UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March
31, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________
to ____________________.
001-32146 |
Commission file number |
DOCUMENT SECURITY SYSTEMS, INC. |
(Exact name of registrant as specified in its charter) |
New York |
|
16-1229730 |
(State or other Jurisdiction of incorporation- or Organization) |
|
(IRS Employer Identification No.) |
28 Main Street East, Suite 1525 |
Rochester, NY 14614 |
(Address of principal executive offices) |
(585) 325-3610 |
(Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files) Yes x No ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
“large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer ¨ Accelerated
filer ¨ Non-accelerated filer (Do not check
if a smaller reporting company) ¨ Smaller reporting
company x
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
As of May 13, 2015, there were 46,302,404 shares of the registrant’s
common stock, $0.02 par value, outstanding.
DOCUMENT SECURITY SYSTEMS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1
- FINANCIAL STATEMENTS
DOCUMENT SECURITY SYSTEMS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of
| |
March 31, 2015 | | |
December 31, 2014 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash | |
$ | 1,591,859 | | |
$ | 2,343,675 | |
Restricted cash | |
| 337,307 | | |
| 355,793 | |
Accounts receivable, net | |
| 1,445,734 | | |
| 2,097,671 | |
Inventory | |
| 1,071,802 | | |
| 869,262 | |
Prepaid expenses and other current assets | |
| 509,291 | | |
| 425,671 | |
Deferred tax asset, net | |
| 2,499 | | |
| 2,499 | |
Total current assets | |
| 4,958,492 | | |
| 6,094,571 | |
| |
| | | |
| | |
Property, plant and equipment, net | |
| 4,906,012 | | |
| 5,016,539 | |
Investments and other assets, net | |
| 631,624 | | |
| 686,912 | |
Goodwill | |
| 12,046,197 | | |
| 12,046,197 | |
Other intangible assets, net | |
| 3,667,124 | | |
| 3,908,399 | |
| |
| | | |
| | |
Total assets | |
$ | 26,209,449 | | |
$ | 27,752,618 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 1,348,103 | | |
$ | 1,037,359 | |
Accrued expenses and other current liabilities | |
| 1,625,424 | | |
| 1,997,241 | |
Current portion of long-term debt, net | |
| 709,031 | | |
| 754,745 | |
| |
| | | |
| | |
Total current liabilities | |
| 3,682,558 | | |
| 3,789,345 | |
| |
| | | |
| | |
Long-term debt, net | |
| 7,280,460 | | |
| 7,439,036 | |
Other long-term liabilities | |
| 535,932 | | |
| 520,180 | |
Deferred tax liability, net | |
| 152,995 | | |
| 148,258 | |
| |
| | | |
| | |
Commitments and contingencies (Note 7) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders' equity | |
| | | |
| | |
Common stock, $.02 par value; 200,000,000 shares authorized, 46,302,404 shares issued and outstanding (46,172,404 on December 31, 2014) | |
| 926,048 | | |
| 923,448 | |
Additional paid-in capital | |
| 101,374,209 | | |
| 101,012,659 | |
Accumulated other comprehensive loss | |
| (76,932 | ) | |
| (61,180 | ) |
Accumulated deficit | |
| (87,665,821 | ) | |
| (86,019,128 | ) |
Total stockholders' equity | |
| 14,557,504 | | |
| 15,855,799 | |
Total liabilities and stockholders' equity | |
$ | 26,209,449 | | |
$ | 27,752,618 | |
See accompanying notes to the condensed
consolidated financial statements
DOCUMENT SECURITY SYSTEMS, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of
Operations and Comprehensive Loss
For Three Months Ended March 31,
(unaudited)
| |
2015 | | |
2014 | |
| |
| | |
| |
Revenue | |
| | | |
| | |
Printed products | |
$ | 3,019,886 | | |
$ | 3,163,500 | |
Technology sales, services and licensing | |
| 409,645 | | |
| 464,231 | |
| |
| | | |
| | |
Total revenue | |
| 3,429,531 | | |
| 3,627,731 | |
| |
| | | |
| | |
Costs and expenses | |
| | | |
| | |
Cost of goods sold, exclusive of depreciation and amortization | |
| 1,986,301 | | |
| 2,198,262 | |
Selling, general and administrative (including stock based compensation) | |
| 2,608,115 | | |
| 3,074,198 | |
Depreciation and amortization | |
| 379,593 | | |
| 1,313,371 | |
Total costs and expenses | |
| 4,974,009 | | |
| 6,585,831 | |
| |
| | | |
| | |
Operating loss | |
| (1,544,478 | ) | |
| (2,958,100 | ) |
| |
| | | |
| | |
Other expense: | |
| | | |
| | |
Interest expense | |
| (78,382 | ) | |
| (74,950 | ) |
Amortization of note discount | |
| - | | |
| (17,367 | ) |
Net loss on debt modification and extinguishment | |
| (19,096 | ) | |
| - | |
| |
| | | |
| | |
Loss before income taxes | |
| (1,641,956 | ) | |
| (3,050,417 | ) |
| |
| | | |
| | |
Income tax expense | |
| 4,737 | | |
| 4,737 | |
| |
| | | |
| | |
Net loss | |
$ | (1,646,693 | ) | |
$ | (3,055,154 | ) |
| |
| | | |
| | |
Other comprehensive loss | |
| | | |
| | |
Interest rate swap loss | |
| (15,752 | ) | |
| (9,943 | ) |
| |
| | | |
| | |
Comprehensive loss: | |
$ | (1,662,445 | ) | |
$ | (3,065,097 | ) |
| |
| | | |
| | |
Loss per share: | |
| | | |
| | |
Basic and diluted | |
$ | (0.04 | ) | |
$ | (0.07 | ) |
| |
| | | |
| | |
Shares used in computing loss per share: | |
| | | |
| | |
Basic and diluted | |
| 46,239,404 | | |
| 41,923,987 | |
See accompanying notes to condensed consolidated financial statements
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Cash Flows
For the Three Months Ended March 31,
(unaudited)
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (1,646,693 | ) | |
$ | (3,055,154 | ) |
Adjustments to reconcile net loss to net cash used by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 379,593 | | |
| 1,313,371 | |
Stock based compensation | |
| 324,598 | | |
| 547,142 | |
Paid in-kind interest | |
| 20,000 | | |
| - | |
Amortization of note discount | |
| - | | |
| 17,367 | |
Net loss on debt modification and extinguishment | |
| 19,096 | | |
| | |
Change in deferred tax provision | |
| 4,737 | | |
| 4,737 | |
Foreign currency translation (gain) loss | |
| (29,400 | ) | |
| 16,420 | |
Decrease (increase) in assets: | |
| | | |
| | |
Accounts receivable | |
| 651,937 | | |
| 997,619 | |
Inventory | |
| (202,540 | ) | |
| (386,366 | ) |
Prepaid expenses and other assets | |
| (28,332 | ) | |
| (183,462 | ) |
Restricted cash | |
| 18,486 | | |
| - | |
Increase (decrease) in liabilities: | |
| | | |
| | |
Accounts payable | |
| 310,744 | | |
| (86,460 | ) |
Accrued expenses and other liabilities | |
| (351,167 | ) | |
| 326,700 | |
Net cash used by operating activities | |
| (528,941 | ) | |
| (488,086 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of property, plant and equipment | |
| (27,791 | ) | |
| (134,373 | ) |
Purchase of investments | |
| - | | |
| (750,000 | ) |
Purchase of intangible assets | |
| - | | |
| (39,126 | ) |
Net cash used by investing activities | |
| (27,791 | ) | |
| (923,499 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Net payments on revolving lines of credit | |
| - | | |
| (158,087 | ) |
Payments of long-term debt | |
| (195,084 | ) | |
| (156,485 | ) |
Borrowings of long-term debt | |
| - | | |
| 2,691,000 | |
| |
| | | |
| | |
Net cash (used) provided by financing activities | |
| (195,084 | ) | |
| 2,376,428 | |
| |
| | | |
| | |
Net (decrease) increase in cash | |
| (751,816 | ) | |
| 964,843 | |
Cash beginning of period | |
| 2,343,675 | | |
| 1,977,031 | |
| |
| | | |
| | |
Cash end of period | |
$ | 1,591,859 | | |
$ | 2,941,874 | |
See accompanying notes to the condensed consolidated financial
statements.
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)
| 1. | Basis of Presentation and Significant Accounting Policies |
Document Security Systems,
Inc. (the “Company”), through two of its subsidiaries, Premier Packaging Corporation, which operates under the assumed
name of DSS Packaging Group, and Plastic Printing Professionals, Inc., which operates under the assumed name of DSS Plastics Group,
operates in the security and commercial printing, packaging and plastic ID markets. The Company develops, markets, manufactures
and sells paper and plastic products designed to protect valuable information from unauthorized scanning, copying, and digital
imaging. The Company’s subsidiary, Extradev, Inc., which operates under the assumed name of DSS Digital Group, develops,
markets and sells digital information services, including data hosting, disaster recovery and data back-up and security services.
