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Document Security Systems, Inc. Announces Third Quarter 2013 Financial Results

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Document Security Systems, Inc. Announces Third Quarter 2013 Financial Results

ROCHESTER, N.Y., Nov.13, 2013 /PRNewswire/ Document Security Systems, Inc. (NYSE MKT: DSS), ("DSS") a leading developer and integrator of secure cloud computing and security printing technologies, today announced its financial results for the third quarter of 2013, ended September 30.

Highlights for 3Q13:

  • Revenue of $4.25 million increased 2% year over year
  • Gross profit of $1.6 million increased 6% year over year
  • Merger with Lexington Technology Group, Inc. completed on July 1, 2013
  • Lexington Technology Group, Inc. renamed DSS Technology Management, Inc. on August 2, 2013

"During the third quarter the Company made progress towards achieving several of its strategic priorities, including generating revenue from AuthentiGuard and acquiring two patent portfolios that further diversify our IP investments," said Jeff Ronaldi, CEO of Document Security Systems. "Going forward, we plan to focus our investments on digital counterfeiting solutions and intellectual property given the high growth, high return characteristics of both areas. We are confident in the direction of the Company and look forward to communicating our ongoing progress against our strategic priorities over time."

Revenues for the third quarter of 2013 were $4.25 million, a 2% increase over the third quarter of 2012, driven by a 14% increase in technology sales, services and licensing revenue. Gross profit for the third quarter of 2013 was $1.6 million, a 6% increase over the third quarter of 2012, driven by a 31% increase in gross profits from technology sales, services and licensing revenue.

Operating expenses increased 67% in the third quarter of 2013 to $4.3 million compared to the $2.6 million recorded in the third quarter of 2012, primarily due to a $1.5 million increase in intangible amortization and impairment expense. The significant increase in DSS's intangible assets is a result of its merger with Lexington Technology Group, Inc. ("LTG") on July 1, 2013. Absent the increase in intangible amortization and impairment expense, operating expenses would have increased 9% which reflects the increase in compensation costs, professional fees and other costs due to the addition of LTG, offset by a reduction in merger related professional fees as compared to the third quarter of 2012.

Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, stock based compensation and other non-recurring items, including professional fees and stock based compensation incurred for the Company's merger with LTG) for the third quarter of 2013 was a loss of $556,000 versus the adjusted EBITDA loss of $61,000 for the third quarter of 2012, which generally reflects the additional expense base of DSS subsequent to its merger with LTG.

The Company recorded net income of $6.5 million for the third quarter of 2013, or $0.15 per share on both a basic and dilutive basis, compared to a net loss of $1.1 million or $0.05 per share in the third quarter of 2012. The significant change in earnings was primarily the result of one-time deferred tax benefit of $9.2 million recorded in the third quarter of 2013 in connection with the Company's merger with LTG. The Company had a loss before income taxes of $2.7 million, versus a loss before income taxes in the third quarter of 2012 of $1.1 million.

Revenues for the first nine months of 2013 were $12.3 million, a 5% increase over the first nine months of 2012, driven by a 14% increase in technology sales, services and licensing revenue. Gross profit for the first nine months of 2013 reached $4.7 million, a 14% increase over the first nine months of 2012.

Operating expenses increased 50% in the first nine months of 2013 compared to the first nine months of 2012 to $10.3 million. This increase was primarily due to a $1.5 million increase in intangible amortization and impairment expense and higher merger related costs, including $723,000 of stock based compensation cost related to the merger, for the first nine months of 2013 as compared to the same period a year earlier.

Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, stock based compensation and other non-recurring items, including professional fees and stock based compensation incurred for the Company's merger with LTG) for the first nine months of 2013 was a loss of $1.1 million, a 9% increase in the adjusted EBITDA loss from $1.0 million for the first nine months of 2012.

The Company recorded net income of $3.4 million for the first nine months of 2013, or $0.12 per share on both a basic and dilutive basis, compared to a net loss of $3.2 million or $0.15 per share for the first nine months of 2012. The significant change in earnings was primarily the result of one-time deferred tax benefit of $9.2 million recorded in the third quarter of 2013 in connection with the Company's merger with LTG. The Company had a loss before income taxes of $5.8 million for the first nine months of 2013, versus a loss before income taxes in first nine months of 2012 of $3.2 million.

