ITEM 1 - FINANCIAL STATEMENTS
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of
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September 30, 2016
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December 31, 2015
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|
(unaudited)
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|
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|
ASSETS
|
|
|
|
|
|
|
|
|
|
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Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
823,446
|
|
|
$
|
1,440,256
|
|
Restricted cash
|
|
|
187,727
|
|
|
|
293,043
|
|
Accounts receivable, net
|
|
|
2,077,932
|
|
|
|
2,097,433
|
|
Inventory
|
|
|
1,188,359
|
|
|
|
937,830
|
|
Prepaid expenses and other current assets
|
|
|
336,440
|
|
|
|
313,528
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|
Total current assets
|
|
|
4,613,904
|
|
|
|
5,082,090
|
|
|
|
|
|
|
|
|
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|
Property, plant and equipment, net
|
|
|
4,677,212
|
|
|
|
5,003,818
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|
Other assets
|
|
|
45,821
|
|
|
|
44,050
|
|
Goodwill
|
|
|
2,453,349
|
|
|
|
2,453,349
|
|
Other intangible assets, net
|
|
|
2,065,329
|
|
|
|
3,017,544
|
|
|
|
|
|
|
|
|
|
|
Total assets
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|
$
|
13,855,615
|
|
|
$
|
15,600,851
|
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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|
|
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Accounts payable
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$
|
2,114,466
|
|
|
$
|
1,945,073
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|
Accrued expenses and other current liabilities
|
|
|
2,072,864
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|
|
|
1,964,726
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|
Short-term debt
|
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|
3,436,910
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|
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|
3,984,316
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|
Current portion of long-term debt, net
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|
1,288,591
|
|
|
|
1,553,061
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|
|
|
|
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|
|
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Total current liabilities
|
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|
8,912,831
|
|
|
|
9,447,176
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|
|
|
|
|
|
|
|
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Long-term debt, net
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1,896,433
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|
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2,240,596
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Other long-term liabilities
|
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86,148
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63,697
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|
Deferred tax liability, net
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176,318
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162,107
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Commitments and contingencies (Note 5)
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Stockholders’ equity
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Common stock, $.02 par value; 200,000,000 shares authorized, 12,977,903 shares issued and outstanding (12,970,487 on December 31, 2015)
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259,558
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259,410
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Additional paid-in capital
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103,907,668
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103,820,170
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Accumulated other comprehensive loss
|
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(86,148
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)
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|
(63,697
|
)
|
Accumulated deficit
|
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|
(101,297,193
|
)
|
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(100,328,608
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)
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Total stockholders’ equity
|
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|
2,783,885
|
|
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|
3,687,275
|
|
|
|
|
|
|
|
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Total liabilities and stockholders’ equity
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$
|
13,855,615
|
|
|
$
|
15,600,851
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|
See
accompanying notes to the condensed consolidated financial statements
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
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For the Three Months Ended
September 30,
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For the Nine Months Ended
September 30,
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2016
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2015
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2016
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2015
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Revenue
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Printed products
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$
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4,448,509
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$
|
3,975,259
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$
|
12,147,796
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$
|
10,678,456
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Technology sales, services and licensing
|
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530,979
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|
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444,734
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|
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1,243,158
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1,367,168
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|
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Total revenue
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4,979,488
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|
4,419,993
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13,390,954
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12,045,624
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Costs and expenses
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Cost of revenue, exclusive of depreciation and amortization
|
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2,874,508
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2,556,044
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|
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|
7,815,658
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|
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|
7,205,723
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|
Selling, general and administrative (including stock based compensation)
|
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|
1,710,099
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|
