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 September
30, 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 November 12, 2015, there were 51,756,948
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
| |
September 30, 2015 | | |
December 31, 2014 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash | |
$ | 1,244,696 | | |
$ | 2,343,675 | |
Restricted cash | |
| 293,043 | | |
| 355,793 | |
Accounts receivable, net | |
| 2,051,744 | | |
| 2,097,671 | |
Inventory | |
| 1,239,860 | | |
| 869,262 | |
Prepaid expenses and other current assets | |
| 471,655 | | |
| 425,671 | |
Deferred tax asset, net | |
| 2,499 | | |
| 2,499 | |
Total current assets | |
| 5,303,497 | | |
| 6,094,571 | |
| |
| | | |
| | |
Property, plant and equipment, net | |
| 5,177,053 | | |
| 5,016,539 | |
Investments and other assets, net | |
| 621,049 | | |
| 686,912 | |
Goodwill | |
| 12,046,197 | | |
| 12,046,197 | |
Other intangible assets, net | |
| 3,217,472 | | |
| 3,908,399 | |
| |
| | | |
| | |
Total assets | |
$ | 26,365,268 | | |
$ | 27,752,618 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 2,016,693 | | |
$ | 1,037,359 | |
Accrued expenses and other current liabilities | |
| 1,578,878 | | |
| 1,997,241 | |
Current portion of long-term debt, net | |
| 1,330,604 | | |
| 754,745 | |
Total current liabilities | |
| 4,926,175 | | |
| 3,789,345 | |
| |
| | | |
| | |
Long-term debt, net | |
| 6,689,483 | | |
| 7,439,036 | |
Other long-term liabilities | |
| 539,630 | | |
| 520,180 | |
Deferred tax liability, net | |
| 162,469 | | |
| 148,258 | |
| |
| | | |
| | |
Commitments and contingencies (Note 7) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders' equity | |
| | | |
| | |
Common stock, $.02 par value; 200,000,000 shares authorized, 50,620,585 shares issued and outstanding (46,172,404 on December 31, 2014) | |
| 1,012,412 | | |
| 923,448 | |
Additional paid-in capital | |
| 102,685,297 | | |
| 101,012,659 | |
Accumulated other comprehensive loss | |
| (80,630 | ) | |
| (61,180 | ) |
Accumulated deficit | |
| (89,569,567 | ) | |
| (86,019,128 | ) |
Total stockholders' equity | |
| 14,047,512 | | |
| 15,855,799 | |
Total liabilities and stockholders' equity | |
$ | 26,365,269 | | |
$ | 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
(unaudited)
| |
For the Three Months Ended September 30, | | |
For the Nine Months Ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Revenue | |
| | | |
| | | |
| | | |
| | |
Printed products | |
$ | 3,975,259 | | |
$ | 4,489,460 | | |
$ | 10,678,456 | | |
$ | 12,060,221 | |
Technology sales, services and licensing | |
| 444,734 | | |
| 474,834 | | |
| 1,367,168 | | |
| 1,415,195 | |
Total revenue | |
| 4,419,993 | | |
| 4,964,294 | | |
| 12,045,624 | | |
| 13,475,416 | |
Costs and expenses | |
| | | |
| | | |
| | | |
| | |
Cost of goods sold, exclusive of depreciation and amortization | |
| 2,556,044 | | |
| 3,111,062 | | |
| 7,205,723 | | |
| 8,505,957 | |
Selling, general and administrative (including stock based compensation) | |
| 2,226,325 | | |
| 2,461,902 | | |
| 7,071,153 | | |
| 8,149,881 | |
Depreciation and amortization | |
| 404,774 | | |
| 1,321,536 | | |
| 1,174,900 | | |
| 3,923,220 | |
Impairment of assets | |
| - | | |
| 11,749,528 | | |
| - | | |
| 11,749,528 | |
Total costs and expenses | |
| 5,187,143 | | |
| 18,644,028 | | |
| 15,451,776 | | |
| 32,328,586 | |
Operating loss | |
| (767,150 | ) | |
| (13,679,734 | ) | |
| (3,406,152 | ) | |
| (18,853,170 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income and (expense): | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (88,551 | ) | |
| (88,812 | ) | |
| (257,263 | ) | |
| (252,667 | ) |
Net loss on debt modification and extinguishment | |
| - | | |
| - | | |
| (19,096 | ) | |
| (51,915 | ) |
Gains on sales of investment and equipment | |
| - | | |
| - | | |
| 146,283 | | |
| - | |
Loss before income taxes | |
| (855,701 | ) | |
| (13,768,546 | ) | |