The Company’s subsidiary as a result of a merger completed on July 1, 2013, DSS Technology Management, Inc., acquires intellectual
property assets, interests in companies owning intellectual property assets, or assists others in managing their intellectual property
monetization efforts, for the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but
not limited to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships
and commercial litigation.
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles
(“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation
S-X for smaller reporting companies. Accordingly, these statements do not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying balance sheets and related interim
statements of operations and comprehensive loss and cash flows include all adjustments, considered necessary for their fair presentation
in accordance with U.S. GAAP. All significant intercompany transactions have been eliminated in consolidation.
Interim results are
not necessarily indicative of results expected for the full year. For further information regarding the Company’s accounting
policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company's Form 10-K for
the fiscal year ended December 31, 2014.
Use of Estimates
- The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
materially from those estimates and assumptions. In preparing these financial statements, the Company has evaluated events and
transactions for potential recognition or disclosure.
Restricted
Cash – As of March 31, 2015, cash of $337,307 ($355,793 – December
31, 2014) is restricted for payments of costs and expenses associated with one of the Company’s IP monetization programs.
Derivative Instruments
- The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate
swap contracts to minimize significant fluctuations in earnings that are caused by interest rate volatility. The Company has an
interest rate swap that changes a variable rate into a fixed rate on a term loan. The swap qualifies as Level 2 fair value financial
instrument. The swap agreement is not held for trading purposes and the Company does not intend to sell the derivative swap financial
instrument. The Company records the interest swap agreement on the balance sheet at fair value because the agreement qualifies
as cash flow hedge under U.S. GAAP. Gains and losses on the instrument are recorded in other
comprehensive income (loss) until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or
losses are reclassified from accumulated other comprehensive income (loss) (“AOCI”) to the Condensed Consolidated Statement
of Operations on the same line item as the underlying transaction. The valuation of the interest rate swap is derived from proprietary
models of Citizens Bank (defined below) based upon recognized financial principles and reasonable estimates about relevant future
market conditions and may reflect certain other financial factors such as anticipated profit or hedging, transactional, and other
costs. The notional amounts of the swap decreases over the life of the agreement. The Company is exposed to a credit loss in the
event of nonperformance by the counter parties to the interest rate swap agreement. However, the Company does not anticipate non-performance
by the counter parties. The cumulative net loss attributable to this cash flow hedge recorded in accumulated other comprehensive
loss and other liabilities at March 31, 2015 was approximately $77,000 ($61,000 - December 31, 2014), which is included in other
long-term liabilities on the balance sheet.
The Company has a notional
amount of approximately $1,064,000 as of March 31, 2015 on its interest rate swap agreement for its debt with RBS Citizens, N.A.
(“Citizens Bank”) (See Note 5) which changes a variable rate into fixed rate on a term loan as follows:
Notional | | |
Variable | | |
| | |
|
Amount | | |
Rate | | |
Fixed Cost | | |
Maturity Date |
$ | 1,064,104 | | |
| 3.33 | % | |
| 5.87 | % | |
August 30, 2021 |
Impairment
of Long Lived Assets and Goodwill
-Long-lived and intangible assets and goodwill are assessed for the potential impairment whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows
is in question. Goodwill and indefinite-lived intangible assets are assessed at least annually, but also whenever events or
changes in circumstances indicate the carrying values may not be recoverable. Factors that could trigger an impairment
review, include (a) significant underperformance relative to historical or projected future operating results; (b)
significant changes in the manner of or use of the acquired assets or the strategy for our overall business; (c) significant
negative industry or economic trends; (d) significant decline in our stock price for a sustained period; and a decline in our
market capitalization below net book value.
Goodwill
- Goodwill is the excess of cost of an acquired entity over the fair value
of amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is
subject to impairment testing at least annually and will be tested for impairment between annual tests if an event occurs or circumstances
change that would indicated the carrying amount may be impaired. FASB ASC Topic 350 provides an entity with the option to first
assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more
likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of
events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than
its carrying amount, then performing the two-step impairment test is unnecessary. If the two-step impairment test is necessary,
a fair-value-based test is applied at the reporting unit level, which is generally one level below the operating segment level.
The test compares the fair value of an entity's reporting units to the carrying value of those reporting units. This test requires
various judgments and estimates. The Company estimates the fair value of the reporting unit using a market approach in combination
with a discounted operating cash flow approach. Impairment of goodwill is measured as the excess of the carrying amount of goodwill
over the fair values of recognized and unrecognized assets and liabilities of the reporting unit. An adjustment to goodwill will
be recorded for any goodwill that is determined to be impaired. During the Company’s annual assessment of goodwill
in 2014, the Company assessed that the negative trends in patent litigation that have recently reduced the success of patent owners
in protecting their patents in the federal court system had caused an impairment of the Company’s goodwill assigned to its
DSS Technology Management division and accordingly, the Company recorded a $3,000,000 goodwill impairment charge to the goodwill
assigned to its DSS Technology Management division.
Contingent
Legal Expenses - Contingent legal fees are expensed in the consolidated
statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from
potential infringers, no contingent legal fees are paid; however, the Company may be liable for certain out of pocket legal costs
incurred pursuant to the underlying legal services agreement that will be paid out from the proceeds from settlements or licenses
that arise pursuant to an enforcement action, which will be expensed as legal fees in the period in which the payment of such fees
is probable. Any unamortized patent acquisition costs will be expensed in the period in which a conclusion is reached in an enforcement
action that does not yield future royalties potential.
Earnings Per
Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual weighted
average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional
shares that would have been outstanding if dilutive potential shares had been issued. In a loss period, the calculation for basic
and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.
As of March 31, 2015
and 2014, there were 11,468,047 and 19,618,892 respectively, of common stock share equivalents potentially issuable under convertible
debt agreements, employment agreements, options, warrants, overallotment options, and restricted stock agreements, that could potentially
dilute basic earnings per share in the future. These shares are excluded from the calculation of diluted earnings per share in
periods in which the Company had a net loss because their inclusion would be anti-dilutive to the Company’s losses in the
respective periods.
Concentration
of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured
limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial
institutions.
During the three months
ended March 31, 2015 and 2014, one customer accounted for 14% and 26%, respectively, of the Company’s consolidated revenue
and accounted for 8% of the Company’s trade accounts receivable balance as of March 31, 2015. The risk with respect to trade
receivables is mitigated by credit evaluations the Company performs on its customers, the short duration of its payment terms for
the significant majority of its customer contracts and by the diversification of its customer base.
Reclassifications
- Certain prior year amounts have been reclassified to conform to the current year presentation.
Continuing
Operations - The Company has incurred significant net losses in previous years
and through the first three months of 2015. The Company’s ability to fund its current and future commitments out of its available
cash and cash generated from its operations depends on a number of factors. Some of these factors include the Company’s ability
to (i) increase sales of the Company’s digital products; (ii) decrease legal and professional expenses for the Company’s
intellectual property monetization business; and (iii) continue to generate operating profits from the Company’s packaging
and plastic printing operations. As of March 31, 2015, the Company had approximately
$1,592,000 in unrestricted cash and $337,000 in restricted cash and up to $800,000 available under a revolving credit line
at its packaging subsidiary, which may not be sufficient to cover the Company’s future working capital requirements if these
and other factors are not met. If the Company cannot generate sufficient cash from its operations, the Company may need to raise
additional funds in the future in order to fund its working capital needs and pursue its growth strategy, although there can be
no assurances, management believes that sources for these additional funds will be available through either current or future investors.
New Accounting
Pronouncements Not Yet Adopted –
In May 2014, the FASB
issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount
of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated guidance
will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a
retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 31, 2017. The Company has not yet selected a transition method and is currently evaluating
the effect that the updated standard will have on its financial statements and related disclosures.
In August 2014, the
FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties
about an Entity's Ability to Continue as a Going Concern." The guidance requires an entity to evaluate whether there are conditions
or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within
one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances.
The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter.
Early application is permitted. The Company does not believe the adoption of this ASU will have a significant impact on its financial
statements.
Inventory consisted of the following:
| |
March 31,
2015 | | |
December 31,
2014 | |
| |
| | |
| |
Finished Goods | |
$ | 882,829 | | |
$ | 572,695 | |
Work in process | |
| 42,147 | | |
| 123,611 | |
Raw Materials | |
| 146,826 | | |
| 172,956 | |
| |
| | | |
| | |
| |
$ | 1,071,802 | | |
$ | 869,262 | |
In January and February
2014, DSS Technology Management made investments of $100,000 and $400,000, respectively, to purchase an aggregate of 594,530 shares
of common stock of Express Mobile, Inc. (“Express Mobile”), which represented approximately 6% of the outstanding common
stock of Express Mobile at the time of investment. Express Mobile is a developer of custom mobile applications and websites. The
investments were recorded using the cost method.