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|
2,226,325
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|
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|
5,262,618
|
|
|
|
7,071,153
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|
Depreciation and amortization
|
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|
349,143
|
|
|
|
404,774
|
|
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|
1,049,387
|
|
|
|
1,174,900
|
|
Total costs and expenses
|
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|
4,933,750
|
|
|
|
5,187,143
|
|
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|
14,127,663
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|
15,451,776
|
|
|
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Operating income (loss)
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|
45,738
|
|
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|
(767,150
|
)
|
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|
(736,709
|
)
|
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|
(3,406,152
|
)
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Other expense:
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Interest expense
|
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|
(67,739
|
)
|
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|
(88,551
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)
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|
(217,665
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)
|
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|
(257,263
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)
|
Gains on sales of investment and equipment
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|
-
|
|
|
|
-
|
|
|
|
-
|
|
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146,283
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|
Net loss on debt modification and extinguishment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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|
(19,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Loss before income taxes
|
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|
(22,001
|
)
|
|
|
(855,701
|
)
|
|
|
(954,374
|
)
|
|
|
(3,536,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income tax expense
|
|
|
4,737
|
|
|
|
4,737
|
|
|
|
14,211
|
|
|
|
14,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss
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|
$
|
(26,738
|
)
|
|
$
|
(860,438
|
)
|
|
$
|
(968,585
|
)
|
|
$
|
(3,550,439
|
)
|
|
|
|
|
|
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|
|
|
|
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|
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Other comprehensive loss:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Interest rate swap gain (loss)
|
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|
11,843
|
|
|
|
(22,009
|
)
|
|
|
(22,451
|
)
|
|
|
(19,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
$
|
(14,895
|
)
|
|
$
|
(882,447
|
)
|
|
$
|
(991,036
|
)
|
|
$
|
(3,569,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Shares used in computing loss per common share:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic and diluted
|
|
|
12,977,903
|
|
|
|
11,703,442
|
|
|
|
12,975,053
|
|
|
|
11,613,491
|
|
See
accompanying notes to condensed consolidated financial statements
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(968,585
|
)
|
|
$
|
(3,550,439
|
)
|
Adjustments to reconcile net loss to net cash from (used by) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,049,387
|
|
|
|
1,174,900
|
|
Stock based compensation
|
|
|
87,738
|
|
|
|
842,265
|
|
Paid in-kind interest
|
|
|
58,000
|
|
|
|
68,000
|
|
Gain on sale of equipment
|
|
|
-
|
|
|
|
(46,283
|
)
|
Net loss on debt modification and extinguishment
|
|
|
-
|
|
|
|
19,096
|
|
Change in deferred tax provision
|
|
|
14,211
|
|
|
|
14,211
|
|
Foreign currency transaction gain
|
|
|
-
|
|
|
|
(29,400
|
)
|
Amortization of deferred financing costs
|
|
|
15,863
|
|
|
|
-
|
|
Decrease (increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
19,501
|
|
|
|
45,927
|
|
Inventory
|
|
|
(250,529
|
)
|
|
|
(370,598
|
)
|
Prepaid expenses and other assets
|
|
|
(24,683
|
)
|
|
|
19,879
|
|
Restricted cash
|
|
|
105,316
|
|
|
|
62,750
|
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
169,394
|
|
|
|
979,334
|
|
Accrued expenses and other liabilities
|
|
|
108,138
|
|
|
|
(396,513
|
)
|
Net cash from (used by) operating activities
|
|
|
383,751
|
|
|
|
(1,166,871
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(192,614
|
)
|
|
|
(118,497
|
)
|
Proceeds from sale of equipment
|
|
|
-
|
|
|
|
46,283
|
|
Proceeds from sale of intangible assets
|
|
|
495,000
|
|
|
|
-
|
|
Purchase of intangible assets
|
|
|
(72,953
|
)
|
|
|
(990
|
)
|
Net cash from (used by) investing activities
|
|
|
229,433
|
|
|
|
(73,204
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments of long-term debt
|
|
|
(1,229,902
|
)
|
|
|
(737,240
|
)
|
Issuances of common stock, net of issuance costs
|
|
|
(92
|
)
|
|
|
878,336
|
|
Net cash from (used by) financing activities
|
|
|
(1,229,994
|
)
|
|
|
141,096
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(616,810
|
)
|
|
|
(1,098,979
|
)
|
Cash beginning of period
|
|
|
1,440,256
|
|
|
|
2,343,675
|
|
|
|
|
|
|
|
|
|
|
Cash end of period
|
|
$
|
823,446
|
|
|
$
|
1,244,696
|
|
See
accompanying notes to the condensed consolidated financial statements.
DOCUMENT
SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
1.
Basis
of Presentation and Significant Accounting Policies
Document
Security Systems, Inc. (the “Company”), through two of its subsidiaries, Premier Packaging Corporation, which operates
under the assumed name of DSS Packaging Group, and Plastic Printing Professionals, Inc., which operates under the assumed name
of DSS Plastics Group, operates in the security and commercial printing, packaging and plastic ID markets. The Company develops,
markets, manufactures and sells paper and plastic products designed to protect valuable information from unauthorized scanning,
copying, and digital imaging. The Company’s subsidiary, DSS Digital Inc. (f/k/a Extradev, Inc.), which operates under the
assumed name of DSS Digital Group, develops, markets and sells digital information services, including data hosting, disaster
recovery and data back-up and security services. The Company’s subsidiary, DSS Technology Management, Inc., acquires intellectual
property (“IP”) assets and interests in companies owning intellectual property assets, or assists others in managing
their intellectual property monetization efforts, for the purpose of monetizing these assets through a variety of value-enhancing
initiatives, including, but not limited to, investments in the development and commercialization of patented technologies, licensing,
strategic partnerships and commercial litigation.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally
accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q
and Rule 8.03 of Regulation S-X for smaller reporting companies. Accordingly, these statements do not include all of the information
and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying balance
sheets and related interim statements of operations and comprehensive loss and cash flows include all adjustments considered necessary
for their fair presentation in accordance with U.S. GAAP. All significant intercompany transactions have been eliminated in consolidation.