| (3,536,228 | ) | |
| (19,157,752 | ) |
Income tax expense (benefit) | |
| 4,737 | | |
| (999,567 | ) | |
| 14,211 | | |
| (990,093 | ) |
Net loss including noncontrolling interest | |
$ | (860,438 | ) | |
$ | (12,768,979 | ) | |
$ | (3,550,439 | ) | |
$ | (18,167,659 | ) |
Less: loss attributable to noncontrolling interest | |
| - | | |
| 4,700,000 | | |
| - | | |
| 4,700,000 | |
Net loss to common shareholders | |
| (860,438 | ) | |
| (8,068,979 | ) | |
| (3,550,439 | ) | |
| (13,467,659 | ) |
Other comprehensive loss: | |
| | | |
| | | |
| | | |
| | |
Interest rate swap gain (loss) | |
| (22,009 | ) | |
| 8,955 | | |
| (19,450 | ) | |
| (16,262 | ) |
Comprehensive loss: | |
$ | (882,447 | ) | |
$ | (12,760,024 | ) | |
$ | (3,569,889 | ) | |
$ | (18,183,921 | ) |
Less: Comprehensive net loss attibutable to noncontrolling interest | |
| - | | |
| 4,700,000 | | |
| - | | |
| 4,700,000 | |
Comprehensive loss to common shareholders | |
| (882,447 | ) | |
| (8,060,024 | ) | |
| (3,569,889 | ) | |
| (13,483,921 | ) |
Loss per common share: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.02 | ) | |
$ | (0.19 | ) | |
$ | (0.08 | ) | |
$ | (0.32 | ) |
Shares used in computing loss per common share: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 46,813,768 | | |
| 42,213,654 | | |
| 46,453,962 | | |
| 42,060,015 | |
See accompanying notes to condensed consolidated financial statements
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Cash Flows
For the Nine Months Ended September 30,
(unaudited)
| |
2015 | | |
2014 | |
| |
| | |
| |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (3,550,439 | ) | |
$ | (18,167,659 | ) |
Adjustments to reconcile net loss to net cash used by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 1,174,900 | | |
| 3,923,220 | |
Stock based compensation | |
| 842,265 | | |
| 1,105,395 | |
Paid in-kind interest | |
| 68,000 | | |
| 30,000 | |
Gain on sale of equipment | |
| (46,283 | ) | |
| - | |
Amortization of note discount | |
| - | | |
| 30,010 | |
Impairment of intangible assets and investments inclusive of noncontrolling interest | |
| - | | |
| 11,749,528 | |
Net loss on debt modification and extinguishment | |
| 19,096 | | |
| - | |
Change in deferred tax provision | |
| 14,211 | | |
| (990,093 | ) |
Foreign currency translation gain | |
| (29,400 | ) | |
| (2,305 | ) |
Decrease (increase) in assets: | |
| | | |
| | |
Accounts receivable | |
| 45,927 | | |
| 293,927 | |
Inventory | |
| (370,598 | ) | |
| (330,944 | ) |
Prepaid expenses and other assets | |
| 19,879 | | |
| (210,504 | ) |
Restricted cash | |
| 62,750 | | |
| 108,707 | |
Increase (decrease) in liabilities: | |
| | | |
| | |
Accounts payable | |
| 979,334 | | |
| 48,669 | |
Accrued expenses and other liabilities | |
| (396,513 | ) | |
| 831,239 | |
Net cash used by operating activities | |
| (1,166,871 | ) | |
| (1,580,810 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of property, plant and equipment | |
| (118,497 | ) | |
| (257,764 | ) |
Sale of equipment | |
| 46,283 | | |
| - | |
Purchase of investments | |
| - | | |
| (750,000 | ) |
Purchase of intangible assets | |
| (990 | ) | |
| (1,216,063 | ) |
Net cash used by investing activities | |
| (73,204 | ) | |
| (2,223,827 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Net payments on revolving lines of credit | |
| - | | |
| (158,087 | ) |
Payments of long-term debt | |
| (737,240 | ) | |
| (457,303 | ) |
Borrowings of long-term debt | |
| - | | |
| 4,041,000 | |
Issuances of common stock, net of issuance costs | |
| 878,336 | | |
| 301,973 | |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 141,096 | | |
| 3,727,583 | |
| |
| | | |
| | |
Net decrease in cash | |
| (1,098,979 | ) | |
| (77,054 | ) |
Cash beginning of period | |
| 2,343,675 | | |
| 1,977,031 | |
Cash end of period | |
$ | 1,244,696 | | |
$ | 1,899,977 | |
See accompanying notes to the condensed consolidated financial
statements.
