488
Total current liabilities			4,484,860				4,473,826
Long-term debt, net			7,028,199				3,087,358
Other long-term liabilities			502,828				27,566
Deferred tax liability, net			317,522				1,364,447
Commitments and contingencies
Stockholders' equity
Common stock, $.02 par value; 200,000,000 shares authorized, 42,213,654 shares issued and outstanding
(49,411,486 on December 31, 2013)			844,273				988,230
Additional paid-in capital			99,584,712				97,790,426
Accumulated other comprehensive loss			(43,828	)			(27,566	)
Accumulated deficit			(58,329,735	)			(44,862,076	)
Non-controlling interest in subsidiary			-				4,500,000
Total stockholders' equity			42,055,422				58,389,014
Total liabilities and stockholders' equity		$	54,388,831			$	67,342,211

 

  

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30,

(Unaudited)

 

		2014				2013
Cash flows from operating activities:
Net income (loss) including noncontrolling interest		$	(18,167,659	)		$	3,404,772
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization			3,923,220				1,660,948
Stock based compensation			1,105,395				1,579,641
Paid in-kind interest			30,000				-
Amortization of note discount			30,010				44,937
Loss on extinguishment of debt			-				26,252
Impairment of intangible assets and investments inclusive of nontrolling interest			11,749,528				516,726
Change in deferred tax provision			(990,093	)			(9,196,014	)
Foreign currency translation gain			(2,305	)			-
Decrease (increase) in assets:
Accounts receivable			293,927				389,521
Inventory			(330,944	)			(282,842	)
Prepaid expenses and other assets			(210,504	)			(188,203	)
Restricted cash			108,707				-
Increase in liabilities:
Accounts payable			48,669				72,847
Accrued expenses and other liabilities			831,239				50,942
Net cash used by operating activities			(1,580,810	)			(1,920,473	)
Cash flows from investing activities:
Purchase of equipment and building improvements			(257,764	)			(321,230	)
Acquisition of business			-				6,560,890
Purchase of investments			(750,000	)			(250,000	)
Purchase of intangible assets			(1,216,063	)			(2,557,825	)
Net cash (used) provided by investing activities			(2,223,827	)			3,431,835
Cash flows from financing activities:
Net payments on revolving lines of credit			(158,087	)			23,660
Payments of long-term debt			(457,303	)			(233,228	)
Borrowings of long-term debt			4,041,000				-
Issuances of common stock, net of issuance costs			301,973				48,767
Net cash provided (used) by financing activities			3,727,583				(160,801	)
Net (decrease) increase in cash			(77,054	)			1,350,561
Cash beginning of period			1,977,031				1,887,163
Cash end of period		$	1,899,977			$	3,237,724

 

  

About the Presentation of Adjusted EBITDA

The Company uses Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by the Company by adding back to net income (loss) interest, income taxes, depreciation and amortization expense, and impairment charges as further adjusted to add back stock-based compensation expense and non-recurring items, such as costs related to the Company’s merger with Lexington Technology Group, and impairments of investments and intangible assets. 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, stock-based compensation and impairment charges, 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 and non-recurring items such as costs related to the Company’s merger with Lexington Technology Group, all of which impact the Company's profitability and operating cash flows, as well as depreciation, amortization, impairment charges 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 income and 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 September 30												Nine Months Ended September 30
		2014				2013				% change				2014				2013				% change
		(unaudited)				(unaudited)								(unaudited)				(unaudited)
Net Loss		$	(8,069,000	)		$	6,462,000				-225	%		$	(13,468,000	)		$	3,405,000				-496	%
Add back:
Depreciation & Amortization			1,322,000				1,207,000				10	%			3,923,000				1,661,000				136	%
Stock based compensation			265,000				291,000				-9	%			1,105,000				1,580,000				-30	%
Interest expense			89,000				65,000				37	%			253,000				158,000				60	%
Amortization of note discount and loss on debt extinguishment			-				17,000				-100	%			52,000				71,000				-27	%
Income Taxes			(1,000,000	)			(9,205,000	)			-89	%			(990,000	)			(9,196,000	)			-89	%
Foreign currency translation adjustments			(19,000	)			-				100	%			(2,000	)			-				100	%
Impairment of intangible assets and investments, net of noncontrolling interests			7,050,000				517,000				1264	%			7,050,000				517,000				1264	%
Professional fees and other costs incurred in conjunction with the Merger with Lexington Technology Group			-				90,000				-100	%			-				677,000				-100	%
Adjusted EBITDA			(362,000	)			(556,000	)			35	%			(2,077,000	)			(1,127,000	)			-84	%
Adjusted EBITDA, by group (unaudited)
Printed Products		$	603,000			$	232,000				160	%		$	1,355,000			$	1,010,000				34	%
Technology Management			(424,000	)			(288,000	)			47	%			(1,285,000	)			(622,000	)			107	%
Corporate, less Merger costs in 2013 periods			(541,000	)			(500,000	)			8	%			(2,147,000	)			(1,515,000	)			42	%
			(362,000	)			(556,000	)			35	%			(2,077,000	)			(1,127,000	)			-84	%