DSS DSS Inc

Document Security Systems, Inc. (NYSE American: DSS), (“DSS”), 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, 2018.

“We continue to migrate out of the managed services business and invest in our AuthentiGuard anti-counterfeiting and brand protection technologies,” stated Jeff Ronaldi, CEO of DSS.  “The response from our latest version of the AuthentiGuard product has been very positive in the market and is reflected in our robust pipeline across several industry verticals.  We will continue to invest in AuthentiGuard, and its diverse applications, and fully expect to have our efforts reflected with an increase in our customer base and revenue over the first half of 2019,” added Ronaldi.

Third Quarter 2018 Financial Highlights

• Revenue for the three months ended September 30, 2018 decreased 3% to $4.1 million from $4.2 million during the three months ended September 30, 2017.  Printed Products revenue was relatively flat at approximately $3.8 million, while Technology sales, servicing and licensing revenues decreased by 28%, as compared to the same period in 2017.  Revenues for the nine months ended September 30, 2018 decreased from $12.8 million to $12.6 million, representing a decline of 2%.  Printed products revenues for the nine months ended September 30, 2018 were down by 1% as compared to the same period in 2017, primarily due to a decline in sales for commercial printing and technology integrated plastic cards and badges, while Technology sales, services and licensing revenue decreased by 12%, primarily resulting from a decline in general IT services and royalty licensing revenues. 
• Costs and expenses for the three months ended September 30, 2018 totaled $4.5 million, an increase of 2% from $4.4 million during the same period of 2017, primarily due to an increase in production equipment depreciation and outside services used by our packaging division, and a general increase in material costs as a percentage of the printed products groups’ total direct costs. Total costs and expenses for the nine months ended September 30, 2018, were $14.1 million, an increase of 6% from $13.3 million for the nine months ended September 30, 2017 for the three months ended September 30, 2018.  
• Net loss during the third quarter of 2018 was $412,000 ($0.02 per share), compared to a net loss of $277,000 ($0.02 per share) during the third quarter of 2017. During the nine months ended September 30, 2018 the company recorded net income of $1.9 million ($0.11 per share), compared to a net loss of $726,000 ($0.05 per share) during the same period in 2017. The over 356% increase is primarily due to the impact of net gain from extinguishment of liabilities of $3.5 million which occurred during the second quarter of 2018, offset by operating losses incurred during the respective periods. The increases in operating losses incurred during the three and nine months ended September 30, 2018 as compared to the same periods ended September 30, 2017 primarily reflect the combined impact of a decline in revenues, especially technology based revenues which carry higher gross margins and an increase in professional fees and an increase in costs associated with the Company’s expansion into Asia by opening an office in Hong Kong on January 1, 2018. 
• The company recorded an Adjusted EBITDA1 loss of $49,000 for the third quarter of 2018, as compared to positive Adjusted EBITDA of $191,000 for the third quarter of 2017. Adjusted EBITDA for the nine months ended September 30, 2018 was $3.1 million, an increase of 281% from $817,000 for the nine months ended September 30, 2017. The significant increase in Adjusted EBITDA was primarily due to the impact of the net gain recognized on the extinguishment of liabilities, which occurred during the second quarter of 2018.   

ABOUT DOCUMENT SECURITY SYSTEMS, INC.For over 15 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 subsidiaries, visit www.dsssecure.com, http://dssplasticsgroup.com and www.premiercustompkg.com.