Interim
results are not necessarily indicative of results expected for the full year. For further information regarding the Company’s
accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s
Form 10-K for the fiscal year ended December 31, 2015.
Use
of Estimates -
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ materially from those estimates and assumptions. In preparing these financial statements, the Company has
evaluated events and transactions for potential recognition or disclosure.
Restricted
Cash
– As of September 30, 2016, cash of $187,727 ($293,043 – December 31, 2015) is restricted for payments
of costs and expenses associated with one of the Company’s IP monetization programs.
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, 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.
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 cash flows that are caused by interest rate volatility. The Company
has one interest rate swap that changes variable rates into fixed rates on one term loan. The swap qualifies as a Level 2 fair
value financial instrument. The swap agreement is not held for trading purposes and the Company does not intend to sell the derivative
swap financial instrument. The Company records interest swap agreements on the balance sheet at fair value because such agreements
qualify as 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 valuation of the interest rate swap
is derived from proprietary models of Citizens Bank (defined below) based upon recognized financial principles and reasonable
estimates about relevant future market conditions and may reflect certain other financial factors such as anticipated profit or
hedging, transactional, and other costs. The notional amounts of the swap decreases over the life of the agreements. The Company
is exposed to a credit loss in the event of nonperformance by the counter parties to the interest rate swap agreement. However,
the Company does not anticipate non-performance by the counter parties. The cumulative net loss attributable to the cash flow
hedge recorded in accumulated other comprehensive loss and other liabilities at September 30, 2016 is approximately $86,000 ($64,000
- December 31, 2015), which is included in other long-term liabilities on the accompanying balance sheets.
The
Company has a notional amount of approximately $981,000 as of September 30, 2016 on its interest rate swap agreement for its debt
with RBS Citizens, N.A. (“Citizens Bank”) (see Note 4) which changes a variable rate into a fixed rate on a term loan
as follows:
Notional
|
|
|
Variable
|
|
|
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Fixed
Cost
|
|
|
Maturity
Date
|
$
|
980,721
|
|
|
|
3.67
|
%
|
|
|
5.87
|
%
|
|
August
30, 2021
|
Impairment
of Long Lived Assets and Goodwill
- Long-lived and intangible assets and goodwill are assessed for potential impairment
whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows
is in question. Goodwill and indefinite-lived intangible assets are assessed at least annually, but also whenever events or changes
in circumstances indicate the carrying values may not be recoverable. Factors that could trigger an impairment review, include
(a) significant underperformance relative to historical or projected future operating results; (b) significant changes in the
manner of or use of the acquired assets or the strategy for the Company’s overall business; (c) significant negative industry
or economic trends; (d) significant decline in the Company’s stock price for a sustained period; and (e) a decline in the
Company’s market capitalization below net book value.
Contingent
Legal Expenses
-
Contingent legal fees associated with our commercial litigation involving our IP are
expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where
there are no recoveries from potential infringers, no contingent legal fees are paid; however, the Company may be liable for certain
out of pocket legal costs incurred pursuant to the underlying legal services agreement that will be paid out from the proceeds
from settlements or licenses that arise pursuant to an enforcement action, which will be expensed as legal fees in the period
in which the payment of such fees is probable. Any unamortized patent acquisition costs will be expensed in the period in which
a conclusion is reached in an enforcement action that does not yield future royalties potential.
Earnings
Per Common Share
- The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual
weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number
of additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss period, the calculation
for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.
On
August 26, 2016, the Company affected a one for four reverse stock split of the Company’s common stock. No fractional shares
of the Company’s common stock were issued as a result of the reverse stock split. Instead, stockholders of record who otherwise
would have been entitled to receive fractional shares were entitled to a rounding up of their fractional share to the nearest
whole share, except in the case of any stockholder that owned less than four shares of the Company’s common stock immediately
preceding the reverse stock split. In such case, such stockholder received cash for such fractional share in an amount equal to
the product obtained by multiplying: (x) the closing sale price of the common stock on August 25, 2016 as reported on the NYSE
MKT, by (y) the amount of the fractional share. As a result, the Company issued 1,166 common shares for shares due as a result
of the rounding up feature and paid $92 to buy-out the fractional shares of holders with less than four shares immediately preceding
the reverse stock split.
