Document Security Systems Reports Third Quarter of 2014 Financial Results
ROCHESTER, N.Y., Nov. 13, 2014 /PRNewswire/ -- Document Security Systems, Inc. (NYSE MKT: DSS), (DSS), a leader in anti-counterfeiting and authentication solutions, reported results for the third quarter ended September 30, 2014.
Q3 2014 Financial Highlights
Revenue for the third quarter of 2014 increased 17% to a record $5.0 million from $4.3 million in the same year-ago quarter. The increase was primarily driven by a 22% increase in printed product revenue, which includes sales of packaging, printing and plastics, to $4.5 million from $3.7 million in the same year-ago period. Revenue growth was offset by an 18% decrease in technology sales, services and licensing revenues to $475,000 from $578,000 in the year-ago period.
Costs of goods and expenses totaled $18.7 million, an increase of 170% from $6.9 million in the same year-ago period. The increase was primarily due to a non-recurring and non-cash $11.8 million impairment charge, which is described below. Excluding the impairment charge, costs of goods and expenses for the third quarter of 2014 totaled $6.9 million, which was essentially flat from the same year-ago period.
Cost of goods sold, excluding depreciation and amortization, increased 24% to $3.1 million compared to $2.5 million in the same year-ago period. This increase was driven by a higher portion of packaging sales as a percentage of total printed products sales in the third quarter of 2014.
Adjusted EBITDA loss, a non-GAAP metric defined as earnings before interest, taxes, depreciation, amortization, and stock-based compensation, as well as other non-recurring items, totaled $362,000 compared to an adjusted EBITDA loss of $556,000 in the same year-ago period (see further discussion about the use of adjusted EBITDA, below). The improvement reflected the increase in sales and cost control initiatives.
Net loss totaled $8.1 million or $(0.19) per basic and diluted share, as compared to net income of $6.5 million or $0.15 per basic and diluted share in the third quarter of 2013. The increased net loss was primarily due to the $11.8 million impairment charge, of which $4.7 million was attributable to a 40% non-controlling interest held by another entity, related to DSS' investment in the intellectual property of VirtualAgility. In September 2014, VirtualAgility received an adverse decision in its infringement suit against Salesforce.com, which triggered the impairment charge.
The net impairment expense, net of a $1.0 million tax benefit, of $6.1 million significantly impacted net loss for the third quarter of 2014. In addition, during the third quarter of 2013, a $9.2 million one-time deferred tax benefit was recorded, which significantly improved net income. Excluding the impairment charge in the third quarter of 2014 and the tax benefit in the year-ago quarter, net loss in the third quarter of 2014 decreased to $2.0 million from $2.7 million last year.
Management Commentary
"The third quarter and first nine months of 2014 marked strong revenue periods for DSS," said Jeff Ronaldi, the company's CEO. "This was driven by growth in our anti-counterfeiting and authentication solutions, as well as continued demand for our printed products. In fact, our focus on topline growth and cost controls in our printed products division resulted in a 22% increase in revenue and a 160% increase in adjusted EBITDA profitability for that division.
"We continue to execute on our long-term plan to build a more diversified, higher-growth, and profitable company. Along those lines, we continue to target cost savings companywide to further optimize our organization. This includes rationalizing our headcount and G&A expenses, while maintaining our current level of sales and marketing expenses in order to capitalize on the significant opportunities we're pursuing with AuthentiGuard."
"While the write-down of our VirtualAgility investment impacted our GAAP results in Q3, we recently achieved important milestones in our IP division, including the resumption of our Bascom Research case following a lengthy stay, as well as the scheduling of Markman hearings in three of our IP disputes," added Ronaldi.
"Over the last two years, we have amassed a diversified patent portfolio that aligns with our technology roadmap and supports our operating divisions, product innovations and licensing programs. Our diversified strategy provides highly predictable and valuable revenue and cash flow streams from our core printed products division, while maximizing the potential returns on our IP investments through product commercialization and licensing.
"Altogether, our expectations for the future remain high and we see a widening pipeline of opportunities ahead. We plan to build on our progress in the fourth quarter and through 2015 to deliver revenue growth and consistent core financial performance while continuing to seek significant returns from our IP investments."
Conference Call
DSS management will hold a conference call later today (November 13, 2014) to discuss these results. The company's CEO, Jeff Ronaldi, and CFO, Phil Jones, will host the presentation, followed by a question and answer period.