Intangible assets are comprised
of the following:
| |
| |
March 31, 2015 | | |
December 31, 2014 | |
| |
Useful Life | |
Gross Carrying
Amount | | |
Accumulated
Amortizaton | | |
Net Carrying
Amount | | |
Gross Carrying
Amount | | |
Accumulated
Amortizaton | | |
Net Carrying
Amount | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| |
Acquired intangibles- customer lists and non-compete
agreements | |
5 -10 years | |
$ | 1,997,300 | | |
$ | 1,570,682 | | |
$ | 426,618 | | |
$ | 1,997,300 | | |
$ | 1,532,123 | | |
$ | 465,177 | |
Acquired intangibles-patents and patent rights | |
Varied (1) | |
| 3,650,000 | | |
| 1,029,889 | | |
| 2,620,111 | | |
| 3,650,000 | | |
| 852,343 | | |
| 2,797,657 | |
Patent application costs | |
Varied (2) | |
| 1,058,833 | | |
| 438,438 | | |
| 620,395 | | |
| 1,058,833 | | |
| 413,268 | | |
| 645,565 | |
| |
| |
$ | 6,706,133 | | |
$ | 3,039,009 | | |
$ | 3,667,124 | | |
$ | 6,706,133 | | |
$ | 2,797,734 | | |
$ | 3,908,399 | |
(1) Acquired patents and patent
rights are amortized over their expected useful life which is generally the remaining legal life of the patent. As of March 31,
2015, the weighted average remaining useful life of these assets in service was approximately 5.2 years.
(2) Patent application costs
are amortized over their expected useful life which is generally the remaining legal life of the patent. As of March 31, 2015,
the weighted average remaining useful life of these assets in service was approximately 9.8 years.
Intangible asset amortization expense for
the three months ended March 31, 2015 amounted to $241,275 ($1,152,084 - March 31, 2014).
On January 5,
2015, the United States District Court for the Northern District of California issued a decision granting summary judgment to
defendant Facebook, Inc. in connection with a lawsuit filed on October 3, 2012 by Plaintiff Bascom Research, LLC (a
subsidiary of the Company) alleging patent infringement. As a result of the Court’s decision, the Company evaluated the
valuation of the patents that were the basis of the case for impairment as of December 31, 2014. The Company determined that
since the patents had been invalidated the probability of future cash flows derived from the patents that would support the
value of the assets had decreased so the assets were impaired. As a result, the Company recorded an impairment charge for the
underlying patent assets of the net book value of the patents as of December 31, 2014 of approximately $22,285,000.
On March 3, 2015, a
Markman hearing was held in the Eastern District of Texas in connection with the pending DSS Technology Management v.Taiwan Semiconductor
Manufacturing Company, Limited, et. al (“TSMC”) case. Based on the District Court’s claim construction order
issued on April 9, 2015, the Company’s subsidiary, DSS Technology Management and TSMC entered in to a Joint Stipulation and
Proposed Final Judgment of Non-Infringement dated May 4, 2015, subject to DSS Technology Management’s right to appeal the
court’s claim construction decision to the Federal Circuit, thus preserving the status quo in the event an appeal results
in remand for further proceedings in the District Court. During its review for the quarter ended March 31, 2015, the
Company determined that this court action was a triggering event requiring that goodwill and certain of the Company’s intangible
assets be tested for impairment as of March 31, 2015.
In performing the
impairment analysis related to the Company’s subsidiary DSS Technology Management’s intangible assets, the
Company determined that the patent portfolio containing the patents being litigated in DSS Technology Management’s suits
against TSMC, Samsung, and Intel, among others, had a net carrying value of approximately $1.4 million as of March 31, 2015.
In the second step of the impairment test, the Company utilized its projections of future undiscounted cash flows based on
the Company’s existing use of the patents. As a result, it was determined that the Company’s projections of
future undiscounted cash flows were greater than the carrying value of the asset group. Accordingly, the Company did not
perform the second step of the impairment test and deemed no impairment had occurred.
The carrying amount
of the Company’s goodwill as of March 31, 2015 was approximately $12 million of which approximately $9.6 million is allocated
to the Company’s subsidiary DSS Technology Management as a reportable unit. As a result of the aforementioned triggering
event, the Company performed the first step of the goodwill impairment test on the goodwill allocated to DSS Technology Management
in order to identify potential impairment by comparing the fair value of the reporting unit with its carrying amount, including
goodwill. For the Company’s DSS Technology Management reporting unit, a significant amount of future value is based on the
value of patents and patent rights, the Company uses a valuation methodology that assess the potential value of the claims against
parties the Company believes have infringed on the patents and therefore, the Company has the rights to receive royalties for those
infringers. The Company assessed the impact of the decision in the TSMC case referenced above on the expected future value of those
assets. Based on the Company’s analysis, the Company determined that the fair value of the reporting unit exceeded the carrying
value of the reporting unit, and therefore, no impairment of goodwill had occurred.
| 5. | Short-Term and Long-Term Debt |
Revolving Credit
Lines - The Company’s subsidiary Premier Packaging Corporation (“Premier Packaging”)
has a revolving credit line with Citizens Bank of up to $800,000 (as amended on April 28, 2015) that bears interest at 1 Month
LIBOR plus 3.75% (3.92% as of March 31, 2015) and matures on May 31, 2016 (as amended on April 28, 2015) . As of March 31, 2015,
the revolving line had a balance of $0 ($0 as of December 31, 2014).
Long-Term Debt
- On December 30, 2011, the Company issued a $575,000 convertible note that was due on December 29,
2013, and carries an interest rate of 10% per annum. Interest is payable quarterly, in arrears. The convertible note was convertible
at any time during the term at lender’s option into a total of 260,180 shares of the Company’s common stock at a conversion
price of $2.21 per share. On February 23, 2015, the Company entered into Convertible Promissory Note Amendment No. 2 to extend
the maturity date to December 30, 2016, eliminate the conversion feature, and to institute principal payments in the amount of
$15,000 per month plus interest through the extended maturity date, and a balloon payment of $230,000 due on the extended maturity
date. As of March 31, 2015, the balance of the note was $545,000 ($604,000 at December 31, 2014).
On May 24, 2013, the
Company entered into a promissory note in the principal sum of $850,000 to purchase three printing presses that were previously
leased by the Company’s wholly-owned subsidiary, Secuprint Inc., and carries an interest rate of 9% per annum. Interest is
payable quarterly, in arrears. On February 23, 2015, the Company entered into Promissory Note Amendment No. 2 to extend the maturity
date to May 31, 2016 and to institute principal payments in the amount of $15,000 per month plus interest through the extended
maturity date, and a balloon payment of $610,000 due on the extended maturity date. As of March 31, 2015, the balance of the term
loan was $820,000 ($850,000 at December 31, 2014).
Term Loan Debt
- On October 8, 2010, Premier Packaging amended its credit facility agreement with Citizens Bank to add a standby
term loan note pursuant to which Citizens Bank was to provide Premier Packaging with up to $450,000 towards the funding of eligible
equipment purchases for up to one year. In October 2011, the Company had borrowed $42,594 under the facility which amount was converted
into a term note payable in 60 monthly installments of $887 plus interest at 1 Month LIBOR plus 3% (3.18% at March 31, 2015). As
of March 31, 2015, the balance under this term note was $16,860 ($19,522 at December 31, 2014).
On July 19, 2013, Premier
Packaging entered into an equipment loan with People’s Capital and Leasing Corp. (“Peoples Capital”) for a printing
press. The loan was for $1,303,900, repayable over a 60-month period which commenced when the equipment was placed in service
in January 2014. The loan bears interest at 4.84% and is payable in equal monthly installments of $24,511. As of March 31, 2015,
the loan had a balance of $1,006,728 ($1,067,586 at December 31, 2014).
Promissory Notes
- On August 30, 2011, Premier Packaging purchased the packaging plant
it occupies in Victor, New York, for $1,500,000, which was partially financed with a $1,200,000 promissory note obtained from Citizens
Bank (“Promissory Note”). The Promissory Note calls for monthly payments of principal and interest in the amount of
$7,658, with interest calculated as 1 Month LIBOR plus 3.15% (3.33% at March 31, 2015). Concurrently with the transaction, the
Company entered into an interest rate swap agreement to lock into a 5.87% effective interest rate for the life of the loan.
The Promissory Note matures in August 2021 at which time a balloon payment of the remaining principal balance will be due. As of
March 31, 2015, the Promissory Note had a balance of $1,064,153 ($1,078,220 at December 31, 2014).
On December 6, 2013,
Premier Packaging entered into a Construction to Permanent Loan with Citizens Bank for up to $450,000 that was converted into a
promissory note upon the completion and acceptance of building improvements to the Company’s packaging plant in Victor, New
York. In May 2014, the Company converted the loan into a $450,000 note payable in monthly installments over a 5 year period of
$2,500 plus interest calculated at a variable rate of 1 Month Libor plus 3.15% (3.33% at March 31, 2015), which payments commenced
on July 1, 2014. The note matures in July 2019 at which time a balloon payment of the remaining principal balance of $300,000 is
due. As of March 31, 2015, the note had a balance of $427,750 ($435,000 at December 31, 2014).
