NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - DESCRIPTION OF BUSINESS
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., manages, licenses and acquires intellectual
property (“IP”) 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 commercial litigation.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
- The consolidated financial statements include the accounts of Document Security System and its subsidiaries.
All intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
- The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires the Company to make estimates and assumptions that affect the amounts reported and disclosed
in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing
basis, the Company evaluates its estimates, including those related to the accounts receivable, fair values of intangible assets
and goodwill, useful lives of intangible assets and property and equipment, fair values of options and warrants to purchase the
Company’s common stock, deferred revenue and income taxes, among others. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments
about the carrying values of assets and liabilities.
Reclassifications
- Certain prior year amounts have been reclassified to conform to the current year presentation.
Restricted
Cash
–As of December 31, 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.
Accounts
Receivable
- The Company carries its trade accounts receivable at invoice amount less an allowance for doubtful accounts.
On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based upon
management’s estimates that include a review of the history of past write-offs and collections and an analysis of current
credit conditions. At December 31, 2015, the Company established a reserve for doubtful accounts of approximately $59,000 ($59,000
– 2014). The Company does not accrue interest on past due accounts receivable.
Inventory
- Inventories consist primarily of paper, plastic materials and cards, pre-printed security paper, paperboard and fully-prepared
packaging which and are stated at the lower of cost or market on the first-in, first-out (“FIFO”) method.
Packaging
work-in-process and finished goods included the cost of materials, direct labor and overhead.
Property,
Plant and Equipment
-
Property, plant and equipment
are recorded at cost. Depreciation is computed using the straight-line
method over the estimated useful lives or lease period of the assets whichever is shorter. Expenditures for renewals and betterments
are capitalized. Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Any gain or loss
upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place. Depreciation
expense in 2015 was approximately $663,000 ($622,000 - 2014).
Investments
–
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. In December 2015, the Company determined
that the investment had been impaired and recognized an impairment loss of $500,000 (See Note 5).
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. FASB ASC Topic 350 provides an entity with the option to first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more
likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment
test is unnecessary. If the two-step impairment test is necessary, a fair-value-based test is applied at the reporting unit level,
which is generally one level below the operating segment level. The test compares the fair value of an entity’s reporting
units to the carrying value of those reporting units. This test requires various judgments and estimates. The Company estimates
the fair value of the reporting unit using a market approach in combination with a discounted operating cash flow approach. Impairment
of goodwill is measured as the excess of the carrying amount of goodwill over the fair values of recognized and unrecognized assets
and liabilities of the reporting unit. An adjustment to goodwill will be recorded for any goodwill that is determined to be impaired.
The Company tests goodwill for impairment at least annually in conjunction with preparation of its annual business plan, or more
frequently if events or circumstances indicate it might be impaired. FASB ASU 2010-28 modifies Step 1 of the goodwill impairment
test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step
2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is
more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors
indicating that an impairment may exist (See Note 6).
Other
Intangible Assets and
Patent Application Costs
- Other intangible assets consist of costs associated with
the application for patents, acquisition of patents and contractual rights to patents and trade secrets associated with the Company’s
technologies. The Company’s patents and trade secrets are generally for document anti-counterfeiting and anti-scanning technologies
and processes that form the basis of the Company’s document security business. Patent application costs are capitalized
and amortized over the estimated useful life of the patent, which generally approximates its legal life. In addition, intangible
assets include customer lists and non-compete agreements obtained as a result of acquisitions. Intangible asset amortization expense
is classified as an operating expense. The Company believes that the decision to incur patent costs is discretionary as the associated
products or services can be sold prior to or during the application process. The Company accounts for other intangible amortization
as an operating expense, unless the underlying asset is directly associated with the production or delivery of a product. Subsequent
to acquisition of patents and trade secrets, legal and associated costs incurred in prosecuting alleged infringements of the patents
will be recognized as expense when incurred. Costs incurred to renew or extend the term of recognized intangible assets, including
patent annuities and fees, and patent defense costs are expensed as incurred. To date, the amount of related amortization expense
for other intangible assets directly attributable to revenue recognized is not material.
Impairment
of Long Lived Assets
-
The Company monitors the carrying value of long-lived assets for potential impairment and tests
the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
If a change in circumstance occurs, the Company performs a test of recoverability by comparing the carrying value of the asset
or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified
for a single asset, the Company will determine whether impairment has occurred for the group of assets for which the Company can
identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company
measures any impairment by comparing the fair value of the asset or asset group to its carrying value (See Note 6).
Fair
Value of Financial Instruments
- Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement
Topic of the FASB ASC establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
|
●
|
Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
|
|
|
●
|
Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as
quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active; and
|
|
|
|
|
●
|
Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable.
|
The
carrying amounts reported in the balance sheet of cash, accounts receivable, prepaids, notes receivable, accounts payable and
accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair
value of revolving credit lines, notes payable and long-term debt approximates their carrying value as the stated or discounted
rates of the debt reflect recent market conditions. Derivative instruments, as discussed below, are recorded as assets and liabilities
at estimated fair value based on available market information. At December 31, 2014, the Company’s convertible note payable
was recorded at its face amount, net of an unamortized premium for a beneficial conversion feature and had an estimated fair value
of approximately $117,000 based on the underlying shares the note could be converted into at the trading price on December 31,
2014. Since the underlying shares were trading in an active, observable market, the fair value measurement qualified as a Level
1 input. As included in Note 7, the conversion feature associated with this note was removed during 2015.
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 two interest rate swaps that change variable rates into fixed rates on two term loans. These swaps qualify as
Level 2 fair value financial instruments. These swap agreements are not held for trading purposes and the Company does not intend
to sell the derivative swap financial instruments. The Company records the interest swap agreements on the balance sheet at fair
value because the agreements qualify as a cash flow hedges under accounting principles generally accepted in the United States
of America. Gains and losses on these instruments are recorded in other comprehensive loss until the underlying transaction is
recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive
loss (“AOCI”) to the consolidated statement of operations on the same line item as the underlying transaction. The
valuations of the interest rate swaps have been derived from proprietary models of Citizens 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 swaps decrease over the life of the agreements.
The Company is exposed to a credit loss in the event of nonperformance by the counter parties to the interest rate swap agreements.
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 as of December 31, 2015 were approximately
$64,000 ($61,000 - December 31, 2014).
The
Company has an interest rate swap with Citizens that changes the variable rate on a term loan to a fixed rate as follows:
Notional Amount
|
|
|
Variable Rate
|
|
|
Fixed Cost
|
|
|
Maturity Date
|
$
|
1,021,926
|
|
|
|
3.39
|
%
|
|
|
5.87
|
%
|
|
August 30, 2021
|
Conventional
Convertible Debt
-
When the convertible feature of a conventional convertible debt provides for a rate of conversion that
is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). Prior to the determination
of the BCF, the proceeds from the debt instrument are first allocated between the convertible debt and any detachable free standing
instruments that are included, such as common stock warrants. The Company records a BCF as a debt discount pursuant to FASB ASC
Topic 470-20. In those circumstances, the convertible debt will be recorded net of the discount related to the BCF. The Company
amortizes the discount to interest expense over the life of the debt using the effective interest method.
Share-Based
Payments
- Compensation cost for stock awards are measured at fair value and the Company recognizes compensation expense
over the service period for which awards are expected to vest. The Company uses the Black-Scholes-Merton option pricing model
for determining the estimated fair value for stock-based awards. The Black-Scholes-Merton model requires the use of subjective
assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility
of the underlying stock. For equity instruments issued to consultants and vendors in exchange for goods and services the Company
determines the measurement date for the fair value of the equity instruments issued at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance
is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over
the term of the consulting agreement.