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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, DSS Technology Management, Inc., acquires intellectual property (“IP”) assets and 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 September 30, 2015, cash of $293,043 ($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 a 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 a 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 September 30, 2015 was approximately $81,000 ($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 $1,036,000 as of September 30, 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 a fixed rate on a term loan as follows:
Notional | | |
Variable | | |
| | |
| |
Amount | | |
Rate | | |
Fixed Cost | | |
Maturity Date | |
$ | 1,036,155 | | |
| 3.34 | % | |
| 5.87 | % | |
| August 30, 2021 | |
Impairment
of Long Lived Assets and Goodwill-Long-lived
and intangible assets and goodwill are assessed for 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 (e)
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 indicate the carrying amount may be impaired. Financial Accounting Standards Board (“FASB”) Accounting
Standard Classification (“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 September 30,
2015 and 2014, there were 11,696,657 and 12,077,804 respectively, of common stock share equivalents potentially issuable under
convertible debt agreements, employment agreements, options, warrants, 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 nine months
ended September 30, 2015 and 2014, one customer accounted for 23% and 31%, respectively, of the Company’s consolidated revenue
and accounted for 16% and 20%, respectively, of the Company’s accounts receivable balance as of September 30, 2015 and December
31, 2014. The risk with respect to accounts 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 nine 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. During September 2015, the Company raised gross proceeds
$950,000 from the sale of its equity. As of September 30, 2015, the Company had approximately $1,245,000 in unrestricted cash and $293,000
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 15, 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 Accounting Standards Update (“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:
| |
September | | |
December | |
| |
30, 2015 | | |
31, 2014 | |
| |
| | |
| |
Finished Goods | |
$ | 878,255 | | |
$ | 572,695 | |
Work in process | |
| 175,123 | | |
| 123,611 | |
Raw Materials | |
| 186,482 | | |
| 172,956 | |
| |
| | | |
| | |
| |
$ | 1,239,860 | | |
$ | 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 and had a balance of $500,000 as of September 30, 2015 ($500,000 – December
31, 2014).
Intangible assets are comprised
of the following:
| |
| |
September 30, 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 | | |
$ | 1,613,732 | | |
$ | 383,568 | | |
$ | 1,997,300 | | |
$ | 1,532,123 | | |
$ | 465,177 | |
Acquired
intangibles-patents and patent rights | |
Varied
(1) | |
| 3,650,000 | | |
| 1,384,981 | | |
| 2,265,019 | | |
| 3,650,000 | | |
| 852,343 | | |
| 2,797,657 | |
Patent
application costs | |
Varied
(2) | |
| 1,059,823 | | |
| 490,938 | | |
| 568,885 | | |
| 1,058,833 | | |
| 413,268 | | |
| 645,565 | |
| |
| |
$ | 6,707,123 | | |
$ | 3,489,651 | | |
$ | 3,217,472 | | |
$ | 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 September
30, 2015, the weighted average remaining useful life of these assets in service was approximately 4.6 years.
(2) Patent application costs
are amortized over their expected useful life which is generally the remaining legal life of the patent. As of September 30, 2015,
the weighted average remaining useful life of these assets in service was approximately 9.3 years.
Intangible asset amortization expense for
the nine months ended September 30, 2015 amounted to $691,917 ($3,474,781 - September 30, 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. Furthermore, during the quarters ended March 31, 2015, June 30, 2015 and September 30, 2015, the Company’s
market capitalization significantly declined due to a substantial decline in the price of the Company’s stock and was considered
an impairment indicator of goodwill in accordance with ASC 350-20. As such, the Company performed impairment tests for goodwill
and certain of its intangible assets as described below for the quarters ended March 31, 2015, June 30, 2015 and September 30,
2015, respectively.
As a result of the
aforementioned triggering events, during the quarters ended March 31, 2015, June 30, 2015 and September 30, 2015, respectively,
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.
The carrying amount of the Company’s goodwill as of March 31, 2015, June 30, 2015 and September 30, 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. 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 during any of the periods tested.
| 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 that bears interest at 1 Month LIBOR plus 3.75% (3.96% as of September
30, 2015) and matures on May 31, 2016. As of September 30, 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 September 30, 2015, the balance of the note was $455,000 ($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 September 30, 2015, the balance of the
term loan was $730,000 ($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% (3.20% at September 30, 2015).
As of September 30, 2015, the balance under this term note was $11,536 ($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 and is secured by the printing press. As of September 30, 2015, the loan had a balance of
$882,785 ($1,067,586 at December 31, 2014).
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. As of September 30, 2015, the loan had a balance of $484,864.
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% (3.35% at September 30, 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
September 30, 2015, the Promissory Note had a balance of $1,036,155 ($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% (3.35% at September 30, 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 September 30, 2015, the note had a balance of $412,747 ($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 quarters ended March 31, 2015, June 30, 2015 and September
30, 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.
In September 2015, the Company made a payment of $150,000 on the note. As of September 30, 2015, an aggregate of $4,007,000 ($4,089,000
as of December 31, 2014) was outstanding which includes the principal of $3,891,000 and aggregate accrued interest of $116,000.
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 accompanying balance sheets. See Note 7 - Commitments
and Contingencies.