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Contact Information:Investor Relations Document Security Systems, Inc.Tel: (585) 232-5440Email: ir@dsssecure.com

FORWARD-LOOKING STATEMENTSForward-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, 2017, filed  with the Securities and Exchange Commission on March 6, 2018.  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
Condensed Consolidated Statements of Operations
(Unaudited)
	Three Months Ended September 30, 2018			Three Months Ended September 30, 2017			% change			Nine Months Ended September 30, 2018			Nine Months Ended September 30, 2017			% change
Revenue
Printed products	$	3,784,000		$	3,767,000		0	%		$	11,432,000		$	11,553,000		-1	%
Technology sales, services and licensing		310,000			432,000		-28	%			1,127,000			1,276,000		-12	%
Total revenue	$	4,094,000		$	4,199,000		-3	%		$	12,559,000		$	12,829,000		-2	%
Costs and expenses
Costs of goods sold, exclusive of depreciation and amortization	$	2,552,000		$	2,401,000		6	%		$	7,890,000		$	7,380,000		7	%
Sales, general and administrative compensation		795,000			920,000		-14	%			2,616,000			2,659,000		-2	%
Depreciation and amortization		310,000			352,000		-12	%			1,003,000			1,042,000		-4	%
Professional fees		243,000			198,000		23	%			828,000			556,000		49	%
Stock based compensation		20,000			12,000		67	%			107,000			203,000		-47	%
Sales and marketing		137,000			117,000		17	%			351,000			292,000		20	%
Rent and utilities		173,000			167,000		4	%			488,000			462,000		6	%
Other operating expenses		240,000			205,000		18	%			698,000			561,000		24	%
Research and development		2,000			-		N/A				107,000			102,000		5	%
Total costs and expenses	$	4,472,000		$	4,372,000		2	%		$	14,088,000		$	13,257,000		6	%
Operating loss		(378,000	)		(173,000	)	119	%			(1,529,000	)		(428,000	)	257	%
Other income and expense
Interest income	$	2,000		$	-		NA			$	8,000		$	-		NA
Interest expense		(30,000	)		(58,000	)	-48	%			(112,000	)		(171,000	)	-35	%
Amortization of deferred financing  costs and debt discount		(6,000	)		(41,000	)	-85	%			(40,000	)		(113,000	)	-65	%
Gain on extinguishment of liabilities, net		-			-		0	%			3,533,000			-		N/A
Total other income and expense	$	(34,000	)	$	(99,000	)	-66	%		$	3,389,000		$	(284,000	)	-1293	%
Income (loss) before income taxes		(412,000	)		(272,000	)	52	%			1,860,000			(712,000	)	-361	%
Income tax expense		-			5,000		-100	%			-			14,000		-100	%
Net income (loss)	$	(412,000	)	$	(277,000	)	49	%		$	1,860,000		$	(726,000	)	-356	%
Income (loss) per common share:
Basic	$	(0.02	)	$	(0.02	)	0	%		$	0.11		$	(0.05	)	-320	%
Diluted	$	(0.02	)	$	(0.02	)	0	%		$	0.11		$	(0.05	)	-320	%
Shares used in computing income (loss) per common share:
Basic		16,767,992			14,087,849		19	%			16,662,907			13,793,946		21	%
Diluted		16,767,992			14,087,849		19	%			16,930,812			13,793,946		23	%

DOCUMENT SECURITY SYSTEMS, INC.  AND SUBSIDIARIES
Consolidated Balance Sheets
As of
		September 30, 2018					December 31, 2017
ASSETS			(unaudited)
Current assets:
	Cash	$	2,051,800				$	4,188,623
	Restricted cash		6,180					256,005
	Accounts receivable, net of $50,000 allowance for doubtful accounts		1,917,576					2,025,284
	Inventory		1,942,575					1,651,246
	Prepaid expenses and other current assets		309,755					261,324
Total current assets			6,227,886					8,382,482
Property, plant and equipment, net			4,736,113					4,805,640
Investment			484,930					484,930
Other assets			90,320					83,376
Goodwill			2,453,597					2,453,597
Other intangible assets, net			842,385					1,220,752
Total assets		$	14,835,231				$	17,430,777
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable	$	1,491,058				$	728,652
	Accrued expenses and deferred revenue		831,689					1,105,718
	Other current liabilities		2,295,681					2,953,629
	Short-term debt		-					3,645,760
	Current portion of long-term debt, net		796,734					966,506
Total current liabilities			5,415,162					9,400,265
Long-term debt, net			1,354,264					1,734,171
Other long-term liabilities			582,653					1,384,500
Deferred tax liability, net			125,982					125,982
Commitments and contingencies (Note 8)
Stockholders' equity
	Common stock, $.02 par value;  200,000,000 shares authorized, 16,813,613 shares issued and outstanding (16,599,327 on December 31, 2017)		336,272					331,987
	Additional paid-in capital		107,024,040					106,633,708
	Subscription receivable, net		-					(300,000	)
	Accumulated other comprehensive loss		(5,675	)				(23,069	)
	Accumulated deficit		(99,997,467	)				(101,856,767	)
	Total stockholders' equity		7,357,170					4,785,859
Total liabilities and stockholders' equity		$	14,835,231				$	17,430,777

