Document Security Systems, Inc. Announces First Quarter 2018 Financial Results

ROCHESTER, N.Y., May 15, 2018 (GLOBE NEWSWIRE) — 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 first quarter ended March 31, 2018.

The first quarter of 2018 was a slow quarter for our Printed Products group which negatively impacted first quarter results. While disappointing, this result was not completely unexpected since this group had its biggest quarter ever in sales in the fourth quarter of 2017.  When looking at the past 6 months, revenues for the printed products group were down 1.4% from the comparable six-month period ending March 31, 2017. We continue to be very positive about our Printed Products group’s performance, with expectations that revenues will strengthen during the remainder of 2018.  “Technology sales experienced significant revenue growth driven by a 172% increase in first quarter revenue from our AuthentiGuard product line,” stated Jeff Ronaldi, CEO of DSS. “Also impacting the quarter was the increase in costs associated with the expansion into the Asia Pacific market, in particular, the commencement of operations in Hong Kong, where we have begun selective sales and marketing efforts. We have also initiated a research project with the Hong Kong R&D Centre for Logistics and Supply Chain Management Enabling Technologies to assist with the adaptation of blockchain technology for product authentication. In addition, this group has become an integral resource for the continuing software development requirements for AuthentiGuard as our customers expand their usage of the product internationally. We are very excited about the Hong Kong office and the early successes we have already realized,” added Ronaldi.

First Quarter 2018 Financial Highlights

  • Revenue for the first quarter of 2018 decreased 8% to $4.4 million from $4.8 million in the first quarter of 2017.   Printed Products revenue decrease of 11% offset by increase in Technology sales by 23%.
     
  • Net Loss during the first quarter of 2018 was approximately $406,000 ($0.02 per share), as compared to a net loss of $184,000 ($0.01 per share) during the first quarter of 2017.
     
  • Costs and expenses for the first quarter totaled $4.7 million, a decrease of 3% from $4.9 million during the same period of 2017.
     
  • Adjusted EBITDA1 for the first quarter of 2018 remained positive and was approximately $15,000 as compared to $391,000 for the first quarter of 2017, which represents a 96% decrease. The decline in Adjusted EBITDA was driven by decreases in revenue at the Company’s Printed Products divisions and costs for the expansion into Hong Kong.

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 Plastics Group subsidiary, visit https://www.dsssecure.com and http://dssplasticsgroup.com.

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Contact Information:
Investor Relations
Document Security Systems, Inc.
Tel: (585) 232-5440
Email: ir@dsssecure.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, 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 March 31,
2018
Three Months
Ended March 31,
2017
%
change
Revenue        
Printed products   $ 3,924,000   $ 4,403,000   -11 %
Technology sales, services and licensing     454,000     368,000   23 %
                   
Total revenue   $ 4,378,000   $ 4,771,000   -8 %
                   
Costs and expenses                  
Costs of goods sold, exclusive of depreciation and amortization   $ 2,582,000   $ 2,788,000   -7 %
Sales, general and administrative compensation     968,000     898,000   8 %
Depreciation and amortization     346,000     343,000   1 %
Professional fees     234,000     161,000   45 %
Stock based compensation     1,000     134,000   -99 %
Sales and marketing     92,000     94,000   -2 %
Rent and utilities     154,000     152,000   1 %
Other operating expenses     234,000     227,000   3 %
Research and development     99,000     60,000   65 %
                   
Total costs and expenses   $ 4,710,000   $ 4,857,000   -3 %
                   
Operating loss     (332,000 )   (86,000 ) 286 %
                   
Other income and expense                  
Interest income     3,000       100 %
Interest expense     (49,000 )   (58,000 ) -16 %
Amortized debt discount     (28,000 )   (35,000 ) -20 %
Total other income and expense   $ (74,000 ) $ (93,000 ) -20 %
                   
                   
                   
Loss before income taxes     (406,000 )   (179,000 ) 127 %
                   
Income tax expense         (5,000 ) -100 %
                   
Net loss   $ (406,000 ) $ (184,000 ) 121 %
                   
Loss per common share:                  
Basic and diluted   $ (0.02 ) $ (0.01 ) 100 %
                   
Shares used in computing loss per common share:                  
Basic and diluted     16,599,327     13,624,522   22 %
                   

DOCUMENT SECURITY SYSTEMS, INC.  AND SUBSIDIARIES
Consolidated Balance Sheets
As of
(unaudited)
 
