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

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ROCHESTER, N.Y., Aug. 14, 2018 (GLOBE NEWSWIRE) -- Document Security Systems, Inc. (NYSE: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 second quarter ended June 30, 2018.

"During the second quarter, our Printed Products sales rebounded after a slow start to the year while technology division revenues slipped after a very strong first quarter of 2018.   For the year thus far, revenues are off slightly, and costs have increased primarily due to higher legal costs related to some of our patent litigation matters and our international expansion that we originated at the beginning of the year.  Supported by several new marketing and technology initiatives, both domestically and internationally, we believe that the investments currently being made to strengthen our value propositions, leadership team, and expand our reach will provide long-term benefits to the Company and our shareholders," states Jeff Ronaldi, CEO of DSS.  

"Also, during the quarter, we were very pleased to bring to completion an agreement entered into in 2014 with one of our third-party funding partners relating to our intellectual property ('IP') monetization business that resulted in a net gain to the Company of approximately $3.5 million.   The agreement covered a four-year financing arrangement that terminated in February of 2018, which supported our IP monetization efforts relating to a portfolio of semiconductor patents owned by one of our subsidiaries, DSS Technology Management.  The resolution of this agreement favorably impacted our net income for the quarter and significantly improves our working capital position," added Ronaldi.

"Regarding our Hong Kong-based subsidiary, DSS Asia, it has become fully-operational, and the team is currently cultivating revenue opportunities and business relationships in the region.  Additionally, their technology unit is concentrating their efforts on delivering the next generation of our AuthentiGuard anti-counterfeiting and product authentication technology," stated Ronaldi.

Second Quarter 2018 Financial Highlights

  • Net income during the second quarter of 2018 was approximately $2.7 million, or $0.16 per share, as compared to a net loss of $265,000 ($0.02 per share) during the second quarter of 2017, primarily due to the impact of net gain from extinguishment of liabilities of approximately $3.5 million, which occurred during the second quarter of 2018, offset by operating losses incurred during the quarter.
     
  • Revenue for the three months ended June 30, 2018 increased 6% to $4.1 million from $3.9 million from the three months ended June 30, 2017.  Printed Products revenue increased 10%, while Technology sales, servicing and licensing revenues decreased by 24%.  Revenue for the six months ended June 30, 2018 declined 2% compared to the same period in 2017.  Printed products revenue decreased by 2%, while technology, sales and licensing services revenue declined by 3%.
     
  • Costs and expenses for the six months ended June 30, 2018 totaled $9.6 million, an increase of 8% from $8.9 million during the same period of 2017, primarily due to an increase in outside services used by our packaging division, a general increase in material costs as a percentage of the printed products groups' total direct costs, increased professional fees, and additional costs associated with the Company's expansion into Asia.
     
  • Adjusted EBITDA1 for the second quarter of 2018 was approximately $3.1 million as compared to $238,000 for the second quarter of 2017. The significant increase in Adjusted EBITDA was driven by the impact of the net gain recognized on the extinguishment of the liabilities, which occurred during the second quarter of 2018.

A full analysis of results for the quarter ended June 30, 2018 is available in the Company's Form 10-Q, which 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 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 http://www.dsssecure.com and http://dssplasticsgroup.com.

To 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 June 30,
2018
Three Months
Ended June 30,
2017
% change
  Six Months
Ended June 30,
2018
Six Months
Ended June 30,
2017
% change
Revenue                  
Printed products     $   3,725,000   $   3,382,000   10 %   $   7,648,000   $   7,786,000   -2 %
Technology sales, services and licensing         362,000       478,000   -24 %       817,000       845,000   -3 %
                   
Total revenue     $   4,087,000   $   3,860,000   6 %   $   8,465,000   $   8,631,000   -2 %
                   
Costs and expenses                  
Costs of goods sold, exclusive of depreciation and amortization $   2,191,000   26 %   $   5,338,000   $   4,979,000   7 %
Sales, general and administrative compensation         855,000       842,000   2 %       1,822,000       1,740,000   5 %
Depreciation and amortization         347,000       348,000   0 %       692,000       690,000   0 %
Professional fees         352,000       196,000   80 %       585,000       358,000   63 %
Stock based compensation         85,000       58,000   47 %       86,000       191,000   -55 %
Sales and marketing         121,000       81,000   49 %       214,000       176,000   22 %
Rent and utilities         161,000       144,000   12 %       316,000       295,000   7 %
Other operating expenses         222,000       126,000   76 %       457,000       354,000   29 %
Research and development         6,000       42,000   -86 %       105,000       102,000   3 %
                   
                   
  Total costs and expenses     $   4,905,000   $   4,028,000   22 %   $   9,615,000   $   8,885,000   8 %
                   
Operating loss         (818,000 )     (168,000 ) 387 %       (1,150,000 )     (254,000 ) 353 %
                   
Other income and expense                  
Interest income     $   3,000   $   -    NA   $   6,000   $   -    NA
Interest expense         (34,000 )     (55,000 ) -38 %       (83,000 )     (112,000 ) -26 %
Amortized debt discount         (6,000 )     (37,000 ) -84 %       (34,000 )     (72,000 ) -53 %
Gain on extinguishment of liabilities, net         3,533,000       -    NA       3,533,000       -    NA
  Total other income and expense     $   3,496,000   $   (92,000 ) -3900 %   $   3,422,000   $   (184,000 ) -1960 %
                   
                   
                   
Income (loss) before income taxes         2,677,000       (260,000 ) -1130 %       2,272,000       (438,000 ) -619 %
                   
