DSS DSS Inc

DSS (NYSE American: DSS) (the “Company”), a leader in anti-counterfeit, authentication, and diversion protection technologies whose products and solutions are used by governments, corporations and financial institutions to defeat fraud and to help ensure product authenticity, today announced its financial results for the third quarter ended September 30, 2019.

Third Quarter 2019 Business Highlights and Recent Developments

• Closed private placement of common shares funded entirely by DSS Chairman of the Board who purchased the full private placement offering of 6,000,000 shares of common stock at an above market rate of $0.3037 per share for gross proceeds to the company of $1,822,200
• Retained CORE IR, a leading investor relations, public relations and strategic advisory firm, to assist the Company with investor relations, public relations and shareholder communications services
• Announced newly established "DSS Certified Printer Program" for qualified printers and packagers with DSS portfolio of physical security and digital anti-counterfeiting technologies
• Added two independent directors, Mr. José Escudero and Mr. Samson Lee to its Board of Directors
• Released blockchain tracking and authentication technology "Sentinel" to combat unauthorized sellers, map violators and retail arbitrage within Amazon Marketplace
• Appointed Jason Grady as Chief Operating Officer
• Priced $5.6 million underwritten public offering of common stock
• Appointed William Wu to DSS Board of Directors as an independent director
• Expanded AuthentiGuard customer engagement

“We are very encouraged by the 61% increase in technology sales, services and licensing revenue during the quarter. This was achieved through significant increases in sales of our AuthentiGuard product and associated brand protection technologies. We view this accomplishment as a direct result of our concerted, successful efforts to drive market penetration and conversion of the pent-up customer demand for the associated anti-counterfeiting and brand protection technologies, which I referenced in our last quarterly results update,” stated Frank D. Heuszel, CEO of DSS.

“Further, we continue to identify potential operational and cost savings while simultaneously aligning resources to support and build a foundation for strategic growth opportunities. To that end, we are hard at work implementing our new strategic business plan, based upon five foundational tenets: Revive the Company’s core businesses; Substantial reduction of corporate overhead; Reduce cash burn – Since last spring, we have reduced the Company’s monthly cash burn by more than $160,000; Exit unprofitable business lines; and Implement business diversification initiatives.

“We have further strengthened our balance sheet with the capital gained from the recent closing of our private placement of common shares, where our Chairman, Mr. Heng Fai Ambrose Chan, purchased the entirety of the offering above market price. Which is a testament to his commitment and support for our expansive turnaround strategy. We are optimistic that our investment in sales and marketing efforts is expanding our customer reach and look forward to continuing to execute on our strategic vision,” concluded Mr. Heuszel.

Third Quarter 2019 Financial Highlights

• Revenues for the nine months ended September 30, 2019 and September 30, 2018 remained relatively flat at $12.5 million and $12.6 million respectively. Printed products revenues for the nine months ended September 30, 2019 were down by 4% as compared to the same period in 2018, primarily due to a decline in vinyl card sales and commercial printing sales, while Technology sales, services and licensing revenue increased by 26%, primarily resulting from increased AuthentiGuard sales. 
• For the three months ended September 30, 2019, total revenue declined 14% as compared to the three months ended September 30, 2018. Revenues from the sale of printed products decreased 20% during the three months ended September 30, 2019, as compared to the same period in 2018, primarily due to significant decreased packaging and technology card sales. Technology sales, services and licensing revenue increased 61% during the three months ended September 30, 2019 as compared to the same period in 2018, primarily due to a significant increase in AuthentiGuard sales. 
• Costs of goods sold decreased by 13% during the three months ended September 30, 2019 as compared to the same period in 2018. This decrease is attributed to both the decline in revenue as well as cost controlling measures put in regarding external warehousing, inter-warehouse shipments, and labor at the DSS Printing and Packaging Group as well as the DSS Plastics Group. For the nine months ended September 30, 2019, costs of goods sold increased by 5% as compared to the same period in 2018, resulting from the increase in paper costs, freight costs, and machine maintenance at the Company’s two production facilities. 
• For the three months ended September 30, 2019, the Company recorded net loss of approximately $1.2 million, as compared to a net loss of $413,000 during the same period in 2018. During the nine months ended September 30, 2019, the company recorded net loss of $2.7 million, as compared to net income of $1.9 million for the nine months ended September 30, 2018. The increases in operating losses incurred during the three and nine months ended September 30, 2019 as compared to the same periods in 2018 primarily reflect the combined impact of a decline in revenues in the printed products group coupled with an increases in professional fees, stock based compensation, costs associated with the Company’s expansion into Asia, and the impact of the net gain from extinguishment of liabilities of approximately $3.5 million, which occurred during the second quarter of 2018. 
• The Company recorded an Adjusted EBITDA1 loss of ($1,231,000) for the nine months ended September 30, 2019 as compared to positive Adjusted EBITDA of $3,115,000 for the nine months ended September 30, 2018. The decline in Adjusted EBITDA was mostly driven by increased operating costs for the Company  and the impact of the $3.5M gain on extinguishment of debt recorded in Q2 2018.