Revenue
Recognition
-
Sales of printed products including commercial and security printing, packaging, and plastic cards
are recognized when a product or service is delivered, shipped or provided to the customer and all material conditions relating
to the sale have been substantially performed.
For
technology sales and services, revenue is recognized in accordance with FASB ASC 985-605. Accordingly, revenue is recognized when
all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or product
has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection
of our fees is reasonably assured. We recognize cloud computing revenue, including data backup, recovery and security services,
on a monthly basis, beginning on the date the customer commences use of our services. Professional services are recognized in
the period services are provided.
For
printing technology licenses, revenue is recognized once all the following criteria for revenue recognition have been met: (1)
persuasive evidence of an agreement exists; (2) the right and ability to use the product or technology has been rendered; (3)
the fee is fixed and determinable and not subject to refund or adjustment; and (4) collection of the amounts due is reasonably
assured.
For
other technology licenses, revenue arrangements generally provide for the payment of contractually determined fees in consideration
for the grant of certain intellectual property rights for patented technologies owned or controlled by the Company. These rights
typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture
and/or sell products covered by patented technologies owned or controlled the Company, (ii) a covenant-not-to-sue, (iii) the release
of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted
may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively
short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an
additional minimum upfront payment. Pursuant to the terms of these agreements, the Company has no further obligation with respect
to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including
no express or implied obligation on the Company’s part to maintain or upgrade the technology, or provide future support
or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant
deliverables upon execution of the agreement, or upon receipt of the minimum upfront payment for term agreement renewals. As such,
the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectability is reasonably
assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria
have been met.
Certain
of the Company’s revenue arrangements provide for future royalties or additional required payments based on future licensee
activities. Additional royalties are recognized in revenue upon resolution of the related contingency provided that all revenue
recognition criteria, as described above, have been met. Amounts of additional royalties due under these license agreements, if
any, cannot be reasonably estimated by management.
Costs
of revenue
-
Costs of revenue includes all direct cost of the Company’s packaging, commercial and security
printing and plastic ID card sales, primarily, paper, plastic, inks, dies, and other consumables, and direct labor, transportation
and manufacturing facility costs. In addition, this category includes all direct costs associated with the Company’s technology
sales, services and licensing including hardware and software that is resold, third-party fees, and fees paid to inventors or
others as a result of technology licenses or settlements, if any. Costs of revenue recorded in the DSS Technology Management group
include contingent legal fees, inventor royalties, legal, consulting and other professional fees directly related to the Company’s
patent monetization, litigation and licensing activities. Amortization of patent costs and acquired technology are included in
depreciation and amortization on the consolidated statement of operations. Costs of revenue do not include expenses related to
product development, integration, and support. These costs are included in research and development, which is a component of selling,
general and administrative expenses on the consolidated statement of operations. Legal costs are included in selling, general
and administrative.
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 a conclusion is reached in an enforcement action that does not yield future royalties
potential.
Advertising
Costs
– Generally consist of online, keyword advertising with Google with additional amounts spent on certain print
media in targeted industry publications
.
Advertising costs were approximately $25,000 in 2015 ($39,000– 2014).
Research
and Development
- Research and development costs are expensed as incurred. Research and development costs consist primarily
of compensation costs for research personnel, third-party research costs, and consulting costs. The Company spent approximately
$470,000 and $462,000 on research and development during 2015 and 2014, respectively.
Income
Taxes
- The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year
and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income
items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available
tax benefits not expected to be realized. We recognize penalties and accrued interest related to unrecognized tax benefits in
income tax expense.
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 year, 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 December 31, 2015 and 2014, there were 11,874,620 and 12,019,194, 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. Common stock equivalents were excluded from the calculation of diluted
earnings per share for 2015 and 2014 in which the Company had a net loss, since their inclusion would have been anti-dilutive.
Comprehensive
Loss
- Comprehensive loss is defined as the change in equity of the Company during a period from transactions and other
events and circumstances from non-owner sources. It consists of net income (loss) and other income and losses affecting stockholders’
equity that, under U.S. GAAP, are excluded from net income (loss). The change in fair value of interest rate swaps was the only
item impacting accumulated other comprehensive loss for the years ended December 31, 2015 and 2014.
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
2015, two customers accounted for 35% of the Company’s consolidated revenue. As of December 31, 2015, these two customers
accounted for 27% of the Company’s trade accounts receivable balance. During 2014, these same two customers accounted for
40% of the Company’s consolidated revenue. As of December 31, 2014, these two customers accounted for 25% of the Company’s
trade accounts receivable balance.
Continuing
Operations -
The Company has incurred significant net losses in previous years and in 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 2015, the Company raised
gross proceeds $1.1 million from the sale of its equity. As of December 31, 2015, the Company had approximately $1,440,000 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.
Recent
Accounting Pronouncements
-
In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers”.
The 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 its currently evaluating the effect that the updated standard will have on its consolidated financial
statements and related disclosures.
In
August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The guidance requires an entity to evaluate
whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue
as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures
in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim
periods thereafter. Early application is permitted. The Company does not believe the adoption of this ASU will have a significant
impact on its consolidated financial statements.
In
April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest”, which requires that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that
debt liability. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015. Early adoption is permitted. The Company does not believe the adoption of this ASU will have a significant
impact on its consolidated financial statements and related disclosures.
In
July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” The guidance
requires that certain inventory, including inventory measured using the first-in-first-out method, be measured at the lower of
cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. The guidance is effective for fiscal years beginning after December
15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the effect that the updated
standard will have on its consolidated financial statements and related disclosures.
In
November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the
presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance
sheet. The guidance becomes effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted.
The Company applied this guidance to its current fiscal years ending December 31, 2015 and 2014. The adoption of this guidance
had no material impact on the results of operations or financial position. Certain prior year deferred tax assets or liabilities
have been reclassified to conform with the current year presentation.
In
February 2016, the FASB issued an accounting standard update ASU 2016-02, “Leases”, which requires that lease arrangements
longer than 12 months result in an entity recognizing an asset and liability. ASU 2016-02 is effective for interim and annual
periods beginning after December 15, 2018, and early adoption is permitted. The Company has not yet evaluated nor has it determined
the effect of the standard on its ongoing financial reporting.
NOTE
3 – INVENTORY
Inventory
consisted of the following at December 31:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Finished Goods
|
|
$
|
718,601
|
|
|
$
|
572,695
|
|
Work in process
|
|
|
167,779
|
|
|
|
123,611
|
|
Raw Materials
|
|
|
51,450
|
|
|
|
172,956
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
937,830
|
|
|
$
|
869,262
|
|
NOTE
4 - PROPERTY PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following at December 31:
|
|
|
|
2015
|
|
|
2014
|
|
|
|
Estimated
Useful Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
5-10 years
|
|
$
|
5,615,562
|
|
|
$
|
5,156,060
|
|
Building and improvements
|
|
39 years
|
|
|
1,923,027
|
|
|
|
1,913,727
|
|
Land
|
|
|
|
|
185,000
|
|
|
|
185,000
|
|
Leasehold improvements
|
|
See (1)
|
|
|
722,984
|
|
|
|
818,846
|
|
Furniture and fixtures
|
|
7 years
|
|
|
68,272
|
|
|
|
163,300
|
|
Software and websites
|
|
3 years
|
|
|
402,225
|
|
|
|
439,373
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
|
|
8,917,070
|
|
|
|
8,676,306
|
|
Less accumulated depreciation
|
|
|
|
|
3,913,252
|
|
|
|
3,659,767
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
|
$
|
5,003,818
|
|
|
$
|
5,016,539
|
|
(1)
Expected lease term between 3 and 10 years.