Between September 15,
2015 and September 24, 2015, the Company entered into securities purchase agreements with certain accredited investors for the
sale of an aggregate of 4,318,181 shares of common stock at a purchase price of $0.22 per share, for a total purchase price of
$950,000. In addition to the common stock, the purchasers received four-year warrants to purchase up to an aggregate of 863,638
additional shares of common stock at an exercise price of $0.40 per share and for a term of four years after the first six months
from the warrant's issuance date. The warrants had an estimated aggregate fair value of approximately $105,000 which was determined
by utilizing the Black-Scholes-Merton option pricing model with a volatility of 81.4%, a risk free rate of return between of 1.45%
and 1.60%, and zero dividend and forfeiture estimates. Between October 5, 2015 and October 21, 2015, the Company entered into securities
purchase agreements with certain accredited investors for the sale of an aggregate of 1,136,363 shares of common stock at a purchase
price of $0.22 per share, for a total purchase price of $250,000. In addition to the common stock, the purchasers received four-year
warrants to purchase up to an aggregate of 227,273 additional shares of common stock at an exercise price of $0.40 per share and
for a term of four years after the first six months from the warrant's issuance date. The warrants had an estimated aggregate fair
value of approximately $28,000 which was determined by utilizing the Black-Scholes-Merton option pricing model with a volatility
of 81.4%, a risk free rate of return between of 1.35% and 1.36%, and zero dividend and forfeiture estimates.
The securities offered
were made pursuant to prospectus supplements to the prospectus dated November 1, 2013, pursuant to the Company’s shelf registration
statement on Form S-3 that was filed with the Securities and Exchange Commission on October 11, 2013 and became effective on November
1, 2013. The offering, as amended, is ongoing, and is expected to consist of multiple closings on the same terms to occur on or
before November 30, 2015. The Company is offering a number of shares of common stock to result in aggregate sales proceeds of up
to $2.02 million. The form of securities purchase agreement contains customary representations, warranties, and covenants by us
and the investors. The accompanying form of warrant contains customary clauses relating to exercise, adjustments for stock dividends
and splits, and transferability. No placement agent or underwriter is involved in the offering.
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 vested 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 vested 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 nine months
ended September 30, 2015, the Company had stock compensation expense of approximately $842,000 or $0.02 basic and diluted earnings
per share ($1,105,000; $0.03 basic earnings per share for the corresponding nine months ended September 30, 2014).
As of September 30,
2015, there was approximately $248,000 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 9 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 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 June 25, 2015, the PTAB instituted the IPR of Apple’s claims.
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. A PTAB hearing was held on August 12, 2015 in connection
with the pending TSMC/Samsung IPR proceeding. No decision has been rendered as of the date of this Report.
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 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. On June 17, 2015,
the parties entered in to a confidential non-suit agreement which ended the litigation with Lenovo.
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 June 29, 2015, Intel filed its Answer to the complaint and also filed a motion to have the
case transferred to the Northern District of California, which motion is currently pending as of the date of this Report.
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 June 29, 2015, the Company filed a motion
to dismiss the suit, which motion is currently pending as of the date of this Report.
On July 16, 2015, DSS
Technology Management filed three separate lawsuits in the United States District Court for the Eastern District of Texas alleging
infringement of one of its semiconductor patents. The defendants are SK Hynix et al., Samsung Electronics et al., and
Qualcomm Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief
and money damages. These cases are currently in the initial pleadings stage.
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 September 30, 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. As of September 30, 2015, there are no contingent payments due.
Related Party
Consulting Payments – During 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.
Operating Leases–
In October 2015, the Company signed a 5 year lease for approximately 5,735 square foot of office space in Brighton, New York
for $6,122 per month. The Company will locate its corporate and DSS Digital groups at the location and expects to move to the location
in December 2015.