A full analysis of results for the quarter ended September 30, 2019 is available in the Company’s Form 10-Q which was filed on November 13, 2019 and is available on the Company’s website at www.dsssecure.com or through the Securities and Exchange Commission’s Edgar database at www.sec.gov. 

ABOUT DOCUMENT SECURITY SYSTEMS, INC.For over 16 years, Document Security Systems, Inc. (“DSS”) has protected corporations, financial institutions, and governments from sophisticated and costly fraud. DSS' innovative anti-counterfeit, authentication, and brand protection solutions are deployed to prevent attacks which threaten products, digital presence, financial instruments, and identification. AuthentiGuard®, the Company's flagship product, provides authentication capability through a smartphone application so businesses can empower a wide range of employees, supply chain personnel, and consumers to track their brands and verify authenticity.  For more information on DSS and its integrated operating divisions, visit DSS at www.dsssecure.com, Premier Printing Corporation at  www.premiercustompkg.com and DSS Plastics Group at www.dsssecure.com.

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Contact Information:Investor Inquiries: ir@dsssecure.comBret ShapiroCoreIR516 222 2560

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, our ability to continue the growth in sales of AuthentiGuard and manage our expenses, as well as those risks disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed  with the Securities and Exchange Commission on March 15, 2019.  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 Balance Sheets
As of
(unaudited)
	September 30, 2019				December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	3,916,332			$	2,447,985
Accounts receivable, net of $50,000 allowance for doubtful accounts		2,127,727				2,217,877
Inventory		1,651,884				1,563,593
Prepaid expenses and other current assets		470,047				285,580
Total current assets		8,165,990				6,515,035
Property, plant and equipment, net		5,122,138				5,014,494
Investment		324,930				324,930
Other assets		90,319				90,319
Right-of-use assets		1,344,601				-
Goodwill		2,453,597				2,453,597
Other intangible assets, net		1,048,503				881,411
Total assets	$	18,550,078			$	15,279,786
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,341,003			$	1,347,491
Accrued expenses and deferred revenue		779,638				1,106,346
Other current liabilities		935,404				2,255,942
Current portion of long-term debt, net		467,382				713,427
Current portion of lease liability		361,713				-
Total current liabilities		3,885,140				5,423,206
Long-term debt, net		2,361,696				1,721,936
Lease liability		1,007,251				-
Other long-term liabilities		311,986				391,325
Deferred tax liability, net		168,986				168,986
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $.02 par value; 200,000,000 shares authorized, 30,180,626 shares issued and outstanding (17,425,858 on December 31, 2018)		603,613				348,517
Additional paid-in capital		113,335,147				107,624,666
Accumulated other comprehensive loss		-				(7,052	)
Accumulated deficit		(103,123,741	)			(100,391,798	)
Total stockholders' equity		10,815,019				7,574,333
Total liabilities and stockholders' equity	$	18,550,078			$	15,279,786