Date: November 13, 2014
Time: 4:30 p.m. Eastern time (1:30 p.m. Pacific time)
U.S. dial-in: (877) 407-8031
International dial-in: (201) 689-8031
The conference call will be broadcast simultaneously and available for replay via the investor section of the company's website at www.dsssecure.com.
Please call the conference telephone number 10 minutes prior to the start time. An operator will register your name and organization. If you have any difficulty connecting with the conference call, please contact Liolios Group at (949) 574-3860.
A replay of the call will be available after 7:30 p.m. Eastern time on the same day through November 27, 2014.
U.S. replay dial-in: (877) 660-6853
International replay dial-in: (201) 612-7415
Replay ID: 13594068
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 continually invests in research and development to meet the ever-changing security needs of its clients and offers licensing of its patented technologies through its subsidiary, DSS Technology Management, Inc.
For more information on the AuthentiGuard Suite, please visit www.authentiguard.com. For more information on DSS and its subsidiaries, please visit www.DSSsecure.com. To follow DSS on Facebook, click here.
For More Information
Investor Relations
Document Security Systems
(585) 325-3610
Email: [email protected]
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 disclosed in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission, and as amended by our subsequent periodic reports. 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 |
|||||||||
| Consolidated Statements of Operations |
|||||||||
| (Unaudited) |
|||||||||
| Three Months |
Three Months |
% |
Nine Months |
Nine Months |
% |
||||
| Revenue |
|||||||||
| Printed products |
$ 4,489,000 |
$ 3,672,000 |
22% |
$ 12,060,000 |
$ 10,773,000 |
12% |
|||
| Technology sales, services and licensing |
475,000 |
578,000 |
-18% |
1,415,000 |
$ 1,526,000 |
-7% |
|||
| Total revenue |
$ 4,964,000 |
$ 4,250,000 |
17% |
$ 13,475,000 |
$ 12,299,000 |
10% |
|||
| Costs and expenses |
|||||||||
| Cost of goods sold, exclusive of depreciation and |
$ 3,111,000 |
$ 2,508,000 |
24% |
$ 8,506,000 |
$ 7,257,000 |
17% |
|||
| Sales, general and administrative compensation |
1,168,000 |
1,204,000 |
-3% |
3,613,000 |
3,560,000 |
1% |
|||
| Depreciation and amortization |
1,322,000 |
1,207,000 |
10% |
3,923,000 |
1,661,000 |
136% |
|||
| Professional fees |
388,000 |
597,000 |
-35% |
1,430,000 |
1,613,000 |
-11% |
|||
| Stock based compensation |
265,000 |
291,000 |
-9% |
1,105,000 |
1,580,000 |
-30% |
|||
| Sales and marketing |
124,000 |
122,000 |
2% |
425,000 |
330,000 |
29% |
|||
| Rent and utilities |
201,000 |
175,000 |
15% |
567,000 |
487,000 |
16% |
|||
| Other operating expenses |
216,000 |
236,000 |
-8% |
668,000 |
681,000 |
-2% |
|||
| Research and development |
118,000 |
54,000 |
119% |
344,000 |
175,000 |
97% |
|||
| Impairment of intangible assets and investments |
11,750,000 |
517,000 |
2173% |
11,750,000 |
517,000 |
2173% |
|||
| Total costs and expenses |
$ 18,663,000 |
$ 6,911,000 |
170% |
$ 32,331,000 |
$ 17,861,000 |
81% |
|||
| Operating loss |
(13,699,000) |
(2,661,000) |
415% |
(18,856,000) |
(5,562,000) |
239% |
|||
| Other expenses |
|||||||||
| Interest expense |
(89,000) |
(65,000) |
37% |
(252,000) |
(158,000) |
59% |
|||
| Amortization of note discount and loss on debt |
- |
(17,000) |
-100% |
(52,000) |
(71,000) |
-27% |
|||
| Foreign currency translation gain |
19,000 |
- |
0% |
2,000 |
- |
0% |
|||
| Other expense, net |
(70,000) |
(82,000) |
-15% |
(302,000) |
(229,000) |
32% |
|||
| Loss before income taxes |
(13,769,000) |
(2,743,000) |
402% |
(19,158,000) |
(5,791,000) |
231% |
|||