| 8. | Supplemental Cash Flow Information |
Supplemental cash flow information for the
nine months ended September 30, 2015 and 2014 is approximately as follows:
| |
2015 | | |
2014 | |
| |
| | |
| |
Cash paid for interest | |
$ | 189,000 | | |
$ | 255,000 | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Loss from change in fair value of interest rate swap derivatives | |
$ | (19,000 | ) | |
$ | (16,000 | ) |
Accrued liabilities with related parties settled with equity | |
$ | - | | |
$ | 134,000 | |
Financing of equipment purchases | |
$ | 525,000 | | |
$ | - | |
Financing of building improvements | |
$ | - | | |
$ | 200,000 | |
Change in non-controlling interest | |
$ | - | | |
$ | (4,500,000 | ) |
Escrow shares retired | |
$ | - | | |
$ | 150,000 | |
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 and nine months ended September 30, 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 September 30, 2015 | |
Packaging and Printing | | |
Plastics | | |
Technology | | |
Corporate | | |
Total | |
Revenues from external customers | |
$ | 2,871,000 | | |
| 1,104,000 | | |
| 445,000 | | |
| - | | |
$ | 4,420,000 | |
Depreciation and amortization | |
| 155,000 | | |
| 29,000 | | |
| 218,000 | | |
| 3,000 | | |
| 405,000 | |
Stock based compensation | |
| 17,000 | | |
| 9,000 | | |
| 8,000 | | |
| 165,000 | | |
| 199,000 | |
Net income (loss) | |
| 337,000 | | |
| 138,000 | | |
| (739,000 | ) | |
| (596,000 | ) | |
| (860,000 | ) |
Nine Months Ended September 30, 2015 | |
Packaging and Printing | | |
Plastics | | |
Technology | | |
Corporate | | |
Total | |
Revenues from external customers | |
$ | 7,663,000 | | |
| 3,016,000 | | |
| 1,367,000 | | |
| - | | |
$ | 12,046,000 | |
Depreciation and amortization | |
| 427,000 | | |
| 90,000 | | |
| 651,000 | | |
| 7,000 | | |
| 1,175,000 | |
Stock based compensation | |
| 52,000 | | |
| 29,000 | | |
| 75,000 | | |
| 686,000 | | |
| 842,000 | |
Net income (loss) | |
| 474,000 | | |
| 236,000 | | |
| (2,166,000 | ) | |
| (2,094,000 | ) | |
| (3,550,000 | ) |
Identifiable assets | |
| 9,534,000 | | |
| 2,116,000 | | |
| 12,535,000 | | |
| 2,180,000 | | |
| 26,365,000 | |
Three Months Ended September 30, 2014 | |
Packaging and Printing | | |
Plastics | | |
Technology | | |
Corporate | | |
Total | |
Revenues from external customers | |
$ | 3,575,000 | | |
| 914,000 | | |
| 475,000 | | |
| - | | |
$ | 4,964,000 | |
Depreciation and amortization | |
| 150,000 | | |
| 27,000 | | |
| 1,145,000 | | |
| - | | |
| 1,322,000 | |
Stock based compensation | |
| 18,000 | | |
| 10,000 | | |
| 24,000 | | |
| 213,000 | | |
| 265,000 | |
Impaiment of investment | |
| - | | |
| - | | |
| 11,750,000 | | |
| - | | |
| 11,750,000 | |
Loss attibutable to noncontrolling interest | |
| - | | |
| - | | |
| 4,700,000 | | |
| - | | |
| 4,700,000 | |
Net income (loss) to common shareholders | |
| 297,000 | | |
| 45,000 | | |
| (7,658,000 | ) | |
| (753,000 | ) | |
| (8,069,000 | ) |
Nine Months Ended September 30, 2014 | |
Packaging and Printing | | |
Plastics | | |
Technology | | |
Corporate | | |
Total | |
Revenues from external customers | |
$ | 9,321,000 | | |
| 2,735,000 | | |
| 1,419,000 | | |
| - | | |
$ | 13,475,000 | |
Depreciation and amortization | |
| 406,000 | | |
| 127,000 | | |
| 3,389,000 | | |
| 1,000 | | |
| 3,923,000 | |
Stock based compensation | |
| 111,000 | | |
| 62,000 | | |
| 141,000 | | |
| 791,000 | | |
| 1,105,000 | |
Impaiment of investment | |
| - | | |
| - | | |
| 11,750,000 | | |
| - | | |
| 11,750,000 | |
Loss attibutable to noncontrolling interest | |
| - | | |
| - | | |
| 4,700,000 | | |
| - | | |
| 4,700,000 | |
Net income (loss) to common shareholders | |
| 496,000 | | |
| 22,000 | | |
| (10,890,000 | ) | |
| (3,096,000 | ) | |
| (13,468,000 | ) |
Identifiable assets | |
| 9,519,000 | | |
| 2,083,000 | | |
| 41,773,000 | | |
| 1,014,000 | | |
| 54,389,000 | |
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 supplemented in the
Risk Factors sections of our previously filed Form 10-Q for the first and second quarters of 2015, 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” . 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 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 Covered Business Method (“CBM”) proceeding 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
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 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 June 25, 2015, the PTAB instituted the IPR of Apple’s
claims.
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 an IPR 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 an IPR 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. A PTAB hearing was held on August 12, 2015 in connection with the pending TSMC/Samsung IPR proceeding. No
decision has been rendered as of the date of this Report.
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. On June 17, 2015, the parties
entered in to a confidential non-suit agreement which ended the litigation with Lenovo.
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. On June 29, 2015, Intel filed its Answer to the complaint and also filed
a motion to have the case transferred to the Northern District of California, which motion is currently pending as of the date
of this Report.