Income tax expense         -        5,000   -100 %       -        9,000   -100 %
                   
Net income (loss)     $   2,677,000   $   (265,000 ) -1110 %   $   2,271,000   $   (449,000 ) -606 %
                   
Income (loss) per common share:                  
Basic     $   0.16   $   (0.02 ) -900 %   $   0.14   $   (0.03 ) -567 %
Diluted     $   0.16   $   (0.02 ) -900 %   $   0.13   $   (0.03 ) -533 %
                   
Shares used in computing income (loss) per common share:          
Basic         16,599,327       13,664,503   21 %       16,599,327       13,644,559   22 %
Diluted         16,842,204       13,664,503   23 %       16,882,450       13,644,559   24 %
                   


DOCUMENT SECURITY SYSTEMS, INC.  AND SUBSIDIARIES
Consolidated Balance Sheets
As of
 
           
       June 30, 2018    December 31, 2017
ASSETS     (unaudited)          
                   
Current assets:                
  Cash   $   3,051,593     $   4,188,623  
  Restricted cash       141,351         256,005  
  Accounts receivable, net of $50,000 allowance for doubtful accounts       1,906,793         2,025,284  
  Inventory       1,361,733         1,651,246  
  Prepaid expenses and other current assets       289,095         261,324  
                   
 Total current assets       6,750,565         8,382,482  
                   
Property, plant and equipment, net       4,764,223         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       605,756         1,220,752  
                   
Total assets   $ 15,142,447     17,430,777  
                   
LIABILITIES AND STOCKHOLDERS' EQUITY          
                   
Current liabilities:                
  Accounts payable   $ 1,032,559      $ 728,652  
  Accrued expenses and deferred revenue     986,486       1,105,718  
  Other current liabilities     2,495,967       2,953,629  
  Short-term debt       -          3,645,760  
  Current portion of long-term debt, net       624,281         966,506  
                   
 Total current liabilities     5,139,293       9,400,265  
                   
                   
Long-term debt, net       1,640,621         1,734,171  
Other long-term liabilities       783,300         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     106,707,881       106,633,708  
  Subscription receivable, net       -          (300,000)  
  Accumulated other comprehensive loss       (1,217)         (23,069)  
  Accumulated deficit       (99,585,400)         (101,856,767)  
  Total stockholders' equity     7,453,251       4,785,859  
                   
Total liabilities and stockholders' equity   $ 15,142,447     $ 17,430,777  
                   
                   


DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
   
Consolidated Statements of Cash Flows
   
For the Six Months Ended June 30,
   
(unaudited)    
                 
             
                 
      2018       2017     
Cash flows from operating activities:                
  Net income (loss)   $   2,271,367     $   (448,566 )    
  Adjustments to reconcile net income (loss) to net cash used by operating activities:          
Depreciation and amortization       692,483         689,749      
Stock based compensation       86,173         191,360      
Paid in-kind interest       12,000         36,000      
Change in deferred tax provision       -          9,474      
Amortization of deferred financing costs       33,899         72,432      
Gain on extinguishment of liabilities, net       (3,532,659 )       -       
Decrease (increase) in assets:                
Accounts receivable       118,491         16,615      
Inventory       289,513         (317,502 )    
Prepaid expenses and other current assets       (27,771 )       52,496      
Increase (decrease) in liabilities:                
Accounts payable       303,907         (445,590 )    
Accrued expenses       (90,318 )       (262,191 )    
Other liabilities       (606,928 )       (393,842 )    
Net cash used by operating activities       (449,843 )       (799,565 )    
                 
Cash flows from investing activities:                
Purchase of property, plant and equipment       (311,402 )       (365,659 )    
Purchase of intangible assets       (20,137 )       (4,903 )    
Net cash used by investing activities       (331,539 )       (370,562 )    
                 
Cash flows from financing activities:                
Payments of long-term debt       (758,302 )       (407,648 )    
Subscription receivable, net       288,000         -       
Net cash used by financing activities       (470,302 )       (407,648 )    
                 
Net decrease in cash       (1,251,684 )       (1,577,775 )    
Cash and restricted cash at beginning of period     4,444,628       6,049,347      
                 
Cash and restricted cash at end of period   $ 3,192,944     $ 4,471,572      
                 

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:

    Three Months Ended June 30,     Six Months Ended June 30,
      2018     2017   % change       2018     2017   % change
    (unaudited) (unaudited)       (unaudited) (unaudited)  
                   
Net income (loss):   $   2,677,000   $   (265,000 ) -1110 %     $   2,271,000   $   (449,000 ) -606 %
Add backs:                  
  Depreciation & amortization       347,000       348,000   0 %         692,000       690,000   0 %
Stock based compensation       85,000       58,000   47 %         86,000       191,000   -55 %
Interest, net       31,000       55,000   -44 %         77,000       112,000   -31 %
Amortized debt discount       6,000       37,000   -84 %         34,000       72,000   -53 %
Income tax expense       -        5,000   -100 %         -        9,000   -100 %
                   
                   
Adjusted EBITDA   $   3,146,000   $   238,000   1222 %         3,160,000       625,000   406 %
                   
                   
Adjusted EBITDA, by  group (unaudited)                
                   
Printed Products   $   177,000   $   487,000   -64 %     $   728,000   $   1,260,000   -42 %
Technology       3,232,000       (45,000 ) -7282 %         2,920,000       (135,000 ) -2263 %
Corporate       (263,000 )     (204,000 ) 29 %         (488,000 )     (500,000 ) -2 %
                   
        3,146,000       238,000   1222 %         3,160,000       625,000   406 %
                   

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