NOTE
5 — INVESTMENTS
During
2014 and 2013 DSS Technology Management made a series of investments in VirtualAgility, Inc. (“VirtualAgility”), a
developer of programming platforms that facilitate the creation of business applications without programming or coding. The initial
investment consisted of a $200,000 non-recourse note plus an equity stake of 1/8 of 7% of the outstanding common stock of VirtualAgility,
for a total cash investment of $250,000. The non-recourse note is eligible for a preferred return of $1,250,000, plus a variable
return of 1.875% based on gross proceeds, if any, derived from VirtualAgility’s patent portfolio. In addition, VirtualAgility
granted DSS Technology Management a total of seven additional options to make additional quarterly investments of $250,000 apiece,
under the same terms as the first investment. If all of such options are exercised, DSS Technology Management will have invested
an aggregate of $2,000,000, consisting of $1,600,000 in non-recourse notes that would be eligible for an aggregate preferred return
of $10,000,000 plus up to 15% of variable returns and, based on the current capitalization of VirtualAgility, DSS Technology Management
would also own approximately 7% of the outstanding common stock of VirtualAgility. In May 2013, DSS Technology Management created
a subsidiary called VirtualAgility Technology Investment, LLC (“VATI”) and transferred its ownership of the VirtualAgility
investment and future investment options to VATI. Also in May 2013, a third-party investor became a 40% member of VATI. In exchange,
the investor contributed $250,000 into VATI which was used to exercise one of the investment options in VirtualAgility per the
terms described above. As of July 1, 2013, DSS Technology Management owned 60% of VATI. In conjunction with its acquisition accounting,
the Company assessed the fair value of the VirtualAgility investment, including the expected exercise of future investment options
as of the acquisition date, at approximately $10,750,000, which became the cost basis of the investment as of July 1, 2013. In
August 2013, the Company contributed $250,000 into VATI which used the funds to make an additional investment in VirtualAgility
per the terms described above. In November 2013, the other member of VATI contributed $250,000 into VATI which used the funds
to make an additional investment in VirtualAgility per the terms described above. On February 14, 2014, DSS Technology Management
contributed $250,000 into VATI which used the funds to make an additional investment in VirtualAgility per the terms described
above. In May 2014, the other member of VATI contributed $250,000 into VATI which used the funds to make an additional investment
in VirtualAgility per the terms described above. As of June 30, 2014, VATI owned 657,119 shares of common stock of VirtualAgility.
As of June 30, 2014, investment in VATI was approximately $11,750,000 and DSS Technology Management owned 60% of VATI.
VirtualAgility
was the plaintiff in a patent infringement lawsuit against Salesforce.com, Inc.
et al.
In May of 2014, Salesforce.Com,
Inc. filed a petition with the United States Patent and Trademark Office’s Patent Trial and Appeal Board (“PTAB”)
requesting covered business method patent review of claims 1-21 of U.S. Patent No. 8,095,413 B1, which was the patent being asserted
by VirtualAgility in the lawsuit (the “413 Patent”), alleging that claims 1-21 of the 413 Patent are unpatentable.
On September 16, 2014, the PTAB issued a written decision holding that challenged claims 1-21 of the 413 Patent are unpatentable,
and also denied VirtualAgility’s contingent motion to amend the challenged claims. As a result of the PTAB’s decision,
the Company estimated that its investment in VATI was impaired and as a result, the Company recorded an impairment of its investment
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 during the third quarter of 2014 of approximately $7,050,000. In June 2015,
pursuant to a confidential Stock Redemption and Settlement Agreement, VATI sold its entire ownership interest in VirtualAgility
to VirtualAgility for $200,000.
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. In accordance with paragraphs 16 through 19 of FASB ASC 825-10-50
the Company determined that it is not practicable to estimate the fair value of these investments since Express Mobile is a privately-held
company that is not subject to the same disclosure regulations as U.S. public companies, and as such, the basis for an estimated
fair value is subject to the completeness, quality, timing and accuracy of data received from Express Mobile. In December 2015,
based on discussions with Express Mobile management and the Company’s understanding of the status of Express Mobile’s
business, the Company determined that the investment was impaired and recognized an impairment loss of $500,000.
NOTE
6 - INTANGIBLE ASSETS AND GOODWILL
During
2015 and 2014, the Company spent approximately $5,000 and $94,000, respectively, on patent application costs. In 2014, the Company
spent $1,150,000 on patent acquisitions.
On
July 8, 2013, the Company’s subsidiary, DSS Technology Management, purchased two patents for $500,000 covering certain methods
and processes related to Bluetooth devices. In conjunction with the patent purchases, DSS Technology Management entered into a
Proceed Right Agreement with certain investors pursuant to which DSS Technology Management initially received $250,000 of a total
of $750,000 which it will ultimately receive thereunder, subject to certain payment milestones, in exchange for 40% of the proceeds
which it receives, if any, from the use, sale or licensing of the two patents. As of December 31, 2015, the Company had received
an aggregate of $650,000 ($650,000 in 2014) from the investors pursuant to the agreement of which approximately $551,000 was in
accrued expenses in the consolidated balance sheet ($603,000 as December 31, 2014).
On
May 23, 2014, the Company’s subsidiary, DSS Technology Management, purchased 115 patents covering certain methods and processes
in the semiconductor industry for $1,150,000.
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 that the assets had been 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.
Intangible
assets are comprised of the following:
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Useful Life
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortizaton
|
|
|
Net Carrying
Amount
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortizaton
|
|
|
Net Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangibles- customer lists and non-compete agreements
|
|
5 -10 years
|
|
|
1,997,300
|
|
|
|
1,635,257
|
|
|
|
362,043
|
|
|
|
1,997,300
|
|
|
|
1,532,123
|
|
|
|
465,177
|
|
Acquired intangibles-patents and patent rights
|
|
Varied (1)
|
|
|
3,650,000
|
|
|
|
1,562,526
|
|
|
|
2,087,474
|
|
|
|
3,650,000
|
|
|
|
852,343
|
|
|
|
2,797,657
|
|
Patent application costs
|
|
Varied (2)
|
|
|
1,062,958
|
|
|
|
494,931
|
|
|
|
568,027
|
|
|
|
1,058,833
|
|
|
|
413,268
|
|
|
|
645,565
|
|
|
|
|
|
$
|
6,710,258
|
|
|
$
|
3,692,714
|
|
|
$
|
3,017,544
|
|
|
$
|
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 December 31, 2015, the weighted average remaining useful life of these assets in service was approximately 4.4
years.
|
|
|
|
|
(2)
|
Patent
application costs are amortized over their expected useful life which is generally the remaining legal life of the patent.
As of December 31, 2015, the weighted average remaining useful life of these assets in service was approximately 9.3 years.
|
Amortization
expense for the year ended December 31, 2015 amounted to approximately $896,000 ($4,653,000 –2014).