On July 16, 2015, DSS Technology
Management filed three separate lawsuits in the United States District Court for the Eastern District of Texas alleging infringement
of one of its semiconductor patents. The defendants are SK Hynix et al., Samsung Electronics et al., and Qualcomm
Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief and
Money damages. These cases are currently in the initial pleadings stage.
Results of Operations for the Three and
Nine Months Ended September 30, 2015 Compared to the Three and Nine Months Ended September 30, 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 September 30, 2015 | | |
Three Months Ended September 30, 2014 | | |
% change | | |
Nine Months Ended September 30, 2015 | | |
Nine Months Ended September 30, 2014 | | |
% change | |
Revenue | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Printed products | |
$ | 3,975,000 | | |
$ | 4,489,000 | | |
| -11 | % | |
$ | 10,678,000 | | |
$ | 12,060,000 | | |
| -11 | % |
Technology sales, services and licensing | |
| 445,000 | | |
| 475,000 | | |
| -6 | % | |
| 1,367,000 | | |
| 1,415,000 | | |
| -3 | % |
Total revenue | |
$ | 4,420,000 | | |
$ | 4,964,000 | | |
| -11 | % | |
$ | 12,045,000 | | |
$ | 13,475,000 | | |
| -11 | % |
For the three months ended
September 30, 2015, total revenue was approximately $4.4 million, representing a decrease of 11% from the corresponding three months
ended September 30, 2014. Revenues from the sale of printed products decreased 11% during the three months ended September 30,
2015, as compared to the same period in 2014, which reflected a decrease in revenues from packaging and commercial printing sales
offset by an increase in plastic card sales. Technology sales, services and licensing revenue decreased 6% during the three months
ended September 30, 2015 as compared to the same period in 2014, which generally reflected a decrease in licensing revenues due
to a decrease in license payments from recurring licensees which was partially offset by an increase in revenues from the sale
of the Company’s digital products during the 2015 period.
For the nine months ended September 30, 2015,
total revenue was approximately $12.0 million, representing a decrease of 11% from the corresponding nine months ended September
30, 2014. During the 2015 period, revenues from the sale of printed products decreased 11% as compared to the same period in 2014,
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 3% which reflected an increase in licensing revenues
due to an increase in one-time license agreements signed during the second quarter of 2015 offset by a decrease in revenues from
the sale of the Company’s digital products during the nine months ended September 30, 2015, as compared to the same period
in 2014.
Costs and expenses
| |
Three Months Ended September 30, 2015 | | |
Three Months Ended September 30, 2014 | | |
% change | | |
Nine Months Ended September 30, 2015 | | |
Nine Months Ended September 30, 2014 | | |
% change | |
Costs and expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of goods sold, exclusive of depreciation and amortization | |
$ | 2,556,000 | | |
$ | 3,111,000 | | |
| -18 | % | |
$ | 7,206,000 | | |
$ | 8,506,000 | | |
| -15 | % |
Sales, general and administrative compensation | |
| 1,008,000 | | |
| 1,168,000 | | |
| -14 | % | |
| 3,021,000 | | |
| 3,613,000 | | |
| -16 | % |
Depreciation and amortization | |
| 405,000 | | |
| 1,322,000 | | |
| -69 | % | |
| 1,175,000 | | |
| 3,923,000 | | |
| -70 | % |
Professional fees | |
| 508,000 | | |
| 388,000 | | |
| 31 | % | |
| 1,534,000 | | |
| 1,430,000 | | |
| 7 | % |
Stock based compensation | |
| 199,000 | | |
| 265,000 | | |
| -25 | % | |
| 842,000 | | |
| 1,105,000 | | |
| -24 | % |
Sales and marketing | |
| 57,000 | | |
| 124,000 | | |
| -54 | % | |
| 250,000 | | |
| 425,000 | | |
| -41 | % |
Rent and utilities | |
| 186,000 | | |
| 201,000 | | |
| -7 | % | |
| 510,000 | | |
| 567,000 | | |
| -10 | % |
Other operating expenses | |
| 151,000 | | |
| 197,000 | | |
| -23 | % | |
| 564,000 | | |
| 665,000 | | |
| -15 | % |
Research and development | |
| 117,000 | | |
| 118,000 | | |
| -1 | % | |
| 350,000 | | |
| 344,000 | | |
| 2 | % |
Impairment of intangible assets and investments | |
| - | | |
| 11,750,000 | | |
| -100 | % | |
| - | | |
| 11,750,000 | | |
| 100 | % |
Total costs and expenses | |
$ | 5,187,000 | | |
$ | 18,644,000 | | |
| -72 | % | |
$ | 15,452,000 | | |
$ | 32,328,000 | | |
| -52 | % |
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 18% during the
three months ended September 30, 2015 as compared to the same period in 2014. The decrease exceeded the correlated decrease in
revenue experienced by the Company during the period primarily due to the increase in sales of higher margin products, such as
technology cards that partially offset decreases in sales of lower margin products such as commercial offset and digital printing
as compared to the sales of those products during the three months ended September 30, 2014. Costs of goods sold decreased 15%
during the nine months ended September 30, 2015 as compared to the same period in 2014. The decrease exceeded the correlated decrease
in revenue experienced by the Company during the period primarily due to the increase in higher margin license revenue that offset
decreases in lower margin revenue during the first nine months of 2015 as compared to the same period in 2014.
