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Document Security Systems, Inc. Reports Third Quarter 2017 Financial Results

ROCHESTER, NY -- (Marketwired) -- 11/14/17 -- 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 the authenticity of both digital and physical financial instruments, identification documents, sensitive publications, brand packaging and websites, today announced its financial results for the third quarter ended September 30, 2017.

"Sales for the third quarter of 2017 were impacted by the timing of some projects that slipped into the fourth quarter, especially for our printed products group. Our technology sales continued to expand, including significant growth in our AuthentiGuard product. When compared to our third quarter of 2016, overall technology sales are only down due to a one-time $150,000 settlement license we received in last year's third quarter." stated Jeff Ronaldi, CEO of DSS. "I am pleased to see that we were able to continue our string of profitable Adjusted EBITDA quarters despite the softness in sales. This reflects the core strength of our business and the impact of our continued investment in our technology-based business opportunities. Thus far in 2017, Adjusted EBITDA profit is up 104% to over $800,000 and I expect that we will finish the year with another strong fourth quarter, especially in our printed products divisions," added Ronaldi.

Third Quarter 2017 Financial Highlights

  • Revenue for the third quarter of 2017 was $4.2 million, down 16% from the same quarter in 2016. During the third quarter of 2017, the Company's technology sales, services and licensing revenue decreased by 19%, while printed products revenue decreased 15%, as compared to the third quarter of 2016. Absent the $150,000 one-time license settlement recorded in the third quarter of 2016, technology sales for the third quarter of 2017 would have reflected a 13% increase, primarily based on an increase in AuthentiGuard product sales. Overall, year-to-date revenue for 2017 is down by 4% as compared to the same period in 2016.

  • Costs and expenses for the third quarter of 2017 decreased 11%, driven by a 16% decrease in direct product costs and decreases in most other expense categories except for sales and marketing related expenses, which increased 48%, and reflects the investment in the growth of our AuthentiGuard anti-counterfeiting and authentication technology sales. For the nine months ended September 30, 2017, total costs and expenses were approximately $13,257,000, a decrease of 6% from $14,128,000 for the nine months ended September 30, 2016.

  • Net loss during the third quarter of 2017 was approximately $277,000 ($0.02 per share), compared to a net loss of $27,000 ($0.00 per share) during the third quarter of 2016. The net loss increase was driven by the decrease in sales, and the impact of a one-time license settlement recorded in the third quarter of 2016. Net loss during the nine months ended September 30, 2017 was approximately $726,000 ($0.05 per share), a 25% decrease compared to a net loss of $969,000 ($0.07 per share) during the first nine months of 2016.

  • Adjusted EBITDA(1) for the third quarter of 2017 was approximately $191,000 as compared to $397,000 for the third quarter of 2016, which represents a 52% decrease. The decrease was driven by the decrease in sales, and the impact of a one-time license settlement recorded in the third quarter of 2016. For the nine months ended, September 30, 2017, Adjusted EBITDA was approximately $817,000 as compared to approximately $400,000 during the first nine months of 2016, an improvement of 104%.

A full analysis of results for the quarter ended September 30, 2017 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.

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.

The Company's wholly-owned subsidiary, DSS Plastics Group (DSSPG), acquired by DSS in 2006, has been manufacturing advanced plastic cards and related products for businesses worldwide for over 40 years. Utilizing DSS core anti-fraud technologies, DSSPG's expertise includes security printing, plastic card manufacturing, Enhanced Tribal Cards, RFID products, SwiftColor InkJet Plastic Cards, Secure Card Designs and Polycarbonate card production. DSSPG's vast experience and knowledge has made them a leader in the plastic card industry, and has resulted in an impressive client list consisting of numerous governmental agencies, social media giants, global technology firms, and U.S. professional sports organizations and events.

For more information on DSS and its Plastics Group subsidiary, visit our websites at http://www.dsssecure.com and http://dssplasticsgroup.com.

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

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, 2016, filed with the Securities and Exchange Commission on March 28, 2017. 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.