Under the Citizens
Bank credit facilities, the Company’s subsidiary, Premier Packaging, is subject to various covenants including fixed charge
coverage ratio, tangible net worth and current ratio covenants. For the quarter ended March 31, 2015, Premier Packaging was in
compliance with the covenants. The Citizens Bank obligations are secured by all of the assets of Premier Packaging and are also
secured through cross guarantees by the Company and its other wholly-owned subsidiaries, Plastic Printing Professionals and Secuprint.
Promissory
Notes and other long-term liabilities - On February 13, 2014, the Company’s subsidiary,
DSS Technology Management, entered into an agreement with certain investors pursuant to which the Company contracted to
receive a series of advances up to $4,500,000 from the investors in exchange for promissory notes, fixed return interests
and contingent interests collateralized by certain of the Company’s intellectual property (the
“Agreement”). The notes bear interest at 1.95% and are subject to various covenants and will also be subject to a
Make Whole Amount calculation (as defined in the Agreement), which would result in an effective annual interest rate of
approximately 4.23% for the term thereof, assuming no prepayments. At the Company’s option, it may pay accrued interest
when due on the Notes, or elect to capitalize the accrued interest, adding it to the principal thereof. The maturity date of
all the Notes is the date four years after issuance (February 13, 2018) of the Initial Advance Note. As of March 31, 2015, an
aggregate of $4,109,000 ($4,089,000 as of December 31, 2014) was outstanding which includes $68,000 of accrued interest. In
addition, $459,000 ($459,000 as of December 31, 2014) was outstanding under the fixed return equity interest and contingent
equity interests which is included in other long-term liabilities on the balance sheet. See Note 7 - Commitments and
Contingencies.
On February 23, 2015,
the Company amended two of its debt obligations that, among other things, extended the maturity dates of the notes, instituted
principal payments for the notes, and eliminated a conversion feature on one of the notes. In conjunction with these agreements,
the Company issued an aggregate of 100,000 shares of its common stock with a grant date fair value of $41,000.
Restricted Shares
– In January 2015, the Company issued an aggregate of 30,000 shares of restricted common stock to certain members
of the Company’s board in exchange for agreements by the board members to reduce their cash compensation for the fiscal year
of 2015. The restricted shares will vest on August 15, 2015 and had an aggregate grant date fair value of approximately $11,000.
Stock Options
- In January 2015, the Company issued an aggregate of 53,550 options to purchase shares of the Company’s common stock with
an exercise price of $0.60 per share to certain members of the Company’s board in exchange for agreements by the board members
to reduce their cash compensation for the fiscal year of 2015. The options shares will vest on August 15, 2015 and had an aggregate
grant date fair value of approximately $6,000. The aggregate fair value of these options was determined by utilizing the Black-Scholes-Merton
option pricing model with a volatility of 72.6%, a risk free rate of return of 1.66% and zero dividend and forfeiture estimates.
Stock-Based Payments
and Compensation - The Company records stock-based payment expense related to options and warrants based on the grant date
fair value in accordance with FASB ASC 718. Stock-based compensation includes expense charges for all stock-based awards to employees,
directors and consultants. Such awards include option grants, warrant grants, and restricted stock awards. During the three months
ended March 31, 2015, the Company had stock compensation expense of approximately $325,000 or $0.01 basic and diluted earnings
per share ($547,000; $0.01 basic earnings per share for the corresponding three months ended March 31, 2014).
As of March 31, 2015,
there was approximately $1,004,000 of total unrecognized compensation costs related to options, warrants and restricted stock
granted under the Company’s stock option plans that will be recognized over the next 15 months. This amount excludes $536,000
of potential stock based compensation for stock options that vest upon the occurrence of certain events which the Company does
not believe are likely.
| 7. | Commitments
and Contingencies |
On October 24, 2011
the Company initiated a lawsuit against Coupons.com Incorporated (“Coupons.com”). The suit was filed in the United
States District Court, Western District of New York, located in Rochester, New York. Coupons.com is a Delaware corporation having
its principal place of business located in Mountain View, California. In the Coupons.com suit, the Company alleged breach of contract,
misappropriation of trade secrets, unfair competition and unjust enrichment, and sought in excess of $10 million in money damages
from Coupons.com for those claims. On October 28, 2014, the District Court granted Coupons.com’s motion for summary judgment,
dismissing the case. On November 25, 2014, the Company appealed that decision to the United States Court of Appeals for the Second
Circuit. On March 5, 2015, the parties entered into a Stipulation whereby the Company withdrew the appeal without prejudice so
that the parties could complete settlement negotiations. On March 31, 2015, a confidential settlement was reached by the parties,
ending the case.
On October 3, 2012,
Lexington Technology Group’s (now DSS Technology Management) subsidiary, Bascom Research, LLC, commenced legal proceedings
against five companies, including Facebook, Inc. and LinkedIn Corporation, in the United States District Court, Eastern District
of Virginia, pursuant to which Bascom Research, LLC alleged infringement of certain of its patents relating to networking technologies
(the “Bascom Litigation”). The cases were subsequently transferred to the United States District Court for the Northern
District of California. In 2013, DSS Technology Management settled with two of the defendants, and released a third defendant
from the case. On January 5, 2015, the District Court issued a decision granting summary judgment to defendants Facebook, Inc.
and LinkedIn Corp. in connection with the lawsuit. On January 22, 2015, Bascom Research and Facebook, Inc. entered in to a Stipulation
filed with the District Court whereby Bascom Research agreed not to appeal the District Court’s judgment, and Facebook,
Inc. agreed to request the dismissal of a pending Covered Business Method (“CBM”) review it had previously filed with
the United State Patent and Trademark Offices’ (“USPTO”) Patent Trial and Appeal Board (“PTAB”).
On February 19, 2015, Facebook and Bascom Research filed a joint motion with PTAB to terminate the CBM proceeding. The CBM proceeding
was terminated on February 24, 2015.
On November 26, 2013,
DSS Technology Management filed suit against Apple, Inc. (“Apple”) in the United States District Court for the Eastern
District of Texas, for patent infringement (the “Apple Litigation”). The Apple Litigation relates to certain patents
owned by DSS Technology Management in the Bluetooth technology space. DSS Technology Management is seeking a judgment for infringement,
injunctive relief, and compensatory damages from Apple. On October 28, 2014, the case was stayed by the District Court pending
a determination of Apple’s motion to transfer the case to the Northern District of California. On November 7, 2014, Apple’s
motion to transfer the case to the Northern District of California was granted. On December 30, 2014, Apple filed two petitions
for Inter Partes Review (“IPRs”) of the patents at issue in the case with the PTAB. DSS Technology Management filed
its responses to the petitions on March 30, 2015. On May 1, 2015, the District Court issued an order granting Apple’s motion
to stay the case until the IPRs are decided.
On March 10, 2014,
DSS Technology Management filed suit in the United States District Court for the Eastern District of Texas against Taiwan Semiconductor
Manufacturing Company, TSMC North America, TSMC Development, Inc. (referred to collectively as “TSMC”), Samsung Electronics
Co., Ltd., Samsung Electronics America, Inc., Samsung Telecommunications America L.L.C., Samsung Semiconductor, Inc., Samsung
Austin Semiconductor LLC (referred to collectively as “Samsung”), and NEC Corporation of America (referred to as “NEC”),
for patent infringement involving certain of its semiconductor patents. DSS Technology Management is seeking a judgment for infringement,
injunctive relief, and money damages from each of the named defendants. In June 2014 TSMC filed a petition for Inter Partes
Review of the patents at issue with the PTAB. DSSTM filed its preliminary response to the petition in October, 2014. Samsung also
filed an IPR relating to the same patents in September 2014. DSSTM filed its preliminary response to that petition in December,
2014. On December 31, 2014, the PTAB instituted review of several of the patent claims at issue in the case. Samsung filed a motion
with PTAB to join TSMC’s IPR proceeding. The request was granted by the PTAB. On March 3, 2015, a Markman hearing was held
in the Eastern District of Texas. Based on the District Court’s claim construction order issued on April 9, 2015, DSS Technology
Management and TSMC entered in to a Joint Stipulation and Proposed Final Judgment of Non-Infringement dated May 4, 2015, subject
to DSS Technology Management’s right to appeal the court’s claim construction decision to the Federal Circuit, thus
preserving the status quo in the event an appeal results in remand for further proceedings in the District Court. On April 28,
2015, DSS Technology Management reached a confidential settlement with NEC.
