Exhibit 99.3
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
On February 12, 2010, Document Security Systems, Inc. (the “Company”) acquired all of the outstanding common stock of Premier Packaging Corporation ( “Premier Packaging”) from Robert B. and Joan T. Bzdick for $2,000,000 in cash and 735,437 shares of the Company's common stock. In connection with the transaction, the Company incurred secured bank debt in the principal amount of $1,500,000 which was used to partially satisfy the purchase price of the Premier Packaging common stock. The acquisition has been accounted for as a business combination, whereby the Company measured the identifiable assets acquired and liabilities assumed based on the acquisition date fair value. The Company is required to recognize and measure any related goodwill acquired in the business combination or a gain from a bargain purchase. Based on management’s preliminary assumptions, the fair value of the assets acquired and liabilities assumed was less than the purchase price resulting in the recording of goodwill.
The unaudited pro forma condensed consolidating statements of operations for the years ending December 31, 2009 and 2008 included in this report have been prepared as if the acquisition occurred at the beginning of such respective periods. The unaudited pro forma condensed consolidating balance sheets as of December 31, 2009 has been prepared by management as if the acquisition occurred on December 31, 2009.
The unaudited pro forma adjustments are based on management’s preliminary estimates of the fair value of intangible assets acquired and the purchase price paid and debt incurred. As a result, the actual adjustments may differ materially from those presented in these unaudited pro forma statements. A change in the unaudited pro forma adjustments would primarily result in achange in the amount recorded as goodwill.
The unaudited pro forma condensed consolidating statements of operations and balance sheets, which have been prepared by management in accordance with rules prescribed by Article 8 of Regulation S-X, are provided for informational purposes only and are not necessarily indicative of the past or future results of operations. No effect has been given for operational efficiencies that may have been achieved if the acquisition had occurred on January 1, 2008 or January 1, 2009.
This information should be read in conjunction with our Current Report on Form 8-K, filed with the SEC on February 18, 2010, Document Security Systems, Inc.’s historical financial statements and the accompanying notes in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and the accompanying stand alone audited financial statement of Premier Packaging that are included in this Current Report as Exhibit 99.2 on Form 8-K/A.
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Pro- Forma Condensed Consolidating Statement of Operations For the Twelve Months Ended December 31, 2009
Document Security Systems | Premier Packaging Corp. | Pro-Forma Adjustments | Consolidated | |||||||||||||
Total revenue | $ | 9,911,691 | $ | 7,293,736 | $ | (194,000 | ) a | $ | 17,011,427 | |||||||
Total costs of revenue | 6,256,399 | 5,458,915 | (194,000 | ) a | 11,521,314 | |||||||||||
Gross profit | 3,655,292 | 1,834,821 | - | 5,490,113 | ||||||||||||
Operating expenses | 7,367,551 | 1,434,850 | (142,000 | ) b | 8,660,401 | |||||||||||
Operating (loss) profit | (3,712,259 | ) | 399,971 | 142,000 | (3,170,288 | ) | ||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 18,140 | - | 18,140 | |||||||||||||
Interest expense and debt discount | (509,020 | ) | (1,012 | ) | (75,000 | ) c | (585,032 | ) | ||||||||
Other income (expense) | 232,078 | (1,119 | ) | 230,959 | ||||||||||||
Other income (expense) | (258,802 | ) | (2,131 | ) | (75,000 | ) | (335,933 | ) | ||||||||
Income (loss) before income taxes | (3,971,061 | ) | 397,840 | 67,000 | (3,506,221 | ) | ||||||||||
Income tax expense | 18,952 | 1,000 | 19,952 | |||||||||||||
Net (loss) income | $ | (3,990,013 | ) | $ | 396,840 | $ | 67,000 | $ | (3,526,173 | ) | ||||||
Net loss per share -basic and diluted: | $ | (0.27 | ) | $ | (0.23 | ) | ||||||||||
Weighted average common shares outstanding, basic and diluted | 14,700,453 | 735,437 | 15,435,890 |
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Pro- Forma Condensed Consolidating Statement of Operations For the Twelve Months Ended December 31, 2008
Document Security Systems | Premier Packaging Corp. | Pro-Forma Adjustments | Pro-Forma Consolidated | |||||||||||||
Total revenue | $ | 6,643,007 | $ | 7,848,137 | $ | (52,367 | ) a | $ | 14,438,777 | |||||||
Total costs of revenue | 3,029,106 | 5,579,182 | (52,367 | ) a | 8,555,921 | |||||||||||
Gross profit | 3,613,901 | 2,268,955 | - | 5,882,856 | ||||||||||||
Operating expenses | 10,633,239 | 1,741,754 | (236,000 | ) b | 12,138,993 | |||||||||||
Operating (loss) profit | (7,019,338 | ) | 527,201 | 236,000 | (6,256,137 | ) | ||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 658 | - | 658 | |||||||||||||
Interest expense and debt discount | (144,533 | ) | (12,250 | ) | (75,000 | ) c | (231,783 | ) | ||||||||
Other income (expense) | (1,102,968 | ) | 27,944 | (1,075,024 | ) | |||||||||||