               Condensed Consolidated Statements of Operations

                                        Three Months   Three Months
                                           Ended          Ended
                                       September 30,  September 30,    %
                                            2017           2016      change
                                       -------------  ------------- -------
  Printed products                     $   3,767,000  $   4,449,000    -15%
  Technology sales, services and
   licensing                                 432,000        531,000    -19%
                                       -------------  ------------- -------
    Total revenue                      $   4,199,000  $   4,980,000    -16%

Costs and expenses
  Costs of goods sold, exclusive of
   depreciation and amortization       $   2,401,000  $   2,875,000    -16%
  Sales, general and administrative
   compensation                              920,000      1,081,000    -15%
  Depreciation and amortization              352,000        349,000      1%
  Professional fees                          198,000        162,000     22%
  Stock based compensation                    12,000          2,000    500%
  Sales and marketing                        117,000         79,000     48%
  Rent and utilities                         167,000        164,000      2%
  Other operating expenses                   205,000        222,000     -8%
                                       -------------  ------------- -------
    Total costs and expenses           $   4,372,000  $   4,934,000    -11%

Operating income (loss)                     (173,000)        46,000   -476%

Other expenses
  Interest expense                     $     (58,000) $     (68,000)   -15%
  Amortized debt discount                    (41,000)             -    100%
                                       -------------  ------------- -------
    Other expense                      $     (99,000) $     (68,000)    46%

Loss before income taxes                    (272,000)       (22,000)  1136%

Income tax expense                             5,000          5,000      0%
                                       -------------  ------------- -------

Net loss                               $    (277,000) $     (27,000)   926%
                                       =============  ============= =======

Loss per common share:
  Basic and diluted                    $       (0.02) $       (0.00)   100%

Shares used in computing loss per
 common share:
  Basic and diluted                       14,087,849     12,977,903      9%

                                        Nine Months    Nine Months
                                           Ended          Ended
                                       September 30,  September 30,    %
                                            2017           2016      change
                                       -------------  ------------- -------
  Printed products                     $  11,553,000  $  12,148,000     -5%
  Technology sales, services and
   licensing                               1,276,000      1,243,000      3%
                                       -------------  ------------- -------
    Total revenue                      $  12,829,000  $  13,391,000     -4%

Costs and expenses
  Costs of goods sold, exclusive of
   depreciation and amortization       $   7,380,000  $   7,816,000     -6%
  Sales, general and administrative
   compensation                            2,761,000      3,082,000    -10%
  Depreciation and amortization            1,042,000      1,049,000     -1%
  Professional fees                          556,000        704,000    -21%
  Stock based compensation                   203,000         88,000    131%
  Sales and marketing                        292,000        245,000     19%
  Rent and utilities                         462,000        449,000      3%
  Other operating expenses                   561,000        695,000    -19%
                                       -------------  ------------- -------
    Total costs and expenses           $  13,257,000  $  14,128,000     -6%

Operating income (loss)                     (428,000)      (737,000)   -42%

Other expenses
  Interest expense                     $    (171,000) $    (218,000)   -22%
  Amortized debt discount                   (113,000)             -    100%
                                       -------------  ------------- -------
    Other expense                      $    (284,000) $    (218,000)    30%

Loss before income taxes                    (711,000)      (955,000)   -26%

Income tax expense                            14,000         14,000      0%
                                       -------------  ------------- -------

Net loss                               $    (726,000) $    (969,000)   -25%
                                       =============  ============= =======

Loss per common share:
  Basic and diluted                    $       (0.05) $       (0.07)   -29%

Shares used in computing loss per
 common share:
  Basic and diluted                       13,793,946     12,975,053      6%

                        Consolidated Balance Sheets
                                   As of
                                               September 30,   December 31,
                                                    2017           2016
                                               -------------  -------------
ASSETS                                          (Unaudited)

Current assets:
  Cash                                         $   4,223,005  $   5,871,738
  Restricted cash                                    336,172        177,609
  Accounts receivable, net of $50,000
   allowance for uncollectible accounts            1,799,005      1,890,981
  Inventory                                        1,913,111      1,206,377
  Prepaid expenses and other current assets          308,223        350,289
                                               -------------  -------------
    Total current assets                           8,579,516      9,496,994

Property, plant and equipment, net                 4,484,284      4,573,841
Investment                                           484,930              -
Other assets                                          45,821         45,821
Goodwill                                           2,453,597      2,453,349
Other intangible assets, net                       1,387,039      1,896,018
                                               -------------  -------------

Total assets                                   $  17,435,187  $  18,466,023
                                               =============  =============


Current liabilities:
  Accounts payable                             $   1,706,607  $   2,212,653
  Accrued expenses and deferred revenue            1,012,719      1,290,593
  Other current liabilities                        2,957,033      2,996,310
  Short-term debt                                  3,611,560              -
  Current portion of long-term debt, net             752,180      1,202,335
                                               -------------  -------------
    Total current liabilities                     10,040,099      7,701,891