Approximate
expected amortization for each of the five succeeding fiscal years is as follows:
Year
|
|
|
Amount
|
|
2016
|
|
$
|
692,000
|
|
2017
|
|
$
|
673,000
|
|
2018
|
|
$
|
537,000
|
|
2019
|
|
$
|
265,000
|
|
2020
|
|
$
|
193,000
|
|
Goodwill
The
Company performed its annual goodwill impairment test as of December 31, 2015. The Company performed the first step of the
goodwill impairment test by comparing the fair value of each of its reporting units with their carrying amounts including
goodwill. In performing this step, the Company determined estimates of fair value using a discounted cash flow model for each
of its reporting units. The Company determined that its Packaging and Plastic reporting units each had fair values in
excess of their carrying value and therefore, did not have an indication of goodwill impairment. The Company
determined that its DSS Technology Management reporting unit had a negative carrying value as a result of the liabilities
exceeding the assets and as a result was required to perform a Step 2 goodwill test. In performing step two of the
goodwill impairment test, the Company compared the carrying value of its Technology Management goodwill to its implied fair
value. For the Company’s technology reporting unit for which a significant amount of future value is based on the value
of patents and patent rights, the Company uses a valuation methodology that assesses the potential value of claims
against parties the Company believes have infringed on the patents and therefore, the Company has the right to receive
royalties from those infringers. The Company uses its best estimates to determine the amount and timing of royalties
that would be due from each potential infringing party based on the estimated scope of usage of the patented technology by
each potential infringing party. Furthermore, the Company uses discount factors to take into account the potential of
settlements at various stages of a typical patent infringement court case depending on the stage of each of the
Company’s infringement proceedings. During the Company’s annual assessment of goodwill in 2015, the Company
considered the negative trends in patent litigation which have reduced the success of patent owners in protecting their
patents in the federal court system, among other factors. In performing Step 2 of the goodwill impairment test, the Company
determined the carrying amount of the goodwill exceeded the implied fair value of the goodwill by $9,600,000, and accordingly
recorded approximately $9,600,000 of a goodwill impairment charge to the goodwill assigned to its DSS Technology
Management division.
During
the Company’s annual assessment of goodwill in 2014, the Company assessed that the negative trends in patent litigation
that have reduced the success of patent owners in protecting their patents in the federal court system had impairment 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.
There
are inherent assumptions and estimates used in developing future cash flows requiring management’s judgment in applying
these assumptions and estimates to the analysis of identifiable intangibles and asset impairment including projecting revenues,
timing and amount of claim or settlements related to patent infringement cases, royalty rates, interest rates, and the cost of
capital. Many of the factors used in assessing fair value are outside the Company’s control and it is reasonably likely
that assumptions and estimates will change in future periods. These changes can result in future impairments.
The
changes in the carrying amount of goodwill for the years ended December 31, 2015 and 2014 are as follows:
|
|
Packaging
|
|
|
Plastics
|
|
|
Technolgy
Management
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,768,400
|
|
|
$
|
684,949
|
|
|
$
|
12,831,774
|
|
|
$
|
15,285,123
|
|
Accumulated impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(238,926
|
)
|
|
|
(238,926
|
)
|
|
|
|
1,768,400
|
|
|
|
684,949
|
|
|
|
12,592,848
|
|
|
|
15,046,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,000,000
|
)
|
|
|
(3,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,768,400
|
|
|
|
684,949
|
|
|
|
12,831,774
|
|
|
|
15,285,123
|
|
Accumulated impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,238,926
|
)
|
|
|
(3,238,926
|
)
|
|
|
|
1,768,400
|
|
|
|
684,949
|
|
|
|
9,592,848
|
|
|
|
12,046,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,592,848
|
)
|
|
|
(9,592,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,768,400
|
|
|
|
684,949
|
|
|
|
12,831,774
|
|
|
|
15,285,123
|
|
Accumulated impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,831,774
|
)
|
|
|
(12,831,774
|
)
|
|
|
$
|
1,768,400
|
|
|
$
|
684,949
|
|
|
$
|
-
|
|
|
$
|
2,453,349
|
|
NOTE
7 – 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% (3.99% as of
December 31, 2015) and matures on May 31, 2016. As of December 31, 2015 and 2014, the revolving line had a balance of $0.
Long-Term
Debt
-
On December 30, 2011, the Company issued a $575,000 convertible note that was initially due on December
29, 2013, and carries an interest rate of 10% per annum. Interest is payable quarterly, in arrears. In conjunction with the issuance
of the convertible note, the Company determined a beneficial conversion feature existed amounting to approximately $88,000, which
was recorded as a debt discount to be amortized over the term of the note. On May 24, 2013, the Company amended the convertible
note to extend the maturity date of the note from December 29, 2013 to December 29, 2015. The change in the fair value of the
embedded conversion option exceeded 10% of the carrying value of the original debt and, therefore, the Company accounted for this
restructuring as an extinguishment in accordance with FASB ASC 470-50 “Debt Modifications and Extinguishments”. The
note was written up to its fair value on the date of modification of approximately $650,000 and the premium recorded in excess
of its face value was amortized over the remaining life of the note. 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 December 31, 2015, the balance of the term loan was $410,000 ($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. The Company also issued the lender as additional consideration a five-year warrant
to purchase up to 60,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The warrant was valued
at approximately $69,000 using the Black-Scholes-Merton option pricing model with a volatility of 60.0%, a risk free rate of return
of 0.89% and zero dividend and forfeiture estimates. In conjunction with the issuance of the warrants, the Company recorded a
discount on debt of approximately $69,000 that was amortized over the original term of the note. The note was set to mature on
May 24, 2014, but its maturity date was extended on May 2, 2014 to May 24, 2015 by the lender. In exchange for the extension,
the Company also issued the lender as additional consideration a five-year warrant to purchase up to 40,000 shares of the Company’s
common stock at an exercise price of $1.50 per share. The warrant was valued at approximately $29,000 using the Black-Scholes-Merton
option pricing model with a volatility of 70.0%, a risk free rate of return of 1.53% and zero dividend and forfeiture estimates.
In conjunction with the issuance of the warrants, the Company recorded expense for modification of debt of approximately $29,000.
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 December 31, 2015, the balance of the term loan was $685,000 ($850,000
at December 31, 2014).
Term
Loan Debt
- On February 12, 2010, in conjunction with the credit facility agreement with Citizens Bank, Premier Packaging
entered into a term loan with Citizens Bank for $1,500,000. As amended on July 26, 2011, the term loan requires monthly principal
payments of $25,000 plus interest through maturity in February 2015. Interest accrues at 1 Month LIBOR plus 3.75% (3.99% at December
31, 2014). The Company entered into an interest rate swap agreement to lock into a 5.7% effective interest rate over the remaining
life of the amended term loan. As of December 31, 2015, the balance of the term loan was $0 ($50,000 at December 31, 2014).
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% (3.24% at December 31, 2015). As of December
31, 2015, the balance under this term note was $8,874 ($19,522 at December 31, 2014).
On
July 19, 2013, Premier Packaging entered into an equipment loan with People’s Capital and Leasing Corp. (“Peoples
Capital”) for a printing press. The loan was for $1,303,900, repayable over a 60-month period which commenced when the equipment
was placed in service in January 2014. The loan bears interest at 4.84% and is payable in equal monthly installments of $24,511.
As of December 31, 2015, the loan had a balance of $819,681 ($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 December 31, 2015, the loan had a balance of $460,448.