| Deferred tax benefit |
(1,000,000) |
(9,205,000) |
-89% |
(990,000) |
(9,196,000) |
-89% |
|||
| Net income (loss) including noncontrolling |
(12,769,000) |
6,462,000 |
-298% |
(18,168,000) |
3,405,000 |
-634% |
|||
| Less: loss attributable to noncontrolling interest |
4,700,000 |
- |
0% |
4,700,000 |
- |
0% |
|||
| Net income (loss) to common shareholders |
$ (8,069,000) |
$ 6,462,000 |
-225% |
$ (13,468,000) |
$ 3,405,000 |
-496% |
|||
| Earnings per share: |
|||||||||
| Basic |
$ (0.19) |
$ 0.15 |
-227% |
$ (0.32) |
$ 0.12 |
-367% |
|||
| Diluted |
$ (0.19) |
$ 0.15 |
-227% |
$ (0.32) |
$ 0.12 |
-367% |
|||
| Shares used in computing earnings per share: |
|||||||||
| Basic |
42,213,654 |
41,911,569 |
1% |
42,060,015 |
28,444,037 |
48% |
|||
| Diluted |
42,213,654 |
41,914,855 |
1% |
42,060,015 |
28,462,741 |
48% |
|||
| DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES |
|||||||||
| Condensed Consolidated Balance Sheets |
|||||||||
| As of |
|||||||||
| September 30, 2014 |
December 31, 2013 |
||||||||
| ASSETS |
(Unaudited) |
||||||||
| Current assets: |
|||||||||
| Cash |
$ |
1,899,977 |
$ |
1,977,031 |
|||||
| Restricted cash |
391,293 |
500,000 |
|||||||
| Accounts receivable, net of allowance |
|||||||||
| of $68,000 ($60,000- 2013) |
1,855,196 |
2,149,123 |
|||||||
| Inventory |
1,165,923 |
834,979 |
|||||||
| Prepaid expenses and other current assets |
578,466 |
403,107 |
|||||||
| Deferred tax asset, net |
166,491 |
223,323 |
|||||||
| Total current assets |
6,057,346 |
6,087,563 |
|||||||
| Property, plant and equipment, net |
5,166,713 |
5,157,852 |
|||||||
| Investments and other assets |
774,702 |
11,448,008 |
|||||||
| Goodwill |
15,046,197 |
15,046,197 |
|||||||
| Other intangible assets, net |
27,343,873 |
29,602,591 |
|||||||
| Total assets |
$ |
54,388,831 |
$ |
67,342,211 |
|||||
| LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||||
| Current liabilities: |
|||||||||
| Accounts payable |
$ |
1,478,822 |
$ |
1,421,765 |
|||||
| Accrued expenses and other current liabilities |
1,691,972 |
1,455,629 |
|||||||
| Revolving lines of credit |
- |
158,087 |
|||||||
| Short-term debt |
850,000 |
824,857 |
|||||||
| Current portion of long-term debt, net |
464,066 |
613,488 |
|||||||
| Total current liabilities |
4,484,860 |
4,473,826 |
|||||||
| Long-term debt, net |
7,028,199 |
3,087,358 |
|||||||
| Other long-term liabilities |
502,828 |
27,566 |
|||||||
| Deferred tax liability, net |
317,522 |
1,364,447 |
|||||||
| Commitments and contingencies |
|||||||||
| Stockholders' equity |
|||||||||
| Common stock, $.02 par value; 200,000,000 shares |
|||||||||
| (49,411,486 on December 31, 2013) |
844,273 |
988,230 |
|||||||
| Additional paid-in capital |
99,584,712 |
97,790,426 |
|||||||
| Accumulated other comprehensive loss |
(43,828) |
(27,566) |
|||||||
| Accumulated deficit |
(58,329,735) |
(44,862,076) |
|||||||
| Non-controlling interest in subsidiary |
- |
4,500,000 |
|||||||
| Total stockholders' equity |
42,055,422 |
58,389,014 |
|||||||
| Total liabilities and stockholders' equity |
$ |
54,388,831 |
$ |
67,342,211 |
|||||
| DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES |
|||||
| Condensed Consolidated Statements of Cash Flows |
|||||
| For the Nine Months Ended September 30, |
|||||
| (Unaudited) |
|||||
| 2014 |
2013 |
||||
| Cash flows from operating activities: |
|||||
| Net income (loss) including noncontrolling interest |
$ |
(18,167,659) |
$ |
3,404,772 |
|
| Adjustments to reconcile net income (loss) to net cash used |
|||||
| Depreciation and amortization |
3,923,220 |
1,660,948 |
|||
| Stock based compensation |
1,105,395 |
1,579,641 |
|||
| Paid in-kind interest |
30,000 |
- |
|||
| Amortization of note discount |