On May 30, 2014,
DSS Technology Management filed suit against Lenovo (United States), Inc. (“Lenovo”) in the United States
District Court for the Eastern District of Texas, for patent infringement. The complaint has alleged infringement by Lenovo
of one of DSS Technology Management’s patents that relates to systems and methods of using low power wireless
peripheral devices. DSS Technology Management is seeking judgment for infringement and money damages from Lenovo in
connection with the case. On April 27, 2015, Lenovo moved for summary judgment in the District Court on the grounds that the
patent at issue is invalid for indefiniteness. A decision on the motion is currently pending. On May 8, 2015, the parties
tentatively agreed to the terms of a confidential non-suit agreement.
On February 16, 2015,
DSS Technology Management filed suit in the United States District Court, Eastern District of Texas, against defendants Intel
Corporation, Dell, Inc., GameStop Corp., Conn’s Inc., Conn Appliances, Inc., NEC Corporation of America, Wal-Mart Stores,
Inc., Wal-Mart Stores Texas, LLC, and AT&T, Inc. The complaint alleges patent infringement and seeks judgment for infringement
of two of DSSTM’s patents, injunctive relief and money damages. The case is currently in the initial pleadings stage. On
April 28, 2015, a confidential settlement was reached with NEC.
On April 28, 2015,
the Company was served with a shareholder derivative lawsuit that was filed in the Supreme Court of the State of New York, County
of Kings: Benjamin Lapin, Derivatively on Behalf of Himself and All Others Similarly Situated, Plaintiff v. Robert Fagenson, Jeffrey
Ronaldi, Peter Hardigan, Robert Bzdick, Jonathon Perrelli, Warren Hurwitz, Ira Greenstein, David Klein and Philip Jones, Defendants,
and Document Security Systems, Inc., Nominal Defendant. The complaint alleges, among other things, breach of fiduciary duty, gross
mismanagement, abuse of control, and waste of corporate assets since October 2, 2012, and alleges that demand on the Board of
Directors to take action would be futile. The complaint seeks unspecified damages, attorneys’ fees, and other costs and
expenses. The Company believes that all of the claims in this lawsuit are without merit and intends to vigorously defend against
these claims, but is unable to predict the outcome or reasonably estimate a range of possible loss.
In addition to the
foregoing, we are subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally
adjudicated. The Company accrues for potential litigation losses when a loss is probable and estimable.
Contingent
Litigation Payments – The Company retains the services of professional
service providers, including law firms that specialize in intellectual property licensing, enforcement and patent law. These service
providers are often retained on an hourly, monthly, project, contingent or a blended fee basis. In contingency fee arrangements,
a portion of the legal fee is based on predetermined milestones or the Company’s actual collection of funds. The Company
accrues contingent fees when it is probable that the milestones will be achieved and the fees can be reasonably estimated. As
of March 31, 2015, the Company has not accrued any contingent legal fees pursuant to these arrangements.
Contingent
Payments – The Company is party to certain agreements with funding partners who have rights to portions of intellectual
property monetization proceeds that the Company receives.
Related Party
Consulting Payments – During the three months ended March 31, 2015 the Company paid consulting
fees of approximately $35,000 to Patrick White, its former CEO, under a consulting agreement that expired on February 28, 2015.
| 8. | Supplemental Cash Flow Information |
Supplemental cash flow information for the
three months ended March 31, 2015 and 2014 is approximately as follows:
| |
2015 | | |
2014 | |
| |
| | |
| |
Cash paid for interest | |
$ | 58,000 | | |
$ | 69,000 | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Loss from change in fair value of interest rate swap derivatives | |
$ | (16,000 | ) | |
$ | (10,000 | ) |
Accrued liabilities with related parties settled with equity | |
$ | - | | |
$ | 134,000 | |
Financing of building improvements | |
$ | - | | |
$ | 200,000 | |
Change in non-controlling interest | |
$ | - | | |
$ | 820,000 | |
The
Company’s businesses are organized, managed and internally reported as four operating segments. Two of these operating
segments, Packaging and Printing, and Plastics are engaged in the printing and production of paper, cardboard and plastic documents
with a wide range of features, including the Company’s patented technologies and trade secrets designed for the protection
of documents against unauthorized duplication and altering. The two other operating segments, ExtraDev,
Inc., dba DSS Digital Group, and DSS Technology Management, Inc., are engaged in various aspects of developing, acquiring, selling
and licensing technology assets and are grouped into one reportable segment called Technology.
Approximate information
concerning the Company’s operations by reportable segment for the three months ended March 31, 2015 and 2014 is as follows.
The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently,
would report the results contained herein:
Three Months Ended March 31, 2015 | |
Packaging and Printing | | |
Plastics | | |
Technology | | |
Corporate | | |
Total | |
Revenues from external customers | |
$ | 2,082,000 | | |
| 938,000 | | |
| 410,000 | | |
| - | | |
$ | 3,430,000 | |
Depreciation and amortization | |
| 128,000 | | |
| 34,000 | | |
| 216,000 | | |
| 2,000 | | |
| 380,000 | |
Stock based compensation | |
| 17,000 | | |
| 10,000 | | |
| 33,000 | | |
| 265,000 | | |
| 325,000 | |
Net income (loss) | |
| 41,000 | | |
| 87,000 | | |
| (1,055,000 | ) | |
| (720,000 | ) | |
| (1,647,000 | ) |
Identifiable assets | |
| 8,673,000 | | |
| 2,132,000 | | |
| 13,947,000 | | |
| 1,457,000 | | |
| 26,209,000 | |
Three Months Ended March 31, 2014 | |
Packaging and Printing | | |
Plastics | | |
Technology | | |
Corporate | | |
Total | |
Revenues from external customers | |
$ | 2,243,000 | | |
| 921,000 | | |
| 464,000 | | |
| - | | |
$ | 3,628,000 | |
Depreciation and amortization | |
| 150,000 | | |
| 43,000 | | |
| 1,119,000 | | |
| 1,000 | | |
| 1,313,000 | |
Stock based compensation | |
| 74,000 | | |
| 42,000 | | |
| 94,000 | | |
| 337,000 | | |
| 547,000 | |
Net loss | |
| (64,000 | ) | |
| (9,000 | ) | |
| (1,679,000 | ) | |
| (1,303,000 | ) | |
| (3,055,000 | ) |
Identifiable assets | |
| 8,989,000 | | |
| 2,179,000 | | |
| 55,543,000 | | |
| 1,024,000 | | |
| 67,735,000 | |
On April 28, 2015,
Premier Packaging and Citizens Bank entered in to a Modification/Extension to the Amended and Restated Revolving Line Note (the
“Revolving Note”) and the Second Amended and Restated Credit Facility Agreement (collectively, the “Loan Documents”)
that, among other things, (i) extended the maturity date of the Revolving Note to May 31, 2016, (ii) reduced the amount available
under the Revolving Note from $1,000,000 to $800,000, (iii) amended certain covenants contained in the Loan Documents, (iv) amended
certain terms and conditions of the Loan Documents, and (v) allowed Premier Packaging to distribute up to $100,000 per fiscal quarter
to its parent company, Document Security Systems. In addition, on April 28, 2015, Premier Packaging entered into a term note with
Citizens for $525,000, repayable over a 60-month period. The loan bears interest at 3.61% and is payable in equal monthly installments
of $9,591. Premier Packaging used the proceeds of the term note to acquire a HP Indigo 7800 Digital press.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements
contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995 (the “1995 Reform Act”). Document Security Systems, Inc. desires to avail itself of certain “safe
harbor” provisions of the 1995 Reform Act and is therefore including this special note to enable us to do so. Except for
the historical information contained herein, this report contains forward-looking statements (identified by the words “estimate”,
“project”, “anticipate”, “plan”, “expect”, “intend”, “believe”,
“hope”, “strategy” and similar expressions), which are based on our current expectations and speak only
as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors, as previously set
forth in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2014 and this report, that
could cause actual results to differ materially from the results anticipated in the forward-looking statements.
Overview
Document Security Systems,
Inc. (referred to in this report as “Document Security Systems”, “DSS”, “we”, “us”,
“our” or “Company”) was formed in New York in 1984 and, in 2002, chose to strategically focus on becoming
a developer and marketer of secure technologies. We specialize in fraud and counterfeit protection for all forms of printed documents
and digital information. The Company holds numerous patents for optical deterrent technologies that provide protection of printed
information from unauthorized scanning and copying. We operate two production facilities, consisting of a combined security printing
and packaging facility and a plastic card facility- where we produce secure and non-secure documents for our customers. We license
our anti-counterfeiting technologies to printers and brand-owners. In addition, we have a digital division which provides cloud
computing services for its customers, including disaster recovery, back-up and data security services. In 2013, the Company expanded
its business focus by merging with DSS Technology Management, Inc., formerly known as Lexington Technology Group, Inc. , which
acquires intellectual property assets and interests in companies owning intellectual property assets for the purpose of monetizing
these assets through a variety of value-enhancing initiatives, including, but not limited to, investments in the development and
commercialization of patented technologies, licensing, strategic partnerships and litigation.