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% (3.39% at December 31, 2015). Concurrently with the transaction, the Company entered into an interest rate swap
agreement to lock into a 5.87% effective interest rate for the life of the loan. The Promissory Note matures in August 2021 at
which time a balloon payment of the remaining principal balance will be due. As of December 31, 2015, the Promissory Note had
a balance of $1,021,926 ($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% (3.39% at December 31, 2015),
which payments commenced on July 1, 2014. The note matures in July 2019 at which time a balloon payment of the remaining principal
balance of $300,000 is due. As of December 31, 2015, the note had a balance of $405,247 ($435,000 –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,
September 30, 2015, and December 31, 2015, Premier Packaging was in compliance with the covenants. The Citizens Bank obligations
are secured by all of the assets of Premier Packaging and are also secured through cross guarantees by the Company and its other
wholly-owned subsidiaries, Plastic Printing Professionals and Secuprint.
A
summary of scheduled principal payments of long-term debt, not including revolving lines of credit and other debt which can be
settled with non-monetary assets, subsequent to December 31, 2015 are as follows:
Year
|
|
Amount
|
|
2016
|
|
$
|
1,553,061
|
|
2017
|
|
|
467,727
|
|
2018
|
|
|
486,599
|
|
2019
|
|
|
491,618
|
|
2020
|
|
|
104,691
|
|
Thereafter
|
|
|
707,480
|
|
Total
|
|
$
|
3,811,176
|
|
Other
Debt
-On February 13, 2014, the Company’s subsidiary, DSS Technology Management, Inc. (the “Company”),
entered into an Investment Agreement (the “Agreement”) dated February 13, 2014 (the “Effective Date”)
with Fortress Credit Co LLC, as collateral agent (the “Collateral Agent”), and certain investors (the “Investors”),
pursuant to which the Company contracted to receive a series of advances up to $4,500,000 (collectively, the “Advances”).
Under the terms of the Agreement, on the Effective Date, the Company issued and sold a promissory note in the amount of $1,791,000,
fixed return equity interests in the amount of $199,000, and contingent equity interests in the amount of $10,000, to each of
the Investors, and in return received $2,000,000 in proceeds. To secure the Advances, the Company placed a lien in favor of the
Investors on ten semi-conductor patents (the “Patents”) and assigned to the Investors certain funds recoverable from
successful patent litigation involving these Patents, including settlement payments, license fees and royalties on the Patents.
The Company is a plaintiff in various ongoing patent infringement lawsuits involving certain of the Patents.
On
March 27, 2014, the Company received an additional $1,000,000 under the Agreement comprised of a promissory note of $900,000 was
promissory note and fixed return interests on $100,000. On September 5, 2014, the Company received the remaining $1,500,000 under
the Agreement comprised of a promissory note of $900,000 was promissory note and fixed return interests on $100,000. In September
2015, the Company made a payment of $150,000 on the note. As of December 31, 2015, total Advances equaled $4,350,000, which consisted
of $3,891,000 under the Agreement and an aggregate of $459,000 under the fixed return equity interest and contingent equity interests.
Aggregate accrued interest totaled $132,000 as of December 31, 2015 ($48,000 as of December 31, 2014).
The
Agreement defines certain Events of Default, one of which is the failure by the Company, on or before the second anniversary of
the Effective Date, which was February 13, 2016, to make payments to the Investors equal to the outstanding Advances. On February
13, 2016, the Company failed to make these payments.
Under
the Agreement, upon an Event of Default, the Collateral Agent and the Investors have a number of remedies, including rights related
to foreclosure or direct monetization of the Patents. As a result of the Event of Default discussed above, the sole and exclusive
recourse of the Investors and the Collateral Agent is to form a special purpose entity to take possession of the Patents, subject
to a perpetual, non-transferable, non-exclusive worldwide royalty-free license back to the Company. The Agreement further provides
that, in the case of this default, the Collateral Agent and Investors will not, individually or collectively, seek to enforce
any monetary judgment with respect to or against any assets of the Company other than the Patents and any payments received in
respect of the Patents, including settlement payments, license fees and royalties on the Patents. In the event that the Collateral
Agent or Investors foreclose on, and take possession of the Patents, the Company will still be entitled to receive any payments
received in respect of the Patents in the event of a recovery by any substituted plaintiff in any related litigation proceedings,
subject to payment of amounts owed under the Agreement to the Investors and the Collateral Agent. In addition, as a result of
the default, the interest rate on the unpaid amounts due increased to 2% per year effective February 13, 2016.
As
a result of the event of default, the Company has classified the remainder of the amounts due on the notes of approximately $4,023,000
as short-term debt as of December 31, 2015. The Company has been in discussions with the investors to amend the Agreement or otherwise
to remedy the event of default; however, there can be no assurance as to the ultimate success of these discussions.
NOTE
8 - STOCKHOLDERS’ EQUITY
Sales
of Equity
-
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 closed on December 31, 2015. No placement agent or underwriter was 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.
Stock
Warrants
– The Company issued warrants to purchase 1,090,911 shares of the Company’s common stock as part
of its offering to accredited investors from September 15, 2015 through October 21, 2015, at an exercise price of $0.40 per share.
The
following is a summary with respect to warrants outstanding and exercisable at December 31, 2015 and 2014 and activity during
the years then ended:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1
|
|
|
6,566,385
|
|
|
$
|
4.70
|
|
|
|
6,875,586
|
|
|
$
|
4.64
|
|
Granted during the year
|
|
|
1,090,911
|
|
|
|
0.40
|
|
|
|
100,000
|
|
|
|
1.56
|
|
Exercised/transferred
|
|
|
-
|
|
|
|
-
|
|
|
|
(80,645
|
)
|
|
|
3.10
|
|
Lapsed/terminated
|
|
|
(207,235
|
)
|
|
|
3.52
|
|
|
|
(328,556
|
)
|
|
|
2.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
7,450,061
|
|
|
$
|
4.10
|
|
|
|
6,566,385
|
|
|
$
|
4.70
|
|
Exercisable at December 31
|
|
|
6,359,150
|
|
|
$
|
4.10
|
|
|
|
6,535,274
|
|
|
$
|
4.71
|
|
Weighted average months remaining
|
|
|
|
|
|
|
34.3
|
|
|
|
|
|
|
|
40.0
|
|
Stock
Options
- On June 20, 2013 the Company’s shareholders adopted the 2013 Employee, Director and Consultant Equity
Incentive Plan (the “2013 Plan”). The 2013 Plan provides for the issuance of up to a total of 6,000,000 shares of
common stock authorized to be issued for grants of options, restricted stock and other forms of equity to employees, directors
and consultants. Under the terms of the 2013 Plan, options granted thereunder may be designated as options which qualify for incentive
stock option treatment (“ISOs”) under Section 422A of the Internal Revenue Code, or options which do not qualify (“NQSOs”).