The Company's balance sheet as of September 30, 2013 reflects the impact of the acquisition of LTG as of July 1, 2013. The cash balance of $3.2 million reflects the $6.6 million of cash that the Company received upon the closing of the LTG Merger, offset by the use of $2.75 million during the third quarter of 2013 to purchase patents and patent rights, and make an additional investment in VirtualAgility by the Company's DSS Technology Management division. The September 30, 2013 balance sheet also reflects the acquisition accounting for the estimated fair values of LTG's investments and intangible assets as of the Merger date of July 1, 2013, which significantly increased the Company's investments, amortizable intangible assets, and goodwill.

CONFERENCE CALL AND WEBCAST DETAILS:

Time: 4:30 pm ET
Date: Wednesday, November 13, 2013
Investor Dial In (Toll Free): 877-407-9205
Investor Dial In (International): 201-689-8054
Live Webcast URL: http://www.investorcalendar.com/IC/CEPage.asp?ID=171430

A replay of the earnings call will be available until November 27, 2013 which can be accessed by dialing (877) 660-6853 if calling within the U.S. or (201) 612-7415 if calling internationally. Please enter conference ID # 13572776 to access the replay.

About DSS (Document Security Systems, Inc.)

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 continually invests in technology to meet the ever-changing security needs of its clients and implements these patented solutions through the Company's operating groups.

DSS Technology Management, Inc. ("DSS TM"), a wholly-owned subsidiary of Document Security Systems, Inc. ("DSS" or "Company"), provides strategy for DSS's IP portfolio, as well as legal expertise and investment capital for pioneering inventions.

DSS provides counterfeit deterrence and authentication technology coupled with licensing and IP monetization solutions. When implemented, DSS technologies help ensure the authenticity of both digital and physical financial instruments, identification documents, sensitive publications, brand packaging and websites.

For more information on DSS and its subsidiaries, please visit www.DSSsecure.com.
Follow DSS on Facebook, click HERE.

For more information:

Investor Relations
Document Security Systems
(585) 325-3610
Email: ir@documentsecurity.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, those that will be disclosed in the "Risk Factors" section of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, to be filed with the Securities and Exchange Commission. 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.

FINANCIAL TABLES FOLLOW

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited)
















For The Three Months Ended
September 30,


For The Nine Months Ended
September 30,

2013


2012


2013


2012

Revenue













Printed products


$

3,671,764


$

3,655,182


$

10,772,849


$

10,326,140

Technology sales, services and licensing


577,606



508,941



1,526,281



1,340,192

Total revenue



4,249,370



4,164,123



12,299,130



11,666,332














Costs of revenue













Printed products



2,542,045



2,501,918



7,355,289



7,301,950

Technology sales, services and licensing


93,804



138,719



248,431



255,731

Total costs of revenue



2,635,849



2,640,637



7,603,720



7,557,681

Gross profit



1,613,521



1,523,486



4,695,410



4,108,651














Operating expenses:













Selling, general and administrative



2,712,488



2,476,528



8,526,378



6,605,593

Impairment of intangible assets



516,726



-



516,726



-

Amortization of intangibles



1,045,620



76,026



1,213,872



228,078

Operating expenses



4,274,834



2,552,554



10,256,976



6,833,671

Operating loss



(2,661,313)



(1,029,068)



(5,561,566)



(2,725,020)














Other expense:













Interest expense



(64,972)



(51,387)



(158,487)



(176,992)

Amortizaton of note discount and loss on
debt extinguishment


(17,367)



(11,058)



(71,189)



(248,758)

Loss before income taxes



(2,743,652)



(1,091,513)



(5,791,242)



(3,150,770)














Income tax (benefit) expense, net



(9,205,488)



4,737



(9,196,014)



14,211

Net income (loss)


$

6,461,836


$

(1,096,250)


$

3,404,772


$

(3,164,981)