As
of September 30, 2016 and 2015, there were 2,498,128 and 2,924,164 (as adjusted to reflect the one-for-four reverse stock split
that took effect on August 26, 2016) respectively, of common stock share equivalents potentially issuable under convertible debt
agreements, employment agreements, options, warrants, and restricted stock agreements, that could potentially dilute basic earnings
per share in the future. These shares are excluded from the calculation of diluted earnings per share in periods in which the
Company had a net loss because their inclusion would be anti-dilutive to the Company’s losses in the respective periods.
Concentration
of Credit Risk
-
The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured
limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial
institutions.
During
the nine months ended September 30, 2016 and 2015, one customer accounted for 25% and 23%, respectively, of the Company’s
consolidated revenue and accounted for 7% and 27%, respectively, of the Company’s accounts receivable balance as of September
30, 2016 and December 31, 2015, respectively. In addition, an additional customer accounted for 17% of the Company’s accounts
receivable balance as of September 30, 2016. The risk with respect to accounts receivables is mitigated by credit evaluations
the Company performs on its customers, the short duration of its payment terms for the significant majority of its customer contracts
and by the diversification of its customer base.
Continuing
Operations -
While the Company’s net losses have decreased during the first nine months of 2016, the Company has
incurred net losses in previous years and there is no assurance that the improved results of the first nine months of 2016 will
be maintained.
The Company has negative working capital of approximately $4,299,000 as of
September 30, 2016, of which approximately $3,462,000 is related to short-term debt that could be paid by non-cash assets when
due.
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 of $1.1 million from the sale of its equity. As of September
30, 2016, the Company had approximately $823,000 in unrestricted cash and $188,000 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
in 2016, the Company will need
to extend maturities of current debt, and, if necessary,
and/or
raise additional funds in the future in order to fund its working capital needs and pursue its business plan, although
there can be no assurances, management believes that sources for these additional funds will be available through either current
or future investors.
Reclassifications
- Certain prior year amounts have been reclassified to conform to the current year presentation. All common share and
per share figures are presented on a post one for four reverse stock split basis.
Recent
Accounting Pronouncements
-
In August 2014, the Financial Accounting Standards Board (“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 currently is evaluating the effect that the updated standard will have on its consolidated
financial statements and related disclosures.
In
May 2014, the FASB issued ASU 2014-9 “Revenue from Contracts with Customers”. The new guidance requires an entity
to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, “Revenue from Contracts
with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”); ASU No. 2016-10, “Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”);
and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”
(“ASU 2016-12”). The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the
“new revenue standards”). The revenue standards 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 revenue standards will have on its consolidated
financial statements and related disclosures.
In
April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which requires all
costs incurred to issue debt to be presented in the balance sheet as a direct deduction from the carrying value of the debt. This
ASU is effective for annual and interim reporting periods beginning after December 15, 2015, with early adoption permitted. The
Company adopted the provisions of this ASU in the first quarter of 2016, and reclassified approximately $57,000 from “Other
assets” as December 31, 2015, as a reduction to the carrying value of the respective debt instrument.
In
February 2016, the FASB issued 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 will have on its consolidated financial statements and related disclosures.
In
March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation: Improvements to Employee Share-Based
Payment Accounting.” The standard is intended to simplify several areas of accounting for share-based compensation arrangements,
including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the
Company on January 1, 2017 and the Company is currently evaluating the impact that ASU 2016-09 will have on its consolidated financial
statements and related disclosures.
2.
Inventory
Inventory
consisted of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Finished Goods
|
|
$
|
658,867
|
|
|
$
|
718,601
|
|
Work in process
|
|
|
406,927
|
|
|
|
167,779
|
|
Raw Materials
|
|
|
122,565
|
|
|
|
51,450
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,188,359
|
|
|
$
|
937,830
|
|
3.