The
following is a summary with respect to options outstanding at December 31, 2015 and 2014 and activity during the years then ended:
|
|
2015
|
|
|
2014
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Life
Remaining
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Life
Remaining
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
|
|
|
|
|
|
(in years)
|
|
Outstanding at January 1:
|
|
|
4,928,291
|
|
|
|
2.92
|
|
|
|
|
|
|
|
4,073,898
|
|
|
|
3.25
|
|
|
|
|
|
Granted
|
|
|
53,550
|
|
|
|
0.60
|
|
|
|
|
|
|
|
1,172,197
|
|
|
|
1.96
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Lapsed/terminated
|
|
|
(557,282
|
)
|
|
|
2.95
|
|
|
|
|
|
|
|
(317,804
|
)
|
|
|
3.56
|
|
|
|
|
|
Outstanding at December 31:
|
|
|
4,424,559
|
|
|
|
2.89
|
|
|
|
4.0
|
|
|
|
4,928,291
|
|
|
|
2.92
|
|
|
|
4.0
|
|
Exercisable at December 31:
|
|
|
3,628,495
|
|
|
|
2.77
|
|
|
|
4.6
|
|
|
|
2,806,696
|
|
|
|
2.94
|
|
|
|
5.0
|
|
Expected to vest at December 31:
|
|
|
346,064
|
|
|
|
2.00
|
|
|
|
3.2
|
|
|
|
1,660,169
|
|
|
|
2.46
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of outstanding options at December 31:
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of exercisable options at December 31:
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of options expected to vest at December 31:
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Included
in these amounts are earn-out options issued to the previous owners of ExtraDev with a contractual term of 5 years, to purchase
an aggregate of 450,000 shares of common stock at an exercise price of $4.50 per share that will be vested if the Company’s
Digital division achieves certain annual revenue targets by the end of fiscal year 2016. The fair value of the earn-out options
amounted to $594,000. If the annual revenue targets are met or are deemed probable to occur, then the Company will record stock
based compensation expense. As of December 31, 2015, vesting is considered remote. All options granted to the owners of ExtraDev
were classified as compensation for post combination services since the vesting of each grant is based on length of employment,
with all unvested options forfeiting upon termination of employment, therefore, the fair value of these equity instruments was
not considered a component of the purchase price of the ExtraDev acquisition.
The
weighted-average grant date fair value of options granted during the year ended December 31, 2015 was $0.12 ($0.71 -2014). The
aggregate grant date fair value of options that vested during the year was approximately $988,000 ($1,145,000 -2014). There were
no options exercised during 2015 or 2014.
The
fair value of each option award is estimated on the date of grant utilizing the Black-Scholes-Merton Option Pricing Model. The
Company estimated the expected volatility of the Company’s common stock at the grant date using the historical volatility
of the Company’s common stock over the most recent period equal to the expected stock option term. 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.
On
March 5, 2014, the Company issued an aggregate of 1,138,697 options to purchase the Company’s common stock at $2.00 per
share with a term of 5 years to its employees covered under the 2013 Plan. The options vest pro-ratably as follows: 1/3 on the
grant date, 1/3 on the first anniversary of the grant date and 1/3 on the second anniversary of the grant date as long as the
employee is employed on such dates. The options were valued at approximately $833,000 using the Black-Scholes-Merton option pricing
model with a volatility of 67.0%, a risk free rate of return of 0.92% and zero dividend and forfeiture estimates. On March 13,
2014, the Company issued an aggregate of 84,025 shares of common stock to three of its directors to pay approximately $134,000
of accrued director’s fees. In December 2014, the Company issued 33,500 options to purchase the Company’s common stock
at $0.60 per share with a term of 5 years to members of the Company’s executive management in exchange for an agreement
by each employee to reduce his cash compensation for the fiscal year of 2015. The options vested on August 15, 2015 and had a
grant date fair value of $6,643. The options were valued using 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.
The
following table shows our weighted average assumptions used to compute the share-based compensation expense for stock options
and warrants granted during the years ended December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Volatility
|
|
|
72.6
|
%
|
|
|
67.1
|
%
|
Expected option term
|
|
|
2.9 years
|
|
|
|
3.5 years
|
|
Risk-free interest rate
|
|
|
1.7
|
%
|
|
|
0.9
|
%
|
Expected forfeiture rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Restricted
Stock
- Restricted common stock may be issued under the Company’s 2013 Plan for services to be rendered which may
not be sold, transferred or pledged for such period as determined by our Compensation Committee and Management Resources. Restricted
stock compensation cost is measured as the stock’s fair value based on the quoted market price at the date of grant. The
restricted shares issued reduce the amount available under the employee stock option plans. Compensation cost is recognized only
on restricted shares that will ultimately vest. The Company estimates the number of shares that will ultimately vest at each grant
date based on historical experience and adjust compensation cost and the carrying amount of unearned compensation based on changes
in those estimates over time. Restricted stock compensation cost is recognized ratably over the requisite service period which
approximates the vesting period. An employee may not sell or otherwise transfer unvested shares and, in the event that employment
is terminated prior to the end of the vesting period, any unvested shares are surrendered to us. The Company has no obligation
to repurchase any restricted stock.
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. In November 2015, the Company
issued 125,000 restricted shares to a consultant in exchange for media advertising services agreement. The restricted shares vested
over a 90 period and had a grant date fair value of $27,500. In December 2014, the Company issued an aggregate of 243,750 shares
of restricted common stock to certain members of the Company’s executive and senior management in exchange for agreements
by the employees 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 $117,000.
The
following is a summary of activity of restricted stock during the years ended at December 31, 2015 and 2014:
|
|
Shares
|
|
|
Weighted- average
Grant Date Fair
Value
|
|
|
|
|
|
|
|
|
|
|
Restricted shares outstanding, December 31, 2013
|
|
|
41,176
|
|
|
$
|
3.33
|
|
Restricted shares granted
|
|
|
243,750
|
|
|
|
0.48
|
|
Restricted shares vested
|
|
|
(20,588
|
)
|
|
|
3.33
|
|
Restricted shares outstanding, December 31, 2014
|
|
|
264,338
|
|
|
$
|
0.70
|
|
Restricted shares granted
|
|
|
155,000
|
|
|
|
0.25
|
|
Restricted shares vested
|
|
|
(359,338
|
)
|
|
|
0.59
|
|
Restricted shares outstanding, December 31, 2015
|
|
|
60,000
|
|
|
$
|
0.22
|
|
Stock-Based
Compensation
- The Company records stock-based payment expense related to these options 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 2015, the Company had
stock compensation expense of approximately $974,000 or $0.02 basic earnings per share ($1,355,000; $0.03 basic earnings per share
- 2014). As of December 31, 2015, there was approximately $147,000 of total unrecognized compensation costs related to options
and restricted stock granted under the Company’s stock option plans, which the Company expects to recognize over the weighted
average period of six 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.
NOTE
9 - INCOME TAXES
Following
is a summary of the components giving rise to the income tax provision (benefit) for the years ended December 31:
|
|
2015
|
|
|
2014
|
|
Currently payable:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
5,836
|
|
|
|
6,735
|
|
Total currently payable
|
|
|
5,836
|
|
|
|
6,735
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(990,745
|
)
|
|
|
(13,939,671
|
)
|
State
|
|
|
(147,674
|
)
|
|
|
488,406
|
|
Total deferred
|
|
|
(1,138,419
|
)
|
|
|
(13,451,265
|
)
|
Less: increase in allowance
|
|
|
1,154,767
|
|
|
|
12,455,900
|
|
Net deferred
|
|
|
16,348
|
|
|
|
(995,365
|
)
|
Total income tax provision (benefit)
|
|
$
|
22,184
|
|
|
$
|
(988,630
|
)
|
|
|
|
|
|
|
|
|
|
Individual components of deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
2015
|
|
|
|
2014
|
|
Net operating loss carry forwards
|
|
$
|
17,383,770
|
|
|
$
|
16,104,083
|
|
Equity issued for services
|
|
|
855,139
|
|
|
|
1,050,348
|
|
Goodwill and other intangibles
|
|
|
692,470
|
|
|
|
773,019
|
|
Investment in pass-through entity
|
|
|
268,476
|
|
|
|
268,476
|
|
Other
|
|
|
681,889
|
|
|
|
591,259
|
|
Gross deferred tax assets
|
|
|
19,881,744
|
|
|
|
18,787,185
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles
|
|
|
291,706
|
|
|
|
312,277
|
|
Depreciation and amortization
|
|
|
289,534
|
|
|
|
312,823
|
|
Gross deferred tax liabilities
|
|
|
581,240
|
|
|
|
625,100
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(19,462,611
|
)
|
|
|
(18,307,844
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(162,107
|
)
|
|
$
|
(145,759
|
)
|
During
2014, the Company recognized a $995,000 net deferred tax benefit primarily as a result of the expense recognized during the period
related to the impairment of the investment in VATI and the Bascom patents.