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)
	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2019				2018				2019				2018
Revenue:
Printed products	$	3,035,219			$	3,783,779			$	11,024,464			$	11,432,038
Technology sales, services and licensing		497,700				310,511				1,424,204				1,126,867
Total revenue		3,532,919				4,094,290				12,448,668				12,558,905
Costs and expenses:
Cost of revenue, exclusive of depreciation and amortization		2,217,822				2,551,782				8,275,046				7,889,844
Selling, general and administrative (including stock based compensation)		2,094,578				1,610,831				5,736,078				5,195,495
Depreciation and amortization		420,063				310,330				1,051,211				1,002,813
Total costs and expenses		4,732,463				4,472,943				15,062,335				14,088,152
Operating loss		(1,199,544	)			(378,653	)			(2,613,667	)			(1,529,247	)
Other income (expense):
Interest income		6,983				2,308				11,175				8,415
Interest expense		(57,759	)			(29,554	)			(127,900	)			(112,460	)
Amortization of deferred financing costs and debt discount		(351	)			(6,168	)			(1,551	)			(40,067	)
Gain on extinguishment of liabilities, net		-				-				-				3,532,659
Income (loss) before income taxes		(1,250,671	)			(412,067	)			(2,731,943	)			1,859,300
Income tax expense (benefit)		-				-				-				-
Net income (loss)	$	(1,250,671	)		$	(412,067	)		$	(2,731,943	)		$	1,859,300
Other comprehensive income (loss):
Foreign currency translation adjustment		-				(5,088	)			-				(5,088.00	)
Interest rate swap gain (loss)		883				-				(15,431	)			-
Settlement of interest rate swap		21,600				(4,458	)			22,483				17,394
Comprehensive income (loss):	$	(1,228,188	)		$	(421,613	)		$	(2,724,891	)		$	1,871,606
Earnings (loss) per common share:
Basic	$	(0.05	)		$	(0.02	)		$	(0.12	)		$	0.11
Diluted	$	(0.05	)		$	(0.02	)		$	(0.12	)		$	0.11

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(unaudited)
	2019					2018
Cash flows from operating activities:
Net income (loss)	$	(2,731,943	)		$	1,859,300
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization		1,051,211				1,002,813
Stock based compensation		331,264				106,617
Paid in-kind interest		-				12,000
Amortization of deferred financing costs and debt discount		351				40,067
Gain on extinguishment of liabilities, net		-				(3,532,659	)
Decrease (increase) in assets:
Accounts receivable		90,150				107,708
Inventory		(88,291	)			(291,329	)
Prepaid expenses and other current assets		(160,104	)			(55,374	)
Increase (decrease) in liabilities:
Accounts payable		(6,485	)			762,404
Accrued expenses		(318,741	)			(394,170	)
Other liabilities		(1,452,876	)			(1,141,929	)
Net cash used by operating activities		(3,285,464	)			(1,524,552	)
Cash flows from investing activities:
Purchase of property, plant and equipment		(823,348	)			(526,251	)
Purchase of intangible assets		(357,816	)			(45,471	)
Net cash used by investing activities		(1,181,164	)			(571,722	)
Cash flows from financing activities:
Payments of long-term debt		(194,386	)			(966,077	)
Borrowing from equipment line of credit		587,750				87,703
Borrowings from convertible note		500,000				-
Issuances of common stock, net of issuance costs		5,041,611				300,000
Receipt of subscription receivable, net of issuance costs		-				288,000
Net cash provided (used) by financing activities		5,934,975				(290,374	)
Net increase (decrease) in cash and cash equivalents		1,468,347				(2,386,648	)
Cash and cash equivalents at beginning of period		2,447,985				4,444,628
Cash and cash equivalents at end of period	$	3,916,332			$	2,057,980

	Three Months Ended September 30,									Nine Months Ended September 30,
		2019		2018			% change				2019		2018		% change
	(unaudited)			(unaudited)						(unaudited)			(unaudited)
Net income (loss):	$	(1,251,000	)	$	(413,000	)	203	%		$	(2,732,000	)	$	1,859,000	-247	%
Add backs:
Depreciation & amortization		420,000			310,000		35	%			1,051,000			1,003,000	5	%
Stock based compensation		273,000			20,000		1265	%			331,000			107,000	209	%
Interest, net		51,000			27,000		89	%			117,000			104,000	13	%
Amortization of deferred financing costs and debt discount		-			6,000		-100	%			2,000			40,000	-95	%
Adjusted EBITDA	$	(507,000	)	$	(50,000	)	914	%		$	(1,231,000	)	$	3,113,000	-140	%

1 ADJUSTED EBITDAThe Company uses Adjusted EBITDA as a non-GAAP financial performance measurement. The Company calculates Adjusted EBITDA 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 nonrecurring items. 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 the Company’s 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 establish internal budgets and goals, and evaluate performance of its business units and management, and evaluate potential acquisitions. 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 goodwill impairments, each 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 income (loss) to Adjusted EBITDA income (loss).