Document Security Systems, Inc. Reports Fourth Quarter and Year-End 2016 Financial Results

ROCHESTER, NY--(Marketwired - Mar 28, 2017) - Document Security Systems, Inc. (NYSE MKT: DSS)

• Year-Over-Year Revenue up 10% to $19.2 million
• 2016 Adjusted EBITDA total $1.1 million vs. 2015 Adjusted EBITDA Loss of ($1.3 million)
• Net Loss Per Share Reduced 94% from ($1.20) in 2015 to ($0.07) in 2016
• 2016 Year-End Cash Balance of $5.9 million vs. $1.4 million in 2015 

Document Security Systems, Inc. (NYSE MKT: 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 fourth quarter and year ended December 31, 2016.

"The fourth quarter of 2016 was another very positive quarter for DSS, and a strong end to our year. Not only did we realize continuing growth and strong financial performance in our printing, packaging, and ID card businesses, but in addition, we announced an exciting new customer for our AuthentiGuard security product line and began to realize early returns from this relationship in the fourth quarter," stated Jeff Ronaldi, CEO of DSS. 

"During the fourth quarter, we completed an IP monetization financing which bolstered our cash position and balance sheet by over $4.4 million. We also generated strong Adjusted EDITDA results, and ended the year with a positive Adjusted EBITDA of just over $1.0 million. These are strong indicators demonstrating that the strategic initiatives undertaken during 2016 are having a positive impact on our business, and helping us build sustainable profitability. As we enter 2017, we are well-positioned to accelerate growth, especially as AuthentiGuard achieves increased customer adoption, and we leverage our improved financial performance and balance sheet to target additional expansion opportunities in the anti-counterfeiting and brand protection markets," added Ronaldi.

Fourth Quarter 2016 Financial Highlights

• Revenue for the fourth quarter of 2016 increased 6% to $5.8 million from $5.5 million in the same year-ago quarter. During the quarter, the Company saw revenue of printed products grow by 2% and technology sales, services and licensing revenue increase by 50%, primarily the result of an increase in AuthentiGuard sales. 
  
  
• Costs and expenses totaled $5.7 million, a decrease of 65% from $16.1 million in the same year-ago period. The decrease was primarily due to a reduction in impairment charges incurred in the fourth quarter of 2016 compared to the fourth quarter of 2015. Absent the impairment charges in the 2015 quarter, costs and expenses for the fourth quarter of 2016 decreased approximately 5% from the adjusted 2015 quarter. 
  
  
• During the fourth quarter of 2016, the Company had net income of $19,000, or $0.00 per share as compared to a net loss of $10.8 million or $(0.93) per share in the fourth quarter of 2015.
  
  
• Adjusted EBITDA¹ totaled $662,000 in the fourth quarter of 2016 compared to an Adjusted EBITDA loss of $65,000 in the fourth quarter of 2015. The significant improvement reflected the increase in revenues and the decrease in costs, especially direct costs of goods sold and professional fees during the fourth quarter of 2016. 
  
  

Full Year 2016 Financial Highlights

• Revenue for full year 2016 increased 10% to $19.2 million from $17.5 million in 2015. During the year, printed products revenue increased 10% while technology sales, services and licensing revenues increased 5%. Printed products sales increases were propelled by increases in plastic card ID sales, especially cards that include technology, and increases in packaging sales, especially to the Company's two largest customers. Technology sales, services and licensing as a group benefited from revenues generated by the AuthentiGuard product line which more than offset revenue declines in that group's traditional IT services and hardware reselling businesses. 
  
  
• Costs and expenses totaled $19.8 million, a decrease of 37% from $31.6 million in 2015. The decrease was primarily due to the reduction in impairment charges incurred in 2015 but not in 2016. Absent the impairment charges in 2015, costs and expenses in 2016 decreased approximately 8% from the adjusted 2015 amount. The decrease was driven by reductions in nearly every expense category, the most significant being a 58% decrease in professional fees and a 66% decrease in stock based compensation costs. 
  
  
• During 2016, the Company reported a net loss of $950,000, or $(0.07) per share, as compared to net loss of $14.3 million or $(1.20) per share in 2015.
  
  
• Adjusted EBITDA totaled $1.1 million in 2016 compared to an Adjusted EBITDA loss of ($1.3 million) in 2015. The significant improvement reflected the increase in revenues and the decrease in costs, especially compensation costs and professional fees.
  