Intangible Assets
Intangible
assets are comprised of the following:
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
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
|
|
|
|
1,699,832
|
|
|
|
297,468
|
|
|
|
1,997,300
|
|
|
|
1,635,257
|
|
|
|
362,043
|
|
Acquired intangibles-patents and patent rights
|
|
Varied (1)
|
|
|
3,155,000
|
|
|
|
1,964,973
|
|
|
|
1,190,027
|
|
|
|
3,650,000
|
|
|
|
1,562,526
|
|
|
|
2,087,474
|
|
Patent application costs
|
|
Varied (2)
|
|
|
1,135,757
|
|
|
|
557,923
|
|
|
|
577,834
|
|
|
|
1,062,958
|
|
|
|
494,931
|
|
|
|
568,027
|
|
|
|
|
|
$
|
6,288,057
|
|
|
$
|
4,222,728
|
|
|
$
|
2,065,329
|
|
|
$
|
6,710,258
|
|
|
$
|
3,692,714
|
|
|
$
|
3,017,544
|
|
|
(1)
|
Acquired
patents and patent rights are amortized over their expected useful life which is generally the remaining legal life of the
patent. As of September 30, 2016, the weighted average remaining useful life of these assets in service was approximately
2.6 years.
|
|
|
|
|
(2)
|
Patent
application costs are amortized over their expected useful life which is generally the remaining legal life of the patent.
As of September 30, 2016, the weighted average remaining useful life of these assets in service was approximately 8.8 years.
|
During
the nine months ended September 30, 2016, the Company received proceeds of $495,000 for the sale of certain patents that were
included in a pool of acquired patents. The Company evaluates acquired patents as related pools of assets for purposes of amortization
and impairment, as well as operational evaluation and use. Accordingly, the proceeds received from the sale of the patents will
reduce the cost of the pool of assets until the carrying value of the pool is reduced to zero. Any excess proceeds from future
sales will result in a gain. The Company also considers the impact that the sale of a portion of the pool has on expected future
recoverability on the pool. No impairment was considered necessary as a result of this evaluation.
Intangible
asset amortization expense for the nine months ended September 30, 2016 amounted to $530,015 ($691,917 - September 30, 2015).
4.
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% (4.27% as of
September 30, 2016) and matures on May 31, 2017. As of September 30, 2016, the revolving line had a balance of $0 ($0 at December
31, 2015).
Long-Term
Debt
-
On December 30, 2011, the Company issued a $575,000 convertible note that was due on December
29, 2013, and carries an interest rate of 10% per annum. Interest is payable quarterly, in arrears. The convertible note was convertible
at any time during the term at lender’s option into a total of 260,180 shares of the Company’s common stock at a conversion
price of $2.21 per share. On February 23, 2015, the Company entered into Convertible Promissory Note Amendment No. 2 to extend
the maturity date to December 30, 2016, eliminate the conversion feature, and to institute principal payments in the amount of
$15,000 per month plus interest through the extended maturity date, and a balloon payment of $230,000 due on the extended maturity
date. On April 12, 2016, the Company entered into Convertible Promissory Note Amendment No. 3 to extend the maturity date to May
31, 2017 and change the balloon payment to $155,000 due on the extended maturity date. As of September 30, 2016, the balance of
the term loan was $275,000 ($410,000 at December 31, 2015).
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., which carries an interest rate of 9% per
annum. Interest is payable quarterly, in arrears. On February 23, 2015, the Company entered into Promissory Note Amendment No.
2 to extend the maturity date to May 31, 2016 and to institute principal payments in the amount of $15,000 per month plus interest
through the extended maturity date, and a balloon payment of $610,000 due on the extended maturity date. On April 12, 2016, the
Company entered into Promissory Note Amendment No. 3 to extend the maturity date to May 31, 2017 and change the balloon payment
to $430,000 due on the extended maturity date. As of September 30, 2016, the balance of the term loan was $550,000 ($685,000 at
December 31, 2015).
Term
Loan Debt
- 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 September 30, 2016, the loan had a balance of $625,735 ($819,681 at December 31, 2015).
On
April 28, 2015, Premier Packaging entered into a term note with Citizens Bank for $525,000, repayable over a 60-month period.
The loan bears interest at 3.61% and is payable in equal monthly installments of $9,591. Premier Packaging used the proceeds of
the term note to acquire a HP Indigo 7800 Digital press. As of September 30, 2016, the loan had a balance of $385,934 ($460,448
at December 31, 2015).
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% (3.67% at September 30, 2016). Concurrently with the
transaction, the Company entered into an interest rate swap agreement to lock into a 5.87% effective interest rate for the life
of the loan. The Promissory Note matures in August 2021 at which time a balloon payment of the remaining principal balance will
be due. As of September 30, 2016, the Promissory Note had a balance of $980,721 ($1,021,926 at December 31, 2015). This note is
presented net of approximately $14,000 ($18,000 at December 31, 2015) of debt issuance costs on the condensed consolidated balance
sheets.