Prior to 2006, our
primary revenue source in our document security division was derived from the licensing of our technology. In 2006, we began a
series of acquisitions designed to expand our ability to produce products for end-user customers. In 2006, we acquired Plastic
Printing Professionals, Inc. (“P3”), a privately held plastic cards manufacturer located in the San Francisco, California
area. P3 is also referred to herein as the “DSS Plastics Group”. In 2008, we acquired substantially all of the assets
of DPI of Rochester, LLC, a privately held commercial printer located in Rochester, New York, referred to herein as “Secuprint”
or “DSS Printing Group”. In 2010, we acquired Premier Packaging Corporation, a privately held packaging company located
in the Rochester, New York area. Premier Packaging Corporation is also referred to herein as “Premier Packaging” or
the “DSS Packaging Group.” In May 2011, we acquired all of the capital stock of ExtraDev, Inc. (“ExtraDev”),
a privately held information technology and cloud computing company located in the Rochester, New York area. ExtraDev is also referred
to herein as the “DSS Digital Group”.
On July 1, 2013, we
merged with DSS Technology Management, Inc. (formerly known as Lexington Technology Group, Inc.), a private intellectual property
monetization company. DSS Technology Management, Inc. is also referred to herein as “DSS Technology Management” or
“DSSTM”. DSS Technology Management is focused on extracting the economic benefits of intellectual property assets through
acquiring or internally developing patents or other intellectual property assets (or interests therein) and then monetizing such
assets through a variety of value enhancing initiatives.
In January 2014, we moved our printing operation
to the same location as our packaging operation in Victor, New York in an effort to make our printing and packaging operations
more efficient.
We do business in four operating segments
as follows:
DSS Packaging
and Printing Group - Produces custom paperboard packaging serving clients in the pharmaceutical, beverage, photo
packaging, toy, specialty foods and direct marketing industries, among others. The group also provides secure and commercial printing
services for end-user customers along with technical support for our technology licensees. The division produces a wide array of
printed materials such as security paper, vital records, prescription paper, birth certificates, receipts, manuals, identification
materials, entertainment tickets, secure coupons, parts tracking forms, brochures, direct mailing pieces, catalogs, business cards,
etc. The division also provides resources and production equipment resources for our ongoing research and development of security
printing and related technologies.
DSS Plastics
Group - Manufactures laminated and surface printed cards which can include magnetic stripes, bar codes, holograms,
signature panels, invisible ink, micro fine printing, guilloche patterns, biometric, radio frequency identification (RFID) and
watermarks for printed plastic documents such as ID cards, event badges, and driver’s licenses.
DSS Digital Group - Provides
data center centric solutions to businesses and governments delivered via the “cloud”. This division developed an iPhone
based application that integrates some of the our traditional optical deterrent technologies into proprietary digital data security
based solutions for brand protection and product diversion prevention.
DSS Technology
Management - Acquires or internally develops patented technology or intellectual property assets (or interests
therein), with the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited
to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships and commercial
litigation. Since 2013, DSS Technology Management has been involved in several patent litigation lawsuits, and as of the date of
this filing, has active litigation against several companies, as summarized below.
On January 5, 2015,
the United States District Court for the Northern District of California issued a decision granting summary judgment to defendants
Facebook and LinkedIn, effectively ending the case at the trial court level. On January 22, 2015, Bascom Research, LLC, a
subsidiary of DSS Technology Management, Inc. (“DSS Technology Management”), and Facebook, entered into a Stipulation
filed with the District Court whereby Bascom Research agreed not to appeal the District Court’s judgment, and Facebook agreed
to request the dismissal of its pending CBM with PTAB. On February 19, 2015, Facebook and Bascom Research filed a joint motion
with the Patent Trial and Appeal Board (“PTAB”) to terminate the Covered Business Method (“CBM”) proceeding.
The CBM proceeding was terminated on February 24, 2015.
On November 26, 2013,
DSS Technology Management filed suit against Apple, Inc. (“Apple”) in the United States District Court for the Eastern
District of Texas, for patent infringement. The complaint has alleged infringement by Apple of two of DSS Technology Management’s’s
patents that relate to systems and methods of using low power wireless peripheral devices. DSS Technology Management is seeking
a judgment for infringement and money damages from Apple in connection with the case. On October 28, 2014, the case was stayed
by the District Court pending a determination of Apple’s motion to transfer the case to the Northern District of California,
which was filed on March 3, 2014. On November 7, 2014, Apple’s motion to transfer the case was granted. On December 30, 2014,
Apple filed two petitions for Inter Partes Review (“IPRs”) of the patents at issue with the PTAB. DSS Technology Management’s
filed its responses to the petitions on March 30, 2015. On May 1, 2015, the District Court issued an order granting Apple’s
motion to the stay the case until the IPRs are decided.
On March 10, 2014,
DSS Technology Management filed suit in the United States District Court for the Eastern District of Texas against Taiwan Semiconductor
Manufacturing Company, TSMC North America, TSMC Development, Inc. (referred to collectively as “TSMC”), Samsung Electronics
Co., Ltd., Samsung Electronics America, Inc., Samsung Telecommunications America L.L.C., Samsung Semiconductor, Inc., Samsung Austin
Semiconductor LLC (referred to collectively as “Samsung”), and NEC Corporation of America (referred to as “NEC”),
for patent infringement involving one of its semiconductor patents. In this case, DSS Technology Management is seeking a judgment
for infringement, injunctive relief, and money damages from each of the named defendants. On June 24, 2014, TSMC filed a petition
for Inter Partes Review with the PTAB, and DSS Technology Management filed its preliminary response to that petition on October
17, 2014. Samsung filed an IPR relating to the same patents on September 12, 2014, and filed a corrected IPR on October 3, 2014.
DSS Technology Management filed its preliminary response to the Samsung IPR in December, 2014. On December 31, 2014, the PTAB instituted
review of several of the patent claims at issue in the case. Samsung filed a motion with PTAB to join TSMC’s IPR proceeding.
The request was granted by the PTAB.
On November 3, 2014,
TSMC filed a motion to transfer its case to the Northern District of California. A decision has not yet been rendered by the District
Court for this motion. On March 3, 2015, a Markman hearing was held in the Eastern District of Texas. Based on the District Court’s
claim construction order issued on April 9, 2015, DSS Technology Management and TSMC entered in to a Joint Stipulation and Proposed
Final Judgement of Non-Infringement dated May 4, 2015, subject to DSS Technology Management’s right to appeal the court’s
claim construction decision to the Federal Circuit, thus preserving the status quo in the event an appeal results in remand for
further proceedings in the District Court. On April 28, 2015, DSS Technology Management reached a confidential settlement with
NEC.
On May 30, 2014,
DSS Technology Management filed suit against Lenovo (United States), Inc. (“Lenovo”) in the United States
District Court for the Eastern District of Texas, for patent infringement. The complaint alleges infringement by Lenovo of
one of DSS Technology Management’s patents that relates to systems and methods of using low power wireless peripheral
devices. DSS Technology Management is seeking judgment for infringement and money damages from Lenovo in connection with the
case. On April 27, 2015, Lenovo moved for summary judgment in the District Court on the grounds that the patent at issue is
invalid for indefiniteness. A decision on the motion is currently pending. On May 8, 2015, the parties tentatively agreed to
the terms of a confidential non-suit agreement.
On February 16, 2015,
DSS Technology Management filed suit in the United States District Court, Eastern District of Texas, against defendants Intel Corporation,
Dell, Inc., GameStop Corp., Conn’s Inc., Conn Appliances, Inc., NEC Corporation of America, Wal-Mart Stores, Inc., Wal-Mart
Stores Texas, LLC, and AT&T, Inc. The complaint alleges patent infringement and seeks a judgment for infringement of two of
DSSTM’s patents, injunctive relief and money damages. The case is currently in the initial pleadings stage. On April 28,
2015, a confidential settlement was reached with NEC.
Results of Operations for the Three
Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014
This discussion should
be read in conjunction with the financial statements and footnotes contained in this quarterly report and in our Annual Report
on Form 10-K for the year ended December 31, 2014.
Revenue
| |
Three Months Ended March 31, 2015 | | |
Three Months Ended March 31, 2014 | | |
% change | |
Revenue | |
| | | |
| | | |
| | |
Printed products | |
$ | 3,020,000 | | |
$ | 3,164,000 | | |
| -5 | % |
Technology sales, services and licensing | |
| 410,000 | | |
| 464,000 | | |
| -12 | % |
Total revenue | |
$ | 3,430,000 | | |
$ | 3,628,000 | | |
| -5 | % |
For the three months
ended March 31, 2015, total revenue was approximately $3.4 million, representing an decrease of 5% from the corresponding three
months ended March 31, 2014. Revenues from the sale of printed products decreased 5%, which reflected a decrease in revenues from
packaging and commercial printing sales offset by increases in security printing and plastic card sales. Technology sales, services
and licensing revenue decreased 12% which reflected an 8% increase in revenues from the sale of the Company’s digital products
offset by a decrease in licensing revenue of 17% for the three months ended March 31, 2015, as compared to the same period in 2014.