  

ABOUT DOCUMENT SECURITY SYSTEMS
Document Security Systems, Inc.'s (NYSE MKT: DSS) products and solutions are used by governments, corporations and financial institutions to defeat fraud and to protect brands and digital information from the expanding world-wide counterfeiting problem. DSS technologies help ensure the authenticity of both digital and physical financial instruments, identification documents, sensitive publications, brand packaging and websites. DSS continuously invests in research and development to meet the ever-changing security needs of its clients and offers licensing of its patented technologies. For more information on DSS and its subsidiaries, please visit www.DSSsecure.com.

For more information on the AuthentiGuard Suite, please visit www.authentiguard.com.

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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, 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.

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
				Three Months Ended December 31, 2016				Three Months Ended December 31, 2015			% change			Year Ended December 31, 2016				Year Ended December 31, 2015			% change
Revenue
	Printed products			$	5,129,000			$	5,022,000		2	%		$	17,277,000			$	15,701,000		10	%
	Technology sales, services and licensing				657,000				437,000		50	%			1,900,000				1,804,000		5	%
		Total revenue		$	5,786,000			$	5,459,000		6	%		$	19,177,000			$	17,505,000		10	%
Costs and expenses
	Cost of goods sold, exclusive of depreciation and amortization			$	3,304,000			$	3,459,000		-4	%		$	11,120,000			$	10,665,000		4	%
	Sales, general and administrative compensation				1,032,000				962,000		7	%			3,764,000				3,983,000		-5	%
	Depreciation and amortization				343,000				384,000		-11	%			1,392,000				1,559,000		-11	%
	Professional fees				109,000				384,000		-72	%			813,000				1,918,000		-58	%
	Stock based compensation				241,000				132,000		83	%			329,000				974,000		-66	%
	Sales and marketing				175,000				78,000		124	%			420,000				329,000		28	%
	Rent and utilities				153,000				165,000		-7	%			602,000				675,000		-11	%
	Other operating expenses				268,000				330,000		-19	%			963,000				922,000		4	%
	Research and development				85,000				120,000		-29	%			435,000				470,000		-7	%
	Impairment of goodwill				-				9,593,000		-100	%			-				9,593,000		-100	%
	Impairment of investments				-				500,000		-100	%			-				500,000		-100	%
		Total costs and expenses		$	5,710,000			$	16,107,000		-65	%		$	19,838,000			$	31,588,000		-37	%
Operating income (loss)					76,000				(10,648,000	)	-101	%			(661,000	)			(14,083,000	)	-95	%
Other expenses
	Interest expense			$	(62,000	)		$	(77,000	)	-19	%		$	(279,000	)		$	(335,000	)	-17	%
	Gain on sales of investment and equipment				-				(26,000	)	-100	%			-				120,000		-100	%
	Net loss on debt modification and extinguishment				-				-		0	%			-				(19,000	)	-100	%
	Foreign currency transaction gain				-				-		0	%			-				29,000		-100	%
Other expense				$	(62,000	)		$	(103,000	)	-40	%		$	(279,000	)		$	(205,000	)	36	%
Loss before income taxes					14,000				(10,751,000	)	-100	%			(939,000	)			(14,288,000	)	-93	%
Income tax expense					(3,000	)			8,000		-138	%			11,000				22,000		-50	%
Net income (loss)					19,000				(10,758,000	)	-100	%			(950,000	)			(14,309,000	)	-93	%
Loss per common share:
	Basic and diluted			$	0.00			$	(0.93	)	-100	%		$	(0.07	)		$	(1.20	)	-94	%
Shares used in computing loss per common share:
	Basic and diluted				12,977,903				11,613,491		12	%			13,068,329				11,939,969		9	%

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
				2016				2015
ASSETS
Current assets:
	Cash			$	5,871,738			$	1,440,256
	Restricted cash				177,609				293,043
	Accounts receivable, net				1,890,981				2,097,433
	Inventory				1,206,377				937,830
	Prepaid expenses and other current assets				350,289				313,528
		Total current assets			9,496,994				5,082,090
Property, plant and equipment, net					4,573,841				5,003,818
Other assets					45,821				44,050
Goodwill					2,453,349				2,453,349
Other intangible assets, net					1,896,018				3,017,544
Total assets				$	18,466,023			$	15,600,851
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	2,212,653			$	1,945,073
	Accrued expenses and deferred revenue				1,290,593				955,066
	Other current liabilities				2,996,310				1,009,660
	Short-term debt				-				3,984,316
	Current portion of long-term debt, net				1,202,335				1,553,061
		Total current liabilities			7,701,891				9,447,176
Long-term debt, net					5,249,569				2,240,596
Other long-term liabilities					2,184,843				63,697
Deferred tax liability, net					45,619				162,107
Commitments and contingencies
Stockholders' equity
	Common stock, $.02 par value; 200,000,000 shares authorized, 13,502,653 shares issued and outstanding
	(12,970,487 on December 31, 2015)				270,053				259,410
	Additional paid-in capital				104,338,002				103,820,170
	Accumulated other comprehensive loss				(45,343	)			(63,697	)
	Accumulated deficit				(101,278,611	)			(100,328,608	)
	Total stockholders' equity				3,284,101				3,687,275
Total liabilities and stockholders' equity				$	18,466,023			$	15,600,851