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% (3.67% at September 30, 2016),
which payments commenced on July 1, 2014. The note matures in July 2019 at which time a balloon payment of the remaining principal
balance of $300,000 is due. As of September 30, 2016, the note had a balance of $382,500 ($405,247 – December 31, 2015).
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, 2016, June 30, 2016
and September 30, 2016, 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.
Other
Debt
- On February 13, 2014, the Company’s subsidiary, DSS Technology Management, Inc. (“DSSTM”), 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” or “Fortress”), and certain investors (the
“Investors”), pursuant to which DSSTM 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, DSSTM 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, DSSTM 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. DSSTM is a plaintiff in various ongoing patent infringement lawsuits involving certain of the Patents.
On
March 27, 2014, DSSTM received an additional $1,000,000 under the Agreement comprised of a promissory note for $900,000 and fixed
and contingent equity interests of $100,000. On September 5, 2014, DSSTM received the remaining $1,500,000 under the Agreement
comprised of a promissory note for $1,350,000 and fixed and contingent return interests of $150,000. On May 23, 2016, DSSTM remitted
$495,000 in proceeds received from the sale of patent assets (Note 3) to Fortress under the terms of the Agreement. On September
20, 2016, DSSTM remitted $125,250 in proceeds received from a settlement to Fortress under the terms of the Agreement. As of September
30, 2016, DSSTM has made aggregate payments of $770,250 on the notes. As of September 30, 2016, total net advances equaled $3,579,750,
which consisted of $4,041,000 in notes and an aggregate of $459,000 of fixed and contingent equity interests, less aggregate payments
of $770,250. Aggregate accrued interest totaled $191,000 as of September 30, 2016 ($132,000 as of December 31, 2015).
The
Agreement defines certain Events of Default, one of which is the failure by DSSTM, 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, DSSTM 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 DSSTM. 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 DSSTM 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, DSSTM 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 $3,462,000
as short-term debt as of September 30, 2016. The balance on the condensed consolidated balance sheets is presented net of approximately
$25,000 of debt issuance costs. 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.
5.
Commitments and Contingencies
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
Inter Partes Review (“
IPR”) petitions with USPTO’s Patent Trial and
Appeal Board (“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. On June 17, 2016, PTAB ruled in favor of Apple on both IPR petitions.
The patent assets underlying this matter had no carrying value as of the date of the decision and therefore, there were no impairment
considerations as a result of the decision. DSS Technology Management has filed a notice of appeal with the U.S. Court of Appeals
for the Federal Circuit relating to the PTAB’s IPR decision.
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. (collectively “TSMC”), Samsung
Electronics Co., Ltd, Samsung Electronics America, Inc., Samsung Telecommunications America L.L.C., Samsung Semiconductor, Inc.,
Samsung Austin Semiconductor LLC (“ Samsung”), and NEC Corporation of America (“ 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. 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 resulted 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 April 1, 2016, TSMC and DSS Technology Management reached a confidential settlement, which
included a sale of certain of the Company’s patent assets to TSMC, ending the litigation with TSMC.
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. Intel’s IPRs were instituted by PTAB on June 8, 2016. The Intel
litigation has been stayed pending final determination 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. SK Hynix’s IPR was instituted by PTAB on May 11, 2016. On March 18, 2016, Samsung filed an IPR petition
as well. On September 23, 2016, Samsung’s IPR was instituted by PTAB. On August 16, 2016, DSS Technology Management and
SK Hynix entered into a confidential settlement agreement ending the litigation between them. The SK Hynix IPR was terminated
by mutual agreement of the parties on August 31, 2016.
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. The Company accrues for potential litigation losses when a loss is probable and reasonably
estimable. In the event any fees, costs, penalties or other monetary awards are assessed against the Company in any of the litigation
in which it is currently involved, it could have a material adverse effect on the Company’s results of operations, cash
flows or financial condition.
Contingent
Litigation Payments
–
The Company retains the services of
professional service providers, including law firms that specialize in intellectual property licensing, enforcement and patent
law. These service providers are often retained on an hourly, monthly, project, contingent or a blended fee basis. In contingency
fee arrangements, a portion of the legal fee is based on predetermined milestones or the Company’s actual collection of
funds. The Company accrues contingent fees when it is probable that the milestones will be achieved and the fees can be reasonably
estimated. As of September 30, 2016, the Company has not accrued any contingent legal fees pursuant to these arrangements.
Contingent
Payments
– The Company is party to certain agreements with funding partners who have rights to portions of
intellectual property monetization proceeds that the Company receives. As of September 30, 2016 and December 31, 2015, there are
no contingent payments due.
6.
