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

ROCHESTER, N.Y., Nov. 14, 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 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.

Keep up-to-date on DSS events and developments, join our online communities at Facebook, Twitter and LinkedIn.

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
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 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 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 %