  March 31, 2018   December 31, 2017
ASSETS        
             
Current assets:            
Cash $ 3,728,086       $ 4,188,623  
Restricted cash   555,831         256,005  
Accounts receivable, net of $50,000 allowance for
doubtful accounts
  1,999,595         2,025,284  
Inventory   1,599,547         1,651,246  
Prepaid expenses and other current assets   247,996         261,324  
Total current assets   8,131,055         8,382,482  
             
Property, plant and equipment, net   4,762,554         4,805,640  
Investment   484,930         484,930  
Other assets   83,376         83,376  
Goodwill   2,453,597         2,453,597  
Other intangible assets, net   1,066,888         1,220,752  
                 
Total assets $ 16,982,400       $ 17,430,777  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY        
             
Current liabilities:            
Accounts payable $ 917,451       $ 728,652  
Accrued expenses and deferred revenue   1,004,025         1,105,718  
Other current liabilities   2,933,591         2,953,629  
Short-term debt   3,714,129         3,645,760  
Current portion of long-term debt, net   806,202         966,506  
Total current liabilities   9,375,398         9,400,265  
                 
Long-term debt, net   1,659,291         1,734,171  
Other long-term liabilities   1,137,821         1,384,500  
Deferred tax liability, net   125,982         125,982  
                 
Commitments and contingencies                
                 
Stockholders’ equity                
Common stock, $.02 par value;  200,000,000
shares authorized, 16,599,327 shares issued and
outstanding (16,599,327 on December 31, 2017)
  331,987         331,987  
Additional paid-in capital   106,622,960         106,633,708  
Subscription receivable           (300,000 )
Accumulated other comprehensive loss   (8,180 )       (23,069 )
Accumulated deficit   (102,262,859 )       (101,856,767 )
Total stockholders’ equity   4,683,908         4,785,859  
             
Total liabilities and stockholders’ equity $ 16,982,400       $ 17,430,777  
             
             

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31,
(unaudited)
             
     2018      2017
Cash flows from operating activities:                
Net loss   $ (406,091 )   $ (184,039 )
Adjustments to reconcile net loss to net cash used by operating activities:                
Depreciation and amortization     345,667       342,774  
Stock based compensation     1,251       133,807  
Paid in-kind interest     12,000       18,000  
Change in deferred tax provision           4,737  
Amortization of deferred financing costs     27,731       35,288  
Decrease (increase) in assets:                
Accounts receivable     25,689       (133,989 )
Inventory     51,699       2,854  
Prepaid expenses and other current assets     13,329       (27,076 )
Increase (decrease) in liabilities:                
Accounts payable     188,795       (419,482 )
Accrued expenses     (103,928 )     (259,678 )
Other liabilities     (249,594 )      
Net cash used by operating activities     (93,452 )     (486,804 )
                 
Cash flows from investing activities:                
Purchase of property, plant and equipment     (132,937 )     (66,206 )
Purchase of intangible assets     (15,780 )     (4,949 )
Net cash used by investing activities     (148,717 )     (71,155 )
                 
Cash flows from financing activities:                
Payments of long-term debt     (206,542 )     (203,647 )
Subscription receivable     288,000        
Net cash from (used by) financing activities     81,458       (203,647 )
                 
Net decrease in cash     (160,711 )     (761,606 )
Cash and restricted cash at beginning of period     4,444,628       6,049,347  
                 
Cash and restricted cash at end of period   $ 4,283,917     $ 5,287,741  
                 
                 

1 ADJUSTED EBITDA
The 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 loss to Adjusted EBITDA loss:

     
    Three Months Ended March 31,
      2018     2017   % change
    (unaudited) (unaudited)  
                   
Net loss:   $ (406,000 ) $ (184,000 ) 121 %
Add backs:                  
Depreciation & amortization     346,000     343,000   1 %
Stock based compensation     1,000     134,000   -99 %
Interest, net     46,000     58,000   -21 %
Amortized debt discount     28,000     35,000   -20 %
Income tax expense         5,000   -100 %
                   
                   
Adjusted EBITDA   $ 15,000   $ 391,000   -96 %
                   
                   
Adjusted EBITDA, by  group (unaudited)                  
                   
Printed Products   $ 551,000   $ 773,000   -29 %
Technology     (309,000 )   (79,000 ) 291 %
Corporate     (227,000 )   (303,000 ) -25 %
                   
      15,000     391,000   -96 %
                   

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