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(unaudited)
	2018					2017
Cash flows from operating activities:
Net income (loss)	$	1,859,300			$	(725,617	)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization		1,002,813				1,041,789
Stock based compensation		106,617				203,111
Paid in-kind interest		12,000				54,000
Change in deferred tax provision		-				14,211
Amortization of deferred financing costs and debt discount		40,067				113,286
Gain on extinguishment of liabilities, net		(3,532,659	)			-
Decrease (increase) in assets:
Accounts receivable		107,708				91,976
Inventory		(291,329	)			(706,735	)
Prepaid expenses and other current assets		(55,374	)			70,838
Increase (decrease) in liabilities:
Accounts payable		762,404				(506,749	)
Accrued expenses		(394,170	)			(268,082	)
Other liabilities		(1,141,929	)			(599,620	)
Net cash used by operating activities		(1,524,552	)			(1,217,592	)
Cash flows from investing activities:
Purchase of property, plant and equipment		(526,251	)			(438,350	)
Purchase of intangible assets		(45,471	)			(4,903	)
Net cash used by investing activities		(571,722	)			(443,253	)
Cash flows from financing activities:
Payments of long-term debt		(966,077	)			(612,419	)
Borrowings from equipment line of credit		87,703				-
Issuances of common stock, net of issuance costs		300,000				783,094
Subscription receivable, net		288,000				-
Net cash (used) provided by financing activities		(290,374	)			170,675
Net decrease in cash		(2,386,648	)			(1,490,170	)
Cash and restricted cash at beginning of period		4,444,628				6,049,347
Cash and restricted cash at end of period	$	2,057,980			$	4,559,177

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 non-recurring 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:

Non-GAAP Financial Performance Measure
	Three Months Ended September 30,										Nine Months Ended September 30,
		2018			2017		% change					2018			2017		% change
	(unaudited)			(unaudited)							(unaudited)			(unaudited)
Net income (loss):	$	(412,000	)	$	(277,000	)	49	%			$	1,859,000		$	(726,000	)	-356	%
Add backs:
Depreciation & amortization		310,000			352,000		-12	%				1,003,000			1,042,000		-4	%
Stock based compensation		20,000			12,000		67	%				107,000			203,000		-47	%
Interest, net		27,000			58,000		-53	%				106,000			171,000		-38	%
Amortization of deferred financing  costs and debt discount		6,000			41,000		-85	%				40,000			113,000		-65	%
Income tax expense		-			5,000		-100	%				-			14,000		-100	%
Adjusted EBITDA	$	(49,000	)	$	191,000		-126	%				3,115,000			817,000		281	%
Adjusted EBITDA, by  group (unaudited)
Printed Products	$	479,000		$	585,000		-18	%			$	1,215,000		$	1,845,000		-34	%
Technology		(365,000	)		(192,000	)	90	%				3,030,000			(327,000	)	-1027	%
Corporate		(163,000	)		(202,000	)	-19	%				(1,130,000	)		(701,000	)	61	%
		(49,000	)		191,000		-126	%				3,115,000			817,000		281	%