Costs and expenses
| |
Three Months Ended March 31, 2015 | | |
Three Months Ended March 31, 2014 | | |
% change | |
Costs and expenses | |
| | | |
| | | |
| | |
Cost of goods sold, exclusive of depreciation and amortization | |
$ | 1,986,000 | | |
$ | 2,198,000 | | |
| -10 | % |
Sales, general and administrative compensation | |
| 1,006,000 | | |
| 1,290,000 | | |
| -22 | % |
Depreciation and amortization | |
| 380,000 | | |
| 1,313,000 | | |
| -71 | % |
Professional fees | |
| 719,000 | | |
| 540,000 | | |
| 33 | % |
Stock based compensation | |
| 325,000 | | |
| 547,000 | | |
| -41 | % |
Sales and marketing | |
| 103,000 | | |
| 171,000 | | |
| -40 | % |
Rent and utilities | |
| 159,000 | | |
| 184,000 | | |
| -14 | % |
Other operating expenses | |
| 180,000 | | |
| 229,000 | | |
| -21 | % |
Research and development | |
| 116,000 | | |
| 114,000 | | |
| 2 | % |
Total costs and expenses | |
$ | 4,974,000 | | |
$ | 6,586,000 | | |
| -24 | % |
Costs of goods sold,
exclusive of depreciation and amortization includes all direct costs of printed products revenues, including materials,
direct labor, transportation and manufacturing facility costs. In addition, this category includes all direct costs associated
with technology sales, services and licensing including hardware and software that are resold, third-party fees, and fees paid
to inventors or others as a result of technology licenses or settlements, if any. Costs of goods sold decreased 10% during the
three ended March 31, 2015. The decrease was due to the decrease in revenue along with a decrease in material costs as a percentage
of sales primarily due to a change in product mix of sales during the first three months of 2015 compared to the first three months
of 2014.
Sales, general and
administrative compensation costs, excluding stock-based compensation, decreased 22% during the three ended March 31, 2015,
respectively, as compared to the same period in 2014, due to the reduction of employee headcount, a reduction in bonus compensation
and a reduction in executive management compensation.
Depreciation and
amortization includes the depreciation of machinery and equipment used for production, depreciation of office equipment and
building and leasehold improvements, amortization of software, and amortization of acquired intangible assets such as customer
lists, trademarks, non-compete agreements and patents, and internally developed patent assets. Depreciation and amortization decreased
71% during the three months ended March 31, 2015 as compared to the same period in 2014, due to the significant decrease in the
carrying value of the Company’s patent assets as a result of impairments recognized by the Company in the fourth quarter
of 2014.
Professional fees
increased 33% in the three ended March 31, 2015 as compared to the same period in 2014. The increase during 2015 was due to the
increase in legal costs incurred in conjunction with the Company’s intellectual property monetization business compared to
the first three months of 2014. The increase in legal costs was partially offset by decreases in accounting and consulting costs.
Stock-based compensation
includes expense charges for all stock-based awards to employees, directors and consultants. Such awards include option grants,
warrant grants, and restricted stock awards. Stock-based compensation for the three ended March 31, 2015 decreased 41%, from the
first three months of 2014 as a result of a decrease in vesting activity in the 2015 period.
Sales and marketing
costs, which includes internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and
trade show participation expenses, decreased 40% during the three months ended March 31, 2015, as compared to the same period in
2014, primarily due to decreases in travel and marketing study costs.
Rent and utilities
decreased 14% during the three months ended March 31, 2015 as compared to the same period in 2014, due to decreases in rented
space costs utilized by the Company’s Technology Management division along with reductions in utilities costs incurred by
the Company’s printed products division.
Other operating
expenses consist primarily of equipment maintenance and repairs, office supplies, IT support, bad debt expense and insurance
costs. Other operating expenses decreased 21% for the three months ended March 31,
2015 compared to 2014 which reflected a general decrease in office, delivery, equipment repair and software costs.
Research and development
costs consist primarily of compensation costs for research personnel, third-party research costs, and consulting costs. Research
and development costs were virtually flat during the first three months of 2015 compared to the first three months of 2014 as the
Company made no changes to number of research personnel involved in the research and development of the Company’s AuthentiGuard
product line.
Net Loss and Net Loss per Share
| |
Three Months Ended March 31, 2015 | | |
Three Months Ended March 31, 2014 | | |
% change | |
| |
| | |
| | |
| |
Net loss | |
| (1,647,000 | ) | |
| (3,055,000 | ) | |
| -46 | % |
| |
| | | |
| | | |
| | |
Loss per share: | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.04 | ) | |
$ | (0.07 | ) | |
| -43 | % |
| |
| | | |
| | | |
| | |
Shares used in computing loss per share: | |
| | | |
| | | |
| | |
Basic and diluted | |
| 46,239,404 | | |
| 41,923,987 | | |
| 10 | % |
For the three months
ended March 31, 2015, net loss was $1.6 million, a 46% decrease from a net loss of $3.1 million in the first three months of 2014.
The decrease was primarily the result of a $910,000 reduction in amortization of intangibles expense in 2015, along with a reduction
in nearly all other cost categories except for professional fees during 2015 as compared to the same period in 2014.
LIQUIDITY AND CAPITAL
RESOURCES
We have historically
met our liquidity and capital requirements primarily through the private placement of our equity securities and debt financings.
As of March 31, 2015, we had cash of approximately $1.6 million and restricted cash of approximately $337,000. In addition, we
have $800,000 available to our packaging division under a revolving credit line.
Operating Cash Flow
– During the first three months of 2015, we used approximately $529,000 of cash for operations, representing a 8% increase
from a use of cash for operations during the first three months of 2014. Significantly impacting the use of cash in the 2015 period
was the net payment of approximately $351,000 of accrued expenses during the period as opposed to a net positive cash flow impact
of $327,000 from accrued expense in the same period in 2014.
Investing
Cash Flow - During the first three months of 2015, we used only approximately $28,000
for capital improvements, which resulted in a significant reduction of investing cash outflows as compared to the first three months
of 2014.
Financing Cash Flows
- During the first three months of 2015, we made principal payments for long-term debt of approximately $195,000. During the first
three months of 2014, the Company had made net payments of approximately $158,000 to the payment of its revolving line of credit,
paid long-term debt of approximately $156,000, and received $2,691,000 from a limited-recourse promissory note entered into by
our subsidiary, DSS Technology Management.
Future
Capital Needs -As of March 31, 2015, the Company had approximately $1.6 million in unrestricted cash
and $337,000 in restricted cash and up to $800,000 available under a revolving credit line at its packaging subsidiary,
which may not be sufficient to cover the Company’s future working capital requirements. The Company believes that its
current cash resources and credit line resources provide it with sufficient resources to fund its operations and
meet its obligations for at least the next twelve months, provided that the Company achieves or substantially achieves the
key factors of its business plan over the next twelve months, including but not limited to (i) increasing sales of the
Company’s digital products; (ii) decreasing legal and professional expenses for the Company’s intellectual
property monetization business; and (iii) continuing to generate operating profits from the Company’s packaging and
plastic printing operations. Furthermore, the Company believes that it will be
able to raise additional equity and/or debt funding if necessary, to fund working capital requirements not met by its current
cash and credit resources. The Company has been able to obtain equity and/or debt based financing in the past, including most
recently, in December 2014 when the Company raised gross proceeds of approximately $1.7 million from the sale of common
stock. However, there is no assurance the Company will be able to raise such funds if necessary.
Off-Balance Sheet Arrangements
We do not have any
off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements,
revenues or expenses.
Critical Accounting Policies and Estimates
As of March 31, 2015,
our critical accounting policies and estimates have not changed materially from those set forth in our Annual Report on Form 10-K
for the year ended December 31, 2014.
ITEM 4 - CONTROLS AND PROCEDURES
Under the supervision
and with the participation of our management, including our principal executive officer and principal financial officer, we conducted
an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended, as of March 31, 2015. Based on this evaluation, our principal executive
officer and principal financial officer have concluded that, based on the material weaknesses discussed below, our disclosure controls
and procedures were not effective to ensure that information required to be disclosed by us in reports filed or submitted under
the Securities Exchange Act were recorded, processed, summarized, and reported within time periods specified in the Securities
and Exchange Commission’s rules and forms and that our disclosure controls are not effectively designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated
to management, including our principal executive officer and principal financial officer, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure.
Management identified
the following material weakness in its internal control over financial reporting in its annual assessment of internal controls
over financial reporting that management performed for the year ended December 31, 2014. This material weakness still remains as
of March 31, 2015.