Sales, general and administrative
compensation costs, excluding stock-based compensation, decreased 14% and 16% during the three and nine months ended September
30, 2015, respectively, as compared to the same periods in 2014, primarily due to a 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 expense decreases during the three
and nine months ended September 30, 2015 as compared to the same periods in 2014, were 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 31% for the three months ended September 30, 2015 as compared to the same period in 2014. The increase was primarily
due to the incurrence of significant professional fees by the Company related to the intellectual property infringement and derivative
suits the Company is currently involved in. This increase was partially offset by decreases in accounting, consulting and investor
relation costs during the quarter. For the nine months ended September 30, 2015, professional fees increased 7%, as compared to
the same period in 2014, due to an increase in legal and professional fees primarily associated with the Company’s intellectual
property and derivative litigation matters, which have been partially offset by decreases in accounting, consulting and investor
relations costs in the 2015 period.
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 costs for the three and nine months ended September 30, 2015
decreased 25% and 24%, respectively, as compared to the same periods in 2014, each of which reflects a general decrease in the
number and value of equity compensation being granted by the Company since 2014.
Sales and marketing
costs, which includes internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and
trade show participation expenses, decreased 54% and 41% during the three and nine months ended September 30, 2015, respectively,
as compared to the same periods in 2014, primarily due to decreases in travel costs.
Rent and utilities
decreased 7% and 10% during the three and nine months ended September 30, 2015, respectively, as compared to the same periods
in 2014, due to decreases in rented space costs utilized by the Company’s Technology Management 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 23% and 15% for the three and nine months ended September 30, 2015, respectively, as compared
to the same periods in 2014 which reflected a general decrease in office, delivery, equipment repair and software costs in 2015.
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 three and nine month periods of 2015 as compared to same periods in 2014 as
the Company made no changes to the number or compensation of research personnel involved in the research and development of the
Company’s AuthentiGuard product line.
Impairment of intangible
assets and investments- In September 2014, the Company recorded an impairment of one of its investments in the gross amount
of approximately $11,750,000 of which 40%, or $4,700,000 of such investment was attributable to a noncontrolling interest, which
equated to a net impairment charge attributable to DSS during the third quarter of 2014 of approximately $7,050,000.
Other Income and Expense
| |
Three Months Ended September 30, 2015 | | |
Three Months Ended September 30, 2014 | | |
% change | | |
Nine Months Ended September 30, 2015 | | |
Nine Months Ended September 30, 2014 | | |
% change | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Other expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
$ | (89,000 | ) | |
$ | (89,000 | ) | |
| 0 | % | |
$ | (257,000 | ) | |
$ | (253,000 | ) | |
| 2 | % |
Gains on sales of investment and equipment | |
| - | | |
| - | | |
| 0 | % | |
| 146,000 | | |
| - | | |
| 100 | % |
Net loss on debt modification and extinguishment | |
| - | | |
| - | | |
| 0 | % | |
| (19,000 | ) | |
| (52,000 | ) | |
| -63 | % |
Other expense | |
$ | (89,000 | ) | |
$ | (89,000 | ) | |
| 0 | % | |
$ | (130,000 | ) | |
$ | (305,000 | ) | |
| -57 | % |
During the second quarter
of 2015, approximately $46,000 was received by the Company’s subsidiary Premier Packaging for the sale of a printing press
that had a zero book value, and $100,000 was received by the Company’s subsidiary DSS Technology Management as a distribution
from its investment in Virtual Agility Technology Investment LLC that the Company had previously written down to zero.
Deferred Tax Benefit
- During the three months ended September 30, 2014, the Company recognized a $1,004,000 deferred tax benefit as a result
of the impairment expense recognized during the period.