30,010 |
44,937 |
|||
| Loss on extinguishment of debt |
- |
26,252 |
|||
| Impairment of intangible assets and investments inclusive |
11,749,528 |
516,726 |
|||
| Change in deferred tax provision |
(990,093) |
(9,196,014) |
|||
| Foreign currency translation gain |
(2,305) |
- |
|||
| Decrease (increase) in assets: |
|||||
| Accounts receivable |
293,927 |
389,521 |
|||
| Inventory |
(330,944) |
(282,842) |
|||
| Prepaid expenses and other assets |
(210,504) |
(188,203) |
|||
| Restricted cash |
108,707 |
- |
|||
| Increase in liabilities: |
|||||
| Accounts payable |
48,669 |
72,847 |
|||
| Accrued expenses and other liabilities |
831,239 |
50,942 |
|||
| Net cash used by operating activities |
(1,580,810) |
(1,920,473) |
|||
| Cash flows from investing activities: |
|||||
| Purchase of equipment and building improvements |
(257,764) |
(321,230) |
|||
| Acquisition of business |
- |
6,560,890 |
|||
| Purchase of investments |
(750,000) |
(250,000) |
|||
| Purchase of intangible assets |
(1,216,063) |
(2,557,825) |
|||
| Net cash (used) provided by investing activities |
(2,223,827) |
3,431,835 |
|||
| Cash flows from financing activities: |
|||||
| Net payments on revolving lines of credit |
(158,087) |
23,660 |
|||
| Payments of long-term debt |
(457,303) |
(233,228) |
|||
| Borrowings of long-term debt |
4,041,000 |
- |
|||
| Issuances of common stock, net of issuance costs |
301,973 |
48,767 |
|||
| Net cash provided (used) by financing activities |
3,727,583 |
(160,801) |
|||
| Net (decrease) increase in cash |
(77,054) |
1,350,561 |
|||
| Cash beginning of period |
1,977,031 |
1,887,163 |
|||
| Cash end of period |
$ |
1,899,977 |
$ |
3,237,724 |
|
About the Presentation of 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, such as costs related to the Company's merger with Lexington Technology Group, 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 its 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 costs related to the Company's merger with Lexington Technology Group, all 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 September 30 |
Nine Months Ended September 30 |
|||||||
| 2014 |
2013 |
% change |
2014 |
2013 |
% change |
|||
| (unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
|||||
| Net Loss |
$ (8,069,000) |
$ 6,462,000 |
-225% |
$ (13,468,000) |
$ 3,405,000 |
-496% |
||
| Add back: |
||||||||
| Depreciation & Amortization |
1,322,000 |
1,207,000 |
10% |
3,923,000 |
1,661,000 |
136% |
||
| Stock based compensation |
265,000 |
291,000 |
-9% |
1,105,000 |
1,580,000 |
-30% |
||
| Interest expense |
89,000 |
65,000 |
37% |
253,000 |
158,000 |
60% |
||
| Amortization of note discount and loss on debt |
- |
17,000 |
-100% |
52,000 |
71,000 |
-27% |
||
| Income Taxes |
(1,000,000) |
(9,205,000) |
-89% |
(990,000) |
(9,196,000) |
-89% |
||
| Foreign currency translation adjustments |
(19,000) |
- |
100% |
(2,000) |
- |
100% |
||
| Impairment of intangible assets and investments, |
7,050,000 |
517,000 |
1264% |
7,050,000 |
517,000 |
1264% |
||
| Professional fees and other costs incurred in |
- |
90,000 |
-100% |
- |
677,000 |
-100% |
||
| Adjusted EBITDA |
(362,000) |
(556,000) |
35% |
(2,077,000) |
(1,127,000) |
-84% |
||
| Adjusted EBITDA, by group (unaudited) |
||||||||
| Printed Products |
$ 603,000 |
$ 232,000 |
160% |
$ 1,355,000 |
$ 1,010,000 |
34% |
||
| Technology Management |
(424,000) |
(288,000) |
47% |
(1,285,000) |
(622,000) |
107% |
||
| Corporate, less Merger costs in 2013 periods |
(541,000) |
(500,000) |
8% |
(2,147,000) |
(1,515,000) |
42% |
||
| (362,000) |
(556,000) |
35% |
(2,077,000) |
(1,127,000) |
-84% |
|||
SOURCE Document Security Systems, Inc.
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