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31,
					2016				2015
Cash flows from operating activities:
	Net loss				$	(950,003	)		$	(14,309,480	)
	Adjustments to reconcile net loss to net cash from (used by) operating activities:
		Depreciation and amortization				1,391,815				1,558,899
		Stock based compensation				328,567				974,137
		Paid in-kind interest				39,000				84,379
		Gain on disposals of equipment, net				-				(20,431	)
		Impairment of goodwill				-				9,592,848
		Impairment of investment				-				500,000
		Net loss on debt modification and extinguishment				-				19,096
		Change in deferred tax provision				(116,488	)			22,184
		Foreign currency transaction gain				-				(29,400	)
		Amortization of deferred financing costs				21,351				-
	Decrease (increase) in assets:
			Accounts receivable			206,452				238
			Inventory			(268,547	)			(68,568	)
			Prepaid expenses and other current assets			(38,532	)			198,423
			Restricted cash			115,434				62,750
	Increase (decrease) in liabilities:
			Accounts payable			267,581				907,714
			Accrued expenses and other liabilities			4,469,895				(469,419	)
Net cash from (used by) operating activities						5,466,525				(976,630	)
Cash flows from investing activities:
	Purchase of property, plant and equipment					(269,870	)			(157,098	)
	Third-party funding received for acquisition of patent assets					3,043,000				-
	Acquisition of patent assets with third-party funding					(3,043,000	)			-
	Proceeds from sale of equipment					-				46,283
	Proceeds from sale of intangible assets					495,000				-
	Purchase of intangible assets					(73,661	)			(5,159	)
Net cash from (used by) investing activities						151,469				(115,974	)
Cash flows from financing activities:
	Payments of long-term debt					(1,386,420	)			(939,151	)
	Issuances of common stock, net of issuance costs					199,908				1,128,336
Net cash from (used by) financing activities						(1,186,512	)			189,185
Net increase (decrease) in cash						4,431,482				(903,419	)
Cash at beginning of year						1,440,256				2,343,675
Cash at end of year					$	5,871,738			$	1,440,256

¹ ADJUSTED EBITDA
The Company uses Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by the Company 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, and impairments of investments and intangible assets. 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 December 31,										Years Ended December 31,
			2016				2015			% change			2016				2015			% change
			(unaudited)				(unaudited)						(unaudited)				(unaudited)
Net Loss:			$	19,000			$	(10,759,000	)	-100	%		$	(950,000	)		$	(14,309,000	)	-93	%
Add backs:
	Depreciation & amortization			343,000				384,000		-11	%			1,392,000				1,559,000		-11	%
	Stock based compensation			241,000				132,000		83	%			329,000				974,000		-66	%
	Interest expense			62,000				78,000		-21	%			279,000				335,000		-17	%
	Amortization of note discount and net loss on debt extinguishment and modification			-				-		0	%			-				19,000		-100	%
	Income Taxes			(3,000	)			8,000		-138	%			11,000				22,000		-50	%
	Impairment of goodwill and investments			-				10,093,000		-100	%							10,093,000		-100	%
	Foreign currency transaction gain			-				-		0	%			-				(29,000	)	-100	%
Adjusted EBITDA				662,000				(64,000	)	-1134	%			1,061,000				(1,336,000	)	-179	%
Adjusted EBITDA, by group (unaudited)
	Printed Products		$	858,000			$	774,000		11	%		$	2,897,000			$	2,183,000		33	%
	Technology Management			119,000				(435,000	)	-127	%			(556,000	)			(1,792,000	)	-69	%
	Corporate			(315,000	)			(403,000	)	-22	%			(1,280,000	)			(1,727,000	)	-26	%
				662,000				(64,000	)	-1134	%			1,061,000				(1,336,000	)	-179	%