Document Security Systems Reports Fourth Quarter and Full Year 2008 Financial Results

Business Wire, March 31, 2009

• Year over Year Revenue increases 11%
• Fourth Quarter SG&A Expenses 26% Below Last Year’s Fourth Quarter
• Completed Acquisition of a $7 million Print Manufacturer

ROCHESTER, N.Y. -- Document Security Systems, Inc. (NYSE Amex: DMC; “DSS”), a leader in proven, patented protection against counterfeiting and unauthorized copying, scanning and photo imaging, reported results for the fourth quarter and year ended December 31, 2008.

Fourth Quarter Results

Revenue for the fourth quarter of 2008 decreased 21% to $1.3 million compared to revenue of $1.7 million in the fourth quarter of 2007 reflecting the delay and cancellation of customer orders during the fourth quarter of 2008. Included in the fourth quarter of 2008 is approximately $90,000 from DPI Secuprint, the commercial printer DSS acquired on December 18, 2008. As a result of the decline in revenue, gross profit for the fourth quarter of 2008 was $581,000, a decrease of 28% from the fourth quarter of 2007.

Selling, general and administrative costs decreased 31% during the fourth quarter of 2008 to $1.4 million from $2.1 million in the fourth quarter of 2007, reflecting cost cutting initiatives implemented by the company beginning in March 2008 to remove $1.5 million in costs on an annualized basis and additional cost reduction measures taken in the fourth quarter in response to the decline in sales. Other operating expenses, including depreciation and amortization, stock based payments, and impairments of other intangible assets increased 27% to $1.2 million from $908,000. During the fourth quarter of 2008, the company recorded $505,000 of asset impairment charges relating to certain of its intangible assets.

Net loss for the fourth quarter of 2008 was $2.1 million, or $0.15 per share, compared with a net loss of $2.2 million, or $0.16 per share, for the fourth quarter of 2007. Adjusted EBITDA for the fourth quarter of 2008 improved to a loss of $0.8 million or $0.05 per share, from a loss of $1.3 million, or $0.09 per share, in the fourth quarter of 2007 (See Reconciliation of GAAP to Non-GAAP Financial Measures table).

2008 Results

Revenue for the full year of 2008 was $6.6 million, including the $90,000 revenue contribution from DPI Secuprint, up 11% over revenue from continuing operations of $6.0 million in 2007. Gross profit for 2008 increased 16% to $3.6 million compared with $3.1 in 2007. Gross profit margin increased to 54% compared with 52% in 2007, primarily reflecting the positive impact of the increase in technology licensing during 2008. Total operating expenses for 2008 were $10.6 million compared with $10.1 million in 2007.

Net loss for the full year 2008 was $8.3 million, or $0.59 per share, compared with a net loss of $7.0 million, or $0.51 per share, in 2007. Adjusted EBITDA for 2008 improved to a loss of $2.1 million from an adjusted EBITDA loss of $3.8 million for 2007. (See Reconciliation of GAAP to Non-GAAP Financial Measures table).

“After three strong quarters, with year-to-date revenue growing 23% over 2007, we had early indications of potential large orders during the fourth quarter that led us to believe that our strong performance would continue,” said Patrick White, chief executive officer. “Unfortunately, as the global economic environment rapidly deteriorated, we saw a large print order and three initial orders for AuthentiGaurd DX cancelled or delayed by customers. Offsetting the revenue slowdown were the cost cuts and efficiency measures we had initiated in early March, 2008. These fully took hold during the fourth quarter enabling us to hold operating expenses in check as our Adjusted EBITDA actually improved by 31% over 2007 in spite of a reduction in revenue.”

White continued, “Looking at the full year, we made progress in 2008 as we successfully completed several important initiatives that have significantly changed the way we will do business going forward. We executed on our strategy to expand the applications of our security technology with digital applications, and at year end we completed the purchase of a $7.0 million print manufacturer. We are now not only a technology company, but a full service provider of manufactured secure printed products. From design to manufacturing, DSS now has the capacity and ability to produce a full range of security products on paper, plastic and digitally for our customers. Our biggest problem in the past has been a dependence on our licensees to make sales on our behalf which resulted in an extremely long sales cycles. Now, with the DPI acquisition, we control our own sales cycle. I firmly believe that a direct manufacturing strategy will be a game changer for the company.”