Net Loss and Net Loss per Share to Common Shareholders
| |
Three Months Ended September 30, 2015 | | |
Three Months Ended September 30, 2014 | | |
% change | | |
Nine Months Ended September 30, 2015 | | |
Nine Months Ended September 30, 2014 | | |
% change | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss including noncontrolling interest | |
| (860,000 | ) | |
| (12,769,000 | ) | |
| -93 | % | |
| (3,550,000 | ) | |
| (18,168,000 | ) | |
| -80 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Less: loss attributable to noncontrolling interest | |
| - | | |
| 4,700,000 | | |
| -100 | % | |
| - | | |
| 4,700,000 | | |
| -100 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net (loss) income to common shareholders | |
$ | (860,000 | ) | |
$ | (8,069,000 | ) | |
| -89 | % | |
$ | (3,550,000 | ) | |
$ | (13,468,000 | ) | |
| -74 | % |
Loss per share: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.02 | ) | |
$ | (0.19 | ) | |
| -89 | % | |
$ | (0.08 | ) | |
$ | (0.32 | ) | |
| -75 | % |
Shares used in computing loss per share: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 46,813,768 | | |
| 42,213,654 | | |
| 11 | % | |
| 46,453,962 | | |
| 42,060,015 | | |
| 10 | % |
For the three months ended
September 30, 2015, net loss to common shareholders was $860,000, a 89% decrease from a net loss to common shareholders of $8.1
million in the three months ended September 30, 2014. The decrease was primarily the result of a $917,000 reduction in amortization
of intangibles expense in 2015, along with a reduction in nearly all other cost categories during 2015 as compared to the same
period in 2014. In addition, the Company recorded an impairment of one of its investments during the third quarter of 2014 in the
amount of approximately $11,750,000 of which $4,700,000 was attributable to a 40% noncontrolling interest in the investment held
by another entity.
For the nine months ended
September 30, 2015, net loss to common shareholders was $3.6 million, a 74% decrease from a net loss to common shareholders of
$13.5 million in the nine months ended September 30, 2014. The decrease was primarily the result of a $2.7 million reduction in
amortization of intangibles expense in 2015, along with a reduction in nearly all other cost categories during the first nine months
of 2015 as compared to the same period in 2014. In addition, the Company recorded an impairment of one of its investments during
the first nine months of 2014 in the amount of approximately $11,750,000 of which $4,700,000 was attributable to a 40% noncontrolling
interest in the investment held by another entity.
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 September 30, 2015, we had cash of approximately $1.2 million and restricted cash of approximately $293,000. In addition, we
have $800,000 available to our packaging division under a revolving credit line. In September 2015, the Company raised $950,000
from the sale of its equity, and the Company raised an additional $250,000 in October 2015.
Operating Cash Flow
– During the first nine months of 2015, we used approximately $1,167,000 of cash for operations, representing a 26% reduction
in cash used for operations during the first nine months of 2014. The reduction in operating cash use reflects the reduction in
the Company’s net loss during 2015 that was due to the reduction in cash-based operating expenses such as compensation, professional
fees, sales and marketing and occupancy costs.
Investing
Cash Flow - During the first nine months of 2015, we used a net of approximately $73,000
for capital improvements, which resulted in a significant reduction of investing cash outflows as compared to the first nine months
of 2014. In addition, the Company has not made any significant investments nor purchased any intangible assets during 2015 other
than minimal expenditures associated with internally developed pending patents.
Financing Cash Flows
- During the first nine months of 2015, we made aggregate principal payments for long-term debt of approximately $737,000. In addition,
the Company received net proceeds of approximately $878,000 from the sale of equity during the first nine months of 2015.
Future
Capital Needs -As of September 30, 2015, the Company had approximately $1.2 million in unrestricted cash and $293,000
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 when the Company raised gross proceeds of $950,000 in September 2015 and an additional
$250,000 in October 2015 from the sale of its equity. However, there is no assurance the Company will be able to raise such funds
in the future 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 September 30, 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
as of September 30, 2015 under the Securities Exchange Act of 1934, as amended. 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
September 30, 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. In June
2015, the Company’s corporate staff accountant voluntarily terminated her employment. The Company is in the process of evaluating
the options to replace or transfer the position, and the impact that the change has on the Company’s internal control over
financial reporting. Otherwise, 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 third 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 August 12, 2015, in
connection with DSS Technology Management’s pending patent infringement litigation against defendants TSMC and Samsung, a
PTAB hearing was held on August 12, 2015 in connection with the pending TSMC/Samsung IPR proceeding. No decision has been rendered
as of the date of this Report.
ITEM 1A - RISK FACTORS
There have been no material changes to the discussion
of risk factors previously disclosed in our most recently filed Annual and Quarterly Reports.
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. |
|
|
|
|
November 13, 2015 |
By: |
/s/ Jeffrey Ronaldi |
|
|
|
Jeffrey Ronaldi
Chief Executive Officer (Principal Executive Officer)
|
|
|
|
|
November 13, 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 September 30, 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: November 13, 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 September 30, 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: November 13, 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 September 30, 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 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: November 13, 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 September 30, 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: November 13, 2015 |
|
|
|
/s/Philip Jones |
|
Philip Jones |
|
Chief Financial Officer (Principal Financial Officer) |
DSS (AMEX:DSS)
Historical Stock Chart
From Mar 2024 to Apr 2024
DSS (AMEX:DSS)
Historical Stock Chart
From Apr 2023 to Apr 2024