Other income (expense) | (1,246,843 | ) | 15,694 | (75,000 | ) | (1,306,149 | ) | |||||||||
Income (loss) before income taxes | (8,266,181 | ) | 542,895 | 161,000 | (7,562,286 | ) | ||||||||||
Income tax expense | 18,961 | 425 | d | 19,386 | ||||||||||||
Net (loss) income | $ | (8,285,142 | ) | $ | 542,470 | $ | 161,000 | $ | (7,581,672 | ) | ||||||
Net loss per share -basic and diluted: | $ | (0.59 | ) | $ | (0.51 | ) | ||||||||||
Weighted average common shares outstanding, basic and diluted | 14,002,034 | 735,437 | 14,737,471 |
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Pro- Forma Condensed Consolidating Balance Sheets
As of December 31, 2009
Document Security Systems | Premier Packaging Corp | Pro-forma adjustments | Consolidated | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 448,895 | $ | 37,069 | $ | (500,000 | ) d | $ | 485,964 | |||||||
500,000 | e | |||||||||||||||
Accounts receivable, net | 1,143,939 | 893,513 | (66,506 | ) f | 1,970,946 | |||||||||||
Inventories | 184,174 | 636,931 | - | 821,105 | ||||||||||||
Prepaid expenses and other current assets | 91,310 | 41,946 | - | 133,256 | ||||||||||||
Total current assets | 1,868,318 | 1,609,459 | (66,506 | ) | 3,411,271 | |||||||||||
Fixed assets, net | 1,286,226 | 635,598 | 1,557,500 | d | 3,479,324 | |||||||||||
Other assets | 305,507 | - | - | 305,507 | ||||||||||||
Investment | 350,000 | - | - | 350,000 | ||||||||||||
Goodwill | 1,315,721 | - | 959,500 | d | 2,275,221 | |||||||||||
Other intangible assets, net | 1,588,969 | - | 1,000,000 | d | 2,588,969 | |||||||||||
Total assets | $ | 6,714,741 | $ | 2,245,057 | $ | 3,450,494 | $ | 12,410,292 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 1,673,901 | $ | 472,994 | $ | (66,506 | ) f | $ | 2,080,389 | |||||||
Accrued expenses & other current liabilities | 934,595 | 22,481 | - | 957,076 | ||||||||||||
Short term debt | 300,000 | d | 300,000 | |||||||||||||
Current portion of capital lease obligations | 78,167 | - | - | 78,167 | ||||||||||||
Total current liabilities | 2,686,663 | 495,475 | 233,494 | 3,415,632 | ||||||||||||
Revolving notes from related parties | 583,000 | - | - | 583,000 | ||||||||||||
Long term debt, net of unamortized discount of $420,000 ($0 -2008) | 954,616 | - | 1,200,000 | d | 2,154,616 | |||||||||||
Capital lease obligations | 182,424 | - | - | 182,424 | ||||||||||||
Deferred tax liability | 70,830 | - | - | 70,830 | ||||||||||||
Stockholders' equity | 2,237,208 | 1,749,582 | 1,517,000 | d | 6,003,790 | |||||||||||
500,000 | e | |||||||||||||||
Total liabilities and stockholders' equity | $ | 6,714,741 | $ | 2,245,057 | $ | 3,450,494 | $ | 12,410,292 |
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
1. | BASIS OF PRESENTATION |
On February 12, 2010, Document Security Systems, Inc. (the “Company”) acquired all of the outstanding common stock of Premier Packaging Corporation ( “Premier Packaging”) from Robert B. and Joan T. Bzdick for $2,000,000 in cash and 735,437 shares of the Company's common stock. In connection with the transaction, the Company incurred secured bank debt in the principal amount of $1,500,000 which was used to partially satisfy the purchase price of the Premier Packaging common stock. The acquisition has been accounted for as a business combination, whereby the Company measured the identifiable assets acquired and liabilities assumed based on the acquisition date fair value. The Company is required to recognize and measure any related goodwill acquired in the business combination or a gain from a bargain purchase. Based on management’s preliminary assumptions, the fair value of the assets acquired and liabilities assumed was less than the purchase price resulting in the recording of goodwill.
The allocation of the purchase price and the estimated useful lives associated with the acquired assets is as follows:
Estimated Useful Lives | |||||
Fair value of the consideration transferred | $ | 4,566,675 | |||
Fair value of assets acquired and liabilities assumed: | |||||
Cash | $ | 5,290 | |||
Accounts receivable | 1,284,227 | ||||
Inventories | 504,162 | ||||
Machinery and equipment | 1,557,500 | 3 to 7 years | |||
Other intangible assets | 1,372,000 | 5 to 10 years | |||
Goodwill | 627,360 | ||||
Total Assets | $ | 5,350,539 | |||
Liabilities assumed: | |||||
Accounts payable | $ | 448,128 | |||
Revolving credit lines | 277,645 | ||||
Accrued Liabilities | 58,091 | ||||
Total Liabilities | $ | 783,864 | |||
Total prelimary purchase price | $ | 4,566,675 |
2. PRO FORMA ADJUSTMENTS
The adjustments included in the unaudited pro forma condensed consolidated balance sheet and unaudited pro forma condensed consolidated statements of operations are summarized as follows:
a. | Elimination of intercompany revenue and offsetting cost of revenues. |
b. | Contractual reductions of facility rent and officer compensation. |
c. | Interest expense on Term Note used to finance a portion of the purchase price. |
d. | Adjustment to reflect consideration paid and assests acquired. |
e. | Pro-forma adjustment to remove Premier Packaging shareholder distributions. |
f. | Pro-forma adjustments for accounts receivable and accounts payable in each company for pre-acquisition billings owed/collectible. |