The Company’s controls associated with
identifying and accounting for complex and non-routine transactions in accordance with GAAP were ineffective. Specifically,
during the course of the annual audit, adjustments were made to correct the recorded amounts for impairment of goodwill that could
have resulted in a material misstatement of our financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
Plan for Remediation of Material Weaknesses
In response to the
identified material weaknesses, management, with oversight from the Company’s audit committee, plans to continue to monitor
and review our control environment and to evaluate whether cost effective solutions are available to remedy the identified material
weaknesses by expanding the resources available to the financial reporting process.
Changes in Internal Control over Financial Reporting
In the ordinary course
of business, we may routinely modify, upgrade or enhance our internal controls and procedures for financial reporting. There have
not been any changes in our internal controls over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) of
the Exchange Act during the first quarter of 2015 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting,
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On March 31, 2015,
the Company reached a confidential settlement with Coupons.com Incorporated in connection with the Company’s pending litigation
against Coupons.com Incorporated, which was filed on October 24, 2011. This settlement resulted in the termination of this lawsuit.
On April 28, 2015,
DSS Technology Management reached a confidential settlement with NEC Corporation of America (“NEC”) that resulted in
the termination of litigation against NEC in connection with DSS Technology Management’s pending litigation filed in the
Eastern District of Texas against TSMC, Samsung and NEC, on March 10, 2014, and its pending litigation filed in the Eastern District
of Texas against Intel Corporation, Dell, Inc., GameStop Corp., Conn’s, Inc., Conn Appliances, Inc., NEC, Wal-Mart Stores,
Inc., Wal-Mart Stores Texas, LLC and AT&T, Inc., on February 16, 2015.
On April 28, 2015,
the Company was served with a shareholder derivative lawsuit that was filed in the Supreme Court of the State of New York, County
of Kings: Benjamin Lapin, Derivatively on Behalf of Himself and All Others Similarly Situated, Plaintiff v. Robert Fagenson, Jeffrey
Ronaldi, Peter Hardigan, Robert Bzdick, Jonathon Perrelli, Warren Hurwitz, Ira Greenstein, David Klein and Philip Jones, Defendants,
and Document Security Systems, Inc., Nominal Defendant. The complaint alleges, among other things, breach of fiduciary duty, gross
mismanagement, abuse of control, and waste of corporate assets since October 2, 2012, and alleges that demand on the Board of Directors
to take action would be futile. The complaint seeks unspecified damages, attorneys’ fees, and other costs and expenses. The
Company believes that all of the claims in this lawsuit are without merit and intends to vigorously defend against these claims,
but is unable to predict the outcome or reasonably estimate a range of possible loss.
On May 1, 2015, in
connection with DSS Technology Management’s pending litigation against Apple, Inc. (“Apple”) originally filed
on November 26, 2013, the District Court for the Northern District of California issued an order granting Apple’s motion
to stay the case until the pending IPR proceedings are decided by the Patent Trial and Appeal Board.
On May 4, 2015, based
on the District Court’s claim construction order issued on April 9, 2015 in connection with DSS Technology Management’s
pending litigation filed on March 10, 2014 in the Eastern District of Texas against defendants TSMC, Samsung and NEC, DSS Technology
Management and TSMC entered in to a Joint Stipulation and Proposed Final Judgment of Non-Infringement, subject to DSS Technology
Management’s right to appeal the court’s claim construction decision to the Federal Circuit, thus preserving the status
quo in the event an appeal results in remand for further proceedings in the District Court.
ITEM 1A - RISK FACTORS
Except as set forth below, there have been
no material changes to the discussion of risk factors included in our most recent Annual Report on Form 10-K.
We and certain of our directors and
executive officers have been named as defendants in a recently initiated shareholder derivative lawsuit that could result in substantial
costs and divert management’s attention.
We, and certain of
our directors and executive officers, have been named as defendants in a shareholder derivative lawsuit that alleges, among other
things, breach of fiduciary duty, gross mismanagement, abuse of control, and waste of corporate assets since October 2, 2012, and
alleges that demand on the board of directors to take action would be futile. We intend to engage in a vigorous defense of such
litigation. Even if we were to be successful in the defense of this litigation, we could incur substantial costs not covered by
our directors and officers liability insurance, suffer a significant adverse impact on our reputation and divert management’s
attention and resources, which could have a material adverse effect on our business. In addition, any settlement of the litigation
could require payments that exceed the limits of our available directors and officers liability insurance, which could have a material
adverse effect on our operating results or financial condition.
If we fail to comply with the continued
listing standards of the NYSE MKT, it may result in a delisting of our common stock from the exchange.
Our common stock is
currently listed for trading on the NYSE MKT, and the continued listing of our common stock on the NYSE MKT is subject to our compliance
with a number of listing standards. These listing standards include the requirement for avoiding a low selling price for a substantial
period of time. Since September 23, 2014, the trading price of our common stock, as reported on the NYSE MKT, has been
less than $1.00. There can be no assurance that we will meet the continued listing standards of the NYSE MKT. If our common stock
were no longer listed on the NYSE MKT, investors might only be able to trade on the OTC Bulletin Board ® or in the Pink Sheets
® (a quotation medium operated by Pink Sheets LLC). This would impair the liquidity of our common stock not only in the number
of shares that could be bought and sold at a given price, which might be depressed by the relative illiquidity, but also through
delays in the timing of transactions and reduction in media coverage.
Due to our low cash balance and negative
cash flow, we may have to further reduce our costs by curtailing future operations to continue as a business, and substantial doubt
may be raised about our ability to continue as a going concern.
We have incurred significant
net losses in previous years, including for the year ended December 31, 2014 and through the first three months of 2015. As of
March 31, 2015, the Company had approximately $1,592,000 in unrestricted cash and $337,000 in restricted cash and up to $800,000
available under a revolving credit line at its packaging subsidiary, Our ability to fund our capital requirements out of our available
cash and cash generated from our operations in the future will depend on many factors, but largely on our ability to (i) increase
sales of the Company’s digital products; (ii) decrease legal and professional expenses for the Company’s intellectual
property monetization business; and (iii) continue to generate operating profits from the Company’s packaging and plastic
printing operations. The Company has been able to obtain equity and/or debt based
financing in the past, including most recently, in December 2014 when the Company raised gross proceeds of approximately $1.7 million
from the sale of common stock. However, we may not be able to find financing in the capital markets or from lenders on acceptable
terms or at all in the future. If we are not successful in generating needed funds from operations or in equity or debt capital
raising transactions, we may need to reduce our costs which measures could include selling or consolidating certain operations
or assets, and delaying, canceling or scaling back product development and marketing programs. These measures could materially
and adversely affect our ability to operate profitably. In addition, if we are not successful in generating needed funds from operations
or from capital raising transactions, substantial doubt may be raised about our status as a going concern.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 – MINE SAFETY DISCLOSURES
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
Exhibit Number |
|
Exhibit Description |
|
|
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.* |
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.* |
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.* |
32.2 |
|
Certification of Chief Financial Officer as required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.* |
101.INS |
|
XBRL Instance Document* |
101.SCH |
|
XBRL Taxonomy Extension Schema Document* |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document* |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document* |
*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
|
|
DOCUMENT SECURITY SYSTEMS, INC. |
|
|
|
|
|
|
May 15, 2015 |
|
By: |
/s/ Jeffrey Ronaldi |
|
|
|
|
Jeffrey Ronaldi
Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
|
May 15, 2015 |
|
By: |
/s/ Philip Jones |
|
|
|
|
Philip Jones
Chief Financial Officer (Principal Financial Officer) |
Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
I, Jeffrey Ronaldi, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of Document Security Systems, Inc. for the quarter ended March 31, 2015;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)),
for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the registrant’s audit committee of the board of directors (or persons performing the equivalent functions):
a) All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: May 15, 2015
/s/Jeffrey Ronaldi |
|
Jeffrey Ronaldi |
|
Chief Executive Officer (Principal Executive Officer) |
|
Exhibit 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
OF CHIEF FINANCIAL OFFICER
I, Philip Jones, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of Document Security Systems, Inc. for the quarter ended March 31, 2015;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)),
for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the registrant’s audit committee of the board of directors (or persons performing the equivalent functions):
a) All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: May 15, 2015
/s/ Philip Jones |
|
Philip Jones, |
|
Chief Financial Officer (Principal Financial Officer) |
|
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of Document Security Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2015 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey Ronaldi, as Chief
Executive Officer of the Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and |
| (2) | The information contained in the eport fairly presents, in all material respects, the financial
condition and results of operations of the Company at the dates and for the periods indicated. |
Date: May 15, 2015
/s/Jeffrey Ronaldi |
|
Jeffrey Ronaldi |
|
Chief Executive Officer (Principal Executive Officer) |
|
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of Document Security Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2015 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip Jones, as Chief Financial
Officer of the Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company at the dates and for the periods indicated. |
Date: May 15, 2015
/s/Philip Jones |
|
Philip Jones |
|
Chief Financial Officer (Principal Financial Officer) |
|
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