The
Company has approximately $51,958,000 in federal net operating loss carryforwards (“NOLs”) available to reduce future
taxable income, which will expire at various dates from 2022 through 2034. Due to the uncertainty as to the Company’s ability
to generate sufficient taxable income in the future and utilize the NOLs before they expire, the Company has recorded a valuation
allowance accordingly. The Company’s NOLs could also be subject to annual limitation as a result of a change in its equity
ownership as defined under the Internal Revenue Code Section 382. This limitation, as applicable, could further limit the use
of the NOLs.
The
excess tax benefits associated with stock option exercises are recorded directly to stockholders’ equity only when realized.
As a result, the excess tax benefits available in net operating loss carryforwards but not reflected in deferred tax assets was
approximately $1,019,000. These carryforwards expire at various dates from 2022 through 2030. The excess tax benefits associated
with stock option exercises are recorded directly to stockholders’ equity only when realized.
The
differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying
consolidated statements of operations are as follows:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Statutory United States federal rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes net of federal benefit
|
|
|
0.7
|
|
|
|
(0.7
|
)
|
Noncontrolling interest in pass-through entity
|
|
|
-
|
|
|
|
(3.4
|
)
|
Permanent differences
|
|
|
(23.3
|
)
|
|
|
(2.3
|
)
|
Other
|
|
|
(3.5
|
)
|
|
|
1.1
|
|
Change in valuation reserves
|
|
|
(8.1
|
)
|
|
|
(26.6
|
)
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(0.2
|
)%
|
|
|
2.1
|
%
|
At
December 31, 2015 and 2014, the total unrecognized tax benefits of $446,000 have been netted against the related deferred tax
assets.
The
Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended
December 31, 2015 and 2014, the Company recognized no interest and penalties.
The
Company files income tax returns in the U.S. federal jurisdiction and various states. The tax years 2012-2015 generally remain
open to examination by major taxing jurisdictions to which the Company is subject.
NOTE
10 - DEFINED CONTRIBUTION PENSION PLAN
The
Company maintains qualified employee savings plans (the “401(k) Plans”) which qualify as deferred salary arrangements
under Section 401(k) of the Internal Revenue Code which covers all employees. Employees generally become eligible to participate
in the 401(k) Plan immediately following the employee’s hire date. Employees may contribute a percentage of their earnings,
subject to the limitations of the Internal Revenue Code. The Company matches up to 50% of the employee’s contribution up
to a maximum match of 3%. The total matching contributions for 2015 were approximately $109,000 ($107,000 -2014).
NOTE
11 – COMMITMENTS AND CONTINGENCIES
Facilities
-
Our corporate offices and Digital division together occupy approximately 5,700 square feet of commercial office
space at 200 Canal View Boulevard, located in Rochester, New York under a lease that expires in December 2020, at a rental rate
of approximately $6,100 per month. Prior to occupying the Canal View premises in December 2015, we paid approximately $133,000
during the 2015 fiscal year for our combined corporate and digital office space located at 28 East Main Street, Rochester, New
York. Our Plastics division leases approximately 15,000 square feet under a lease that expires December 31, 2018 for approximately
$13,000 per month. In addition, the Company owns a 40,000 square foot packaging and printing plant in Victor, New York, a suburb
of Rochester, New York. The Company’s Technology Management division leases executive office space in Reston, Virginia under
a 12 month lease that expires in December 2016 for approximately $600 per month, and also leases a sales and research and development
facility in Plano, Texas under a 12 month lease that expires in December 2016 for approximately $1,100 per month. The Company
believes that it can negotiate renewals or similar lease arrangements on acceptable terms when its current leases expire. The
Company believes that its facilities are adequate for its current operations.
Equipment
Leases
– From time to time, the Company leases certain production and office equipment, digital and offset presses,
laminating and finishing equipment for its various printing operations. The leases may be capital leases or operating leases and
are generally for a term of 36 to 60 months. The leases expire at various dates February 2017. As of December 31, 2015 and 2014,
the Company did not have any capital leases.
The
following table summarizes the Company’s lease commitments.
|
|
Operating Leases
|
|
|
|
Equipment
|
|
|
Facilities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments made in 2015
|
|
$
|
45,745
|
|
|
$
|
337,738
|
|
|
$
|
383,483
|
|
Future minimum lease commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
$
|
48,499
|
|
|
$
|
233,937
|
|
|
$
|
282,436
|
|
2017
|
|
|
44,131
|
|
|
|
237,929
|
|
|
|
282,060
|
|
2018
|
|
|
43,258
|
|
|
|
243,002
|
|
|
|
286,260
|
|
2019
|
|
|
14,419
|
|
|
|
68,820
|
|
|
|
83,239
|
|
2020
|
|
|
-
|
|
|
|
68,820
|
|
|
|
68,820
|
|
Total future minimum lease commitments
|
|
$
|
150,307
|
|
|
$
|
852,508
|
|
|
$
|
1,002,815
|
|
Employment
Agreements
- The Company has employment or severance agreements with seven members of its management team with terms ranging
from one to five years through December 2019. The employment or severance agreements provide for severance payments in the event
of termination for certain causes. As of December 31, 2015, the minimum annual severance payments under these employment agreements
are, in aggregate, approximately $1,011,000.
Related
Party Payments
-
During 2015, the Company paid consulting fees of approximately $35,000 ($145,000 – 2014)
to Patrick White, its former CEO, under a consulting agreement that expired on February 28, 2015.
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 December 31, 2015 and 2014, the Company has not accrued
any contingent legal fees pursuant to these arrangements.
Legal
Proceedings
-
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
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, the parties reached a confidential
settlement which ended the litigation.
On
October 3, 2012, Lexington Technology Group’s (now DSS Technology Management) subsidiary, Bascom Research, LLC, commenced
legal proceedings against five companies, including Facebook, Inc. and LinkedIn Corporation, pursuant to which Bascom Research,
LLC alleged that such companies infringed on one or more of its patents. On January 5, 2015, the U.S. District Court for the Northern
District of California granted summary judgment to defendants Facebook, Inc., and LinkedIn Corp. effectively ending the case at
the trial court level. On January 22, 2015, Bascom Research, LLC and Facebook, Inc. entered in to a Stipulation filed with the
District Court whereby Bascom Research, LLC agreed not to appeal the District Court’s judgment, and Facebook, Inc. agreed
to request the dismissal of a pending CBM review it had previously filed with the USPTO’s Patent Trial and Appeal Board
(PTAB). The CBM proceeding was terminated on February 24, 2015.
On
November 26, 2013, DSS Technology Management filed suit against Apple, Inc. (“Apple”), in the United States District
Court for the Eastern District of Texas, for patent infringement (the “Apple Litigation”). The complaint alleges infringement
by Apple of DSS Technology Management’s patents that relate to systems and methods of using low power wireless peripheral
devices. DSS Technology Management is seeking a judgement 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, the case was transferred to the Northern District of California.