Stockholders’ Equity
On
August 26, 2016, the Company affected a one-for-four reverse stock split of the Company’s common stock. No fractional shares
of the Company’s common stock were issued as a result of the reverse stock split. Instead, stockholders of record who otherwise
would have been entitled to receive fractional shares were entitled to a rounding up of their fractional share to the nearest
whole share, except in the case of any stockholder that owned less than four shares of the Company’s common stock immediately
preceding the reverse stock split. In such case, such stockholder received cash for such fractional share in an amount equal to
the product obtained by multiplying: (x) the closing sale price of the common stock on August 25, 2016 as reported on the NYSE
MKT, by (y) the amount of the fractional share. As a result, the Company issued 1,166 common shares for shares due as a result
of the rounding up feature and paid $92 to buy-out the fractional shares of holders with less than four shares immediately preceding
the reverse stock split. All references in this report to the number of shares of our common stock and to related per-share prices
(including references to periods prior to the effective date of the reverse stock split) reflect this reverse stock split.
Stock
Options
- In March 2016, three of the Company’s senior management voluntarily cancelled an aggregate of 300,000
options to purchase shares of the Company’s common stock with exercise prices of $3.00 per share, of which 41,667 of the
options were unvested on the date of cancellation.
During the nine months ended September
30, 2016, the Company issued an aggregate of 37,500 options to purchase the Company’s common stock at $1.00 per share with
a term of five years to two new employees. 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 $15,000 using the Black-Scholes-Merton option pricing model with a volatility of 85.6%, a risk free rate of return
of 1.28% and zero dividend and forfeiture estimates.
Restricted
Stock
- During the nine months ended September 30, 2016, the Company issued 6,250 shares of restricted common stock to
a consultant providing marketing services to the Company. The restricted shares vested on May 2, 2016 and had an aggregate grant
date fair value of approximately $6,250.
Stock-Based
Payments and Compensation -
The Company records stock-based payment expense related to options and warrants based
on the grant date fair value in accordance with FASB ASC 718. Stock-based compensation includes expense charges for all stock-based
awards to employees, directors and consultants. Such awards include option grants, warrant grants, and restricted stock awards.
During the nine months ended September 30, 2016, the Company had stock compensation expense of approximately $88,000 or less than
$0.01 basic and diluted earnings per share ($842,000; $0.07 basic and diluted earnings per share for the corresponding nine months
ended September 30, 2015).
7.
Supplemental Cash Flow Information
Supplemental
cash flow information for the nine months ended September 30, 2016 and 2015 is approximately as follows:
|
|
2016
|
|
|
2015
|
|
Cash paid for interest
|
|
$
|
163,000
|
|
|
$
|
189,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Loss from change in fair value of interest rate swap derivatives
|
|
$
|
(22,000
|
)
|
|
$
|
(19,000
|
)
|
Financing of equipment purchases
|
|
$
|
-
|
|
|
$
|
525,000
|
|
8.
Segment Information
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, DSS Digital Group and DSS Technology
Management, are engaged in various aspects of developing, acquiring, selling and licensing technology assets and are grouped into
one reportable segment called Technology.
Approximate
information concerning the Company’s operations by reportable segment for the three and nine months ended September 30,
2016 and 2015 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments,
if operated independently, would report the results contained herein:
Three Months Ended September 30, 2016
|
|
Packaging and Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
3,287,000
|
|
|
|
1,162,000
|
|
|
|
531,000
|
|
|
|
-
|
|
|
$
|
4,980,000
|
|
Depreciation and amortization
|
|
|
163,000
|
|
|
|
29,000
|
|
|
|
157,000
|
|
|
|
1,000
|
|
|
|
350,000
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Net income (loss) to common stockholders
|
|
|
415,000
|
|
|
|
134,000
|
|
|
|
(182,000
|
)
|
|
|
(394,000
|
)
|
|
|
(27,000
|
)
|
Three Months Ended September 30, 2015
|
|
Packaging and Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
2,871,000
|
|
|
|
1,104,000
|
|
|
|
445,000
|
|
|
|
-
|
|
|
$
|
4,420,000
|
|
Depreciation and amortization
|
|
|
155,000
|
|
|
|
29,000
|
|
|
|
218,000
|
|
|
|
3,000
|
|
|
|
405,000
|
|
Stock based compensation
|
|
|
17,000
|
|
|
|
9,000
|
|
|
|
8,000
|
|
|
|
165,000
|