Other comprehensive income (loss):












Interest rate swap gain (loss)



2,609



(5,179)



78,717



(27,671)














Comprehensive income (loss)


$

6,464,445


$

(1,101,429)


$

3,483,489


$

(3,192,652)














Earnings per share:













Basic


$

0.15


$

(0.05)


$

0.12


$

(0.15)

Diluted


$

0.15


$

(0.05)


$

0.12


$

(0.15)














Shares used in computing earnings
per share:












Basic



41,911,569



20,822,351



28,444,037



20,536,448

Diluted



41,914,855



20,822,351



28,462,741



20,536,448














DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

As of



September 30, 2013


December 31, 2012

ASSETS


(unaudited)











Current assets:







Cash

$

3,237,724


$

1,887,163


Accounts receivable, net of allowance







of $60,000 ($60,000- 2012)


1,733,498



2,123,019


Inventory


1,100,527



817,685


Prepaid expenses and other current assets


438,624



290,402

Total current assets


6,510,373



5,118,269








Property, plant and equipment, net


5,304,101



3,723,908

Investments and other assets


6,927,005



232,815

Goodwill


15,305,316



3,322,799

Other intangible assets, net


30,774,994



1,852,677

Total assets

$

64,821,789


$

14,250,468








LIABILITIES AND STOCKHOLDERS' EQUITY













Current liabilities:







Accounts payable

$

1,334,663


$

1,417,460


Accrued expenses and other current liabilities


1,577,974



1,223,244


Revolving lines of credit


261,900



238,240


Short-term debt, net of unamortized discount of $46,000


807,490



-


Current portion of long-term debt, net of unamortized
discount of $0 ($44,000-2012)


333,744



864,514

Total current liabilities


4,315,771



3,743,458








Long-term debt


2,920,094



1,527,906

Interest rate swap hedging liabilities


49,166



127,883

Deferred tax liability, net


3,153,104



127,675








Commitments and contingencies













Stockholders' equity







Common stock, $.02 par value; 200,000,000 shares
authorized,49,230,159 shares issued and outstanding







(21,705,969 in 2012)


984,603



434,118


Additional paid-in capital


97,499,051



55,872,917


Accumulated other comprehensive loss


(49,166)



(127,883)


Accumulated deficit


(44,050,834)



(47,455,606)


Total stockholders' equity


54,383,654



8,723,546

Total liabilities and stockholders' equity

$

64,821,789


$

14,250,468








DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30,

(unaudited)


2013


2012

Cash flows from operating activities:






Net income (loss)

$

3,404,772


$

(3,164,981)

Adjustments to reconcile net loss to net cash used by
operating activities:






Depreciation and amortization


1,660,948



598,010

Stock based compensation


1,579,641



631,466

Amortization of note discount


44,937



248,758

Loss on extinguishment of debt


26,252



-

Impairment of intangible assets


516,726



-

Change in deferred tax provision


(9,196,014)



14,211

(Increase) decrease in assets:






Accounts receivable


389,521



(63,395)

Inventory


(282,842)



(332,108)

Prepaid expenses and other assets


(188,203)



(181,330)

Increase (decrease) in liabilities:






Accounts payable


72,847



182,229

Accrued expenses and other liabilities


50,942



(11,287)

Net cash used by operating activities


(1,920,473)



(2,078,427)







Cash flows from investing activities:






Purchase of property, plant and equipment


(321,230)



(108,931)

Acquisition of business


6,560,890



-

Purchase of investment


(250,000)



-

Purchase of intangible assets


(2,557,825)



(103,569)

Net cash provided (used) by investing activities


3,431,835



(212,500)







Cash flows from financing activities:






Net (payments) borrowings on revolving lines of credit


23,660



(220,780)

Payment of short-term loan from related party


-



(150,000)

Payments of long-term debt


(233,228)



(269,056)

Payments of capital lease obligations


-



(74,279)

Issuance of common stock, net of issuance costs


48,767



3,310,287

Net cash (used) provided by financing activities


(160,801)



2,596,172







Net increase in cash


1,350,561



305,245



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