Long-term debt, net                                1,607,752      5,249,569
Other long-term liabilities                        1,624,500      2,184,843
Deferred tax liability, net                           59,830         45,619

Commitments and contingencies

Stockholders' equity

  Common stock, $.02 par value; 200,000,000
   shares authorized, 15,939,327 shares issued
   and outstanding (13,502,653 on December 31,
   2016)                                             318,787        270,053
  Additional paid-in capital                     106,123,997    104,338,002
  Subscriptions receivable from related party       (300,000)             -
  Accumulated other comprehensive loss               (35,551)       (45,343)
  Accumulated deficit                           (102,004,227)  (101,278,611)
                                               -------------  -------------
  Total stockholders' equity                       4,103,006      3,284,101
                                               -------------  -------------
Total liabilities and stockholders' equity     $  17,435,187  $  18,466,023
                                               =============  =============

                   Consolidated Statements of Cash Flows
                  For the Nine Months Ended September 30:

                                                    2017           2016
                                               -------------  -------------
Cash flows from operating activities:
  Net loss                                     $    (725,617) $    (968,585)
  Adjustments to reconcile net loss to net
   cash from (used by) operating activities:
    Depreciation and amortization                  1,041,789      1,049,387
    Stock based compensation                         203,111         87,738
    Paid in-kind interest                             54,000         58,000
    Change in deferred tax provision                  14,211         14,211
    Amortization of deferred financing costs         113,286         15,863
  Decrease (increase) in assets:
    Accounts receivable                               91,976         19,501
    Inventory                                       (706,735)      (250,529)
    Prepaid expenses and other current assets         70,838        (24,683)
    Restricted cash                                 (158,563)       105,316
  Increase (decrease) in liabilities:
    Accounts payable                                (506,749)       169,394
    Accrued expenses and other liabilities          (867,702)       108,138
                                               -------------  -------------
Net cash (used) provided by operating
 activities                                       (1,376,155)       383,751

Cash flows from investing activities:
  Purchase of property, plant and equipment         (438,350)      (192,614)
  Proceeds from sale of intangibles                        -        495,000
  Purchase of intangible assets                       (4,903)       (72,953)
                                               -------------  -------------
Net cash (used) provided by investing
 activities                                         (443,253)       229,433

Cash flows from financing activities:
  Payments of long-term debt                        (612,419)    (1,229,902)
  Issuances of common stock, net of issuance
   costs                                             783,094            (92)
                                               -------------  -------------
Net cash provided (used) by financing
 activities                                          170,675     (1,229,994)

Net decrease in cash                              (1,648,733)      (616,810)
Cash at beginning of period                        5,871,738      1,440,256
                                               -------------  -------------
Cash at end of period                          $   4,223,005  $     823,446
                                               =============  =============

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 evaluate potential acquisitions, establish internal budgets and goals, and evaluate performance of its business units and management. 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             Nine Months Ended
                         September 30,                 September 30,
                                           %                             %
                   2017        2016     change    2017        2016    change
                ----------  ----------  ------ ----------  ---------- ------
               (unaudited)  (unaudited)        (unaudited) (unaudited)

Net Loss:       $ (277,000) $  (27,000)  926%  $ (726,000) $ (969,000) -25%
Add backs:
  Depreciation &
   amortization    352,000     349,000    1%    1,042,000   1,049,000   -1%
  Stock based
   compensation     12,000       2,000   500%     203,000      88,000  131%
   expense          58,000      68,000   -15%     171,000     218,000  -22%
   of note
   discount         41,000           -   100%     113,000           -  100%
  Income Taxes       5,000       5,000    0%       14,000      14,000   0%

                ----------  ----------  ------ ----------  ---------- ------

Adjusted EBITDA    191,000     397,000   -52%     817,000     400,000  104%
                ==========  ==========  ====== ==========  ========== ======

Adjusted EBITDA,
 by group

   Products     $  585,000  $  770,000   -24%  $1,845,000  $2,039,000  -10%
   Management     (192,000)     (8,000)  2300%   (327,000)   (675,000) -52%
  Corporate       (202,000)   (365,000)  -45%    (701,000)   (964,000) -27%
                ----------  ----------  ------ ----------  ---------- ------

                   191,000     397,000   -52%     817,000     400,000  104%
                ==========  ==========  ====== ==========  ========== ======

For more information:

Investor Relations
Document Security Systems
(585) 232-5440
Email: Email Contact

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