In December 2014, Apple filed two IPR petitions with PTAB for review of the patents at issue in the case. The PTAB instituted
the IPRs on June 25, 2015. Oral arguments of the IPRs took place on March 15, 2016, with a decision expected from PTAB by the
end of June 2016.
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 sought a judgment for infringement,
injunctive relief, and money damages from each of the named defendants. In June, 2014, TSMC filed an IPR petition with PTAB for
review of the patents at issue. Samsung then filed an IPR petition relating to the same patents in September 2014, and filed a
corrected IPR petition in October 2014. On December 31, 2014, the PTAB instituted review of several of the patent claims at issue
in the case. Samsung then filed a motion with PTAB to join TSMC’s IPR proceeding. The request was granted by PTAB. On November
30, 2015, the PTAB issued a decision invalidating the patent claims at issue in the case. DSS Technology Management then filed
a notice of appeal of the IPR decision with the Federal Circuit on February 1, 2016, which is pending 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 Judgment
of Non-Infringement dated May 4, 2015, subject to DSS Technology Management’s right to appeal the court’s claim construction
order to the Federal Circuit, thus preserving the status quo in the event an appeal results in a remand for further proceedings
in the District Court. On March 22, 2016, the Federal Circuit ruled in favor of TSMC in the appeal. On April 28, 2015, DSS Technology
Management reached a confidential settlement with NEC, ending the litigation 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 alleged infringement by Lenovo of one
of DSSTM’s patents that relates to systems and methods of using low power wireless peripheral devices. DSS Technology Management
sought judgment for infringement and money damages from Lenovo in connection with the case. 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. On December 9, 2015, Intel filed IPR petitions
with PTAB for review of the patents at issue in the case. PTAB has not yet made a determination whether the IPRs will be instituted.
On March 18, 2016, the District Court issued an Order granting Intel’s motion to stay the case until completion of the IPR
proceedings.
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 certain 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. On November 12, 2015, SK Hynix filed an IPR petition with PTAB for review of the patent at
issue in their case. On March 18, 2016, Samsung filed an IPR petition as well. As of the date of this Report, PTAB has not yet
made a determination whether those IPRs will be instituted.
On
January 29, 2016, the Company received notice of the dismissal of a shareholder derivative suit filed in New York State Court
in April 2015 by Benjamin Lapin, derivatively and on behalf of 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 the Company, as Nominal Defendant.
In
addition to the foregoing, the Company is subject to other legal proceedings that have arisen in the ordinary course of business
and have not been finally adjudicated. Although there can be no assurance in this regard, in the opinion of management, none of
the legal proceedings to which we are a party, whether discussed herein or otherwise, will have a material adverse effect on its
results of operations, cash flows or our financial condition. The Company accrues for potential litigation losses when a loss
is probable and reasonably estimable.
NOTE
12 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental
cash flow information for the years ended December 31:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
251,000
|
|
|
$
|
298,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Accrued liabilities with related parties settled with equity
|
|
$
|
-
|
|
|
$
|
134,000
|
|
Financing of building improvements
|
|
$
|
-
|
|
|
$
|
200,000
|
|
Financing of equipment purchases
|
|
$
|
525,000
|
|
|
$
|
-
|
|
Change in non-controlling interest
|
|
$
|
-
|
|
|
$
|
(4,700,000
|
)
|
Loss from change in fair value of interest rate swap derivative
|
|
$
|
(2,500
|
)
|
|
$
|
(34,000
|
)
|
Escrow shares retired
|
|
$
|
-
|
|
|
$
|
150,000
|
|
NOTE
13 - SEGMENT INFORMATION
As
of January 1, 2015, 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 years ended December 31, 2015 and 2014 is
as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated
independently, would report the results contained herein:
Year Ended December 31, 2015
|
|
Packaging and
Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
11,797,000
|
|
|
|
3,904,000
|
|
|
|
1,804,000
|
|
|
|
-
|
|
|
$
|
17,505,000
|
|
Depreciation and amortization
|
|
|
584,000
|
|
|
|
120,000
|
|
|
|
847,000
|
|
|
|
8,000
|
|
|
|
1,559,000
|
|
Interest expense
|
|
|
137,000
|
|
|
|
-
|
|
|
|
84,000
|
|
|
|
114,000
|
|
|
|
335,000
|
|
Stock based compensation
|
|
|
69,000
|
|
|
|
39,000
|
|
|
|
112,000
|
|
|
|
754,000
|
|
|
|
974,000
|
|
Impairment of goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
9,593,000
|
|
|
|
-
|
|
|
|
9,593,000
|
|
Impairment of intangible assets and investments
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
500,000
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
|
|
22,000
|
|
Net income (loss) to common stockholders
|
|
|
1,070,000
|
|
|
|
166,000
|
|
|
|
(12,944,000
|
)
|
|
|
(2,601,000
|
)
|
|
|
(14,309,000
|
)
|
Capital expenditures
|
|
|
621,000
|
|
|
|
52,000
|
|
|
|
9,000
|
|
|
|
-
|
|
|
|
682,000
|
|
Identifiable assets
|
|
|
9,571,000
|
|
|
|
2,131,000
|
|
|
|
3,299,000
|
|
|
|
656,000
|
|
|
|
15,657,000
|
|
Year Ended December 31, 2014
|
|
Packaging and
Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
12,926,000
|
|
|
|
3,552,000
|
|
|
|
1,809,000
|
|
|
|
-
|
|
|
$
|
18,287,000
|
|
Depreciation and amortization
|
|
|
567,000
|
|
|
|
171,000
|
|
|
|
4,532,000
|
|
|
|
4,000
|
|
|
|
5,274,000
|
|
Interest expense
|
|
|
156,000
|
|
|
|
7,000
|
|
|
|
54,000
|
|
|
|
100,000
|
|
|
|
317,000
|
|
Stock based compensation
|
|
|
121,000
|
|
|
|
69,000
|
|
|
|
155,000
|
|
|
|
1,010,000
|
|
|
|
1,355,000
|
|
Impairment of goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000,000
|
|
|
|
-
|
|
|
|
3,000,000
|
|
Impairment of intangible assets and investments
|
|
|
-
|
|
|
|
-
|
|
|
|
34,035,000
|
|
|
|
-
|
|
|
|
34,035,000
|
|
Loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,700,000
|
)
|
|
|
-
|
|
|
|
(4,700,000
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(989,000
|
)
|
|
|
(989,000
|
)
|
Net income (loss) to common stockholders
|
|
|
842,000
|
|
|
|
(106,000
|
)
|
|
|
(38,843,000
|
)
|
|
|
(3,050,000
|
)
|
|
|
(41,157,000
|
)
|
Capital expenditures
|
|
|
717,000
|
|
|
|
131,000
|
|
|
|
1,244,000
|
|
|
|
-
|
|
|
|
2,092,000
|
|
Identifiable assets
|
|
|
8,873,000
|
|
|
|
1,872,000
|
|
|
|
14,872,000
|
|
|
|
2,133,000
|
|
|
|
27,750,000
|
|
International
revenue, which consists of sales to customers with operations in Canada, Western Europe, Latin America, Africa, the Middle East
and Asia comprised 2% of total revenue for 2015 (2%- 2014). Revenue is allocated to individual countries by customer based on
where the product is shipped to, location of services performed or the location of equipment that is under an annual maintenance
agreement. The Company had no long-lived assets in any country other than the United States for any period presented.