|
|
|
199,000
|
|
Net income (loss) to common stockholders
|
|
|
337,000
|
|
|
|
138,000
|
|
|
|
(739,000
|
)
|
|
|
(596,000
|
)
|
|
|
(860,000
|
)
|
Nine Months Ended September 30, 2016
|
|
Packaging and Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
8,871,000
|
|
|
|
3,277,000
|
|
|
|
1,243,000
|
|
|
|
-
|
|
|
$
|
13,391,000
|
|
Depreciation and amortization
|
|
|
469,000
|
|
|
|
86,000
|
|
|
|
492,000
|
|
|
|
2,000
|
|
|
|
1,049,000
|
|
Stock based compensation
|
|
|
17,000
|
|
|
|
11,000
|
|
|
|
19,000
|
|
|
|
41,000
|
|
|
|
88,000
|
|
Net income (loss) to common stockholders
|
|
|
947,000
|
|
|
|
388,000
|
|
|
|
(1,242,000
|
)
|
|
|
(1,062,000
|
)
|
|
|
(969,000
|
)
|
Identifiable assets
|
|
|
9,032,000
|
|
|
|
2,167,000
|
|
|
|
2,450,000
|
|
|
|
207,000
|
|
|
|
13,856,000
|
|
Nine Months Ended September 30, 2015
|
|
Packaging and Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
7,663,000
|
|
|
|
3,016,000
|
|
|
|
1,367,000
|
|
|
|
-
|
|
|
$
|
12,046,000
|
|
Depreciation and amortization
|
|
|
427,000
|
|
|
|
90,000
|
|
|
|
651,000
|
|
|
|
7,000
|
|
|
|
1,175,000
|
|
Stock based compensation
|
|
|
52,000
|
|
|
|
29,000
|
|
|
|
75,000
|
|
|
|
686,000
|
|
|
|
842,000
|
|
Net income (loss) to common stockholders
|
|
|
474,000
|
|
|
|
236,000
|
|
|
|
(2,166,000
|
)
|
|
|
(2,094,000
|
)
|
|
|
(3,550,000
|
)
|
Identifiable assets
|
|
|
9,534,000
|
|
|
|
2,116,000
|
|
|
|
12,535,000
|
|
|
|
2,180,000
|
|
|
|
26,365,000
|
|
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
Certain
statements contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995 (the “1995 Reform Act”). Document Security Systems, Inc. desires to avail itself of certain “safe
harbor” provisions of the 1995 Reform Act and is therefore including this special note to enable us to do so. Except for
the historical information contained herein, this report contains forward-looking statements (identified by the words “estimate”,
“project”, “anticipate”, “plan”, “expect”, “intend”, “believe”,
“hope”, “strategy” and similar expressions), which are based on our current expectations and speak only
as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors, as previously set
forth in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2015 that could cause actual
results to differ materially from the results anticipated in the forward-looking statements.
Overview
Document
Security Systems, Inc. (referred to in this report as “Document Security Systems”, “DSS”, “we”,
“us”, “our” or “Company”) has strategically focused its core business efforts on developing
and selling anti-counterfeiting technologies and solutions. We emphasize fraud and counterfeit prevention for all forms of printed
documents and digital information. The Company holds numerous patents for optical deterrent technologies that provide protection
of printed information from unauthorized scanning and copying. We operate two production facilities, consisting of a combined
security printing and packaging facility and a plastic card facility where we produce secure and non-secure documents for our
customers. We license our anti-counterfeiting technologies to printers and brand-owners. In addition, we have a digital division
which provides cloud computing services for our customers, including disaster recovery, back-up and data security services. In
2013, the Company expanded its business focus by merging with DSS Technology Management, Inc., formerly known as Lexington Technology
Group, Inc., which acquires intellectual property assets and interests in companies owning intellectual property assets for the
purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments
in the development and commercialization of patented technologies, licensing, strategic partnerships and commercial litigation.
We
do business in four operating segments as follows:
DSS
Packaging and Printing Group
- Produces custom paperboard packaging serving clients in the pharmaceutical, beverage,
photo packaging, toy, specialty foods and direct marketing industries, among others. The group also provides secure and commercial
printing services for end-user customers along with technical support for our technology licensees. The division produces a wide
array of printed materials such as security paper, vital records, prescription paper, birth certificates, receipts, manuals, identification
materials, entertainment tickets, secure coupons, parts tracking forms, brochures, direct mailing pieces, catalogs, business cards,
etc. The division also provides resources and production equipment resources for our ongoing research and development of security
printing and related technologies.
DSS
Plastics Group
- Manufactures laminated and surface printed cards which can include magnetic stripes, bar codes,
holograms, signature panels, invisible ink, micro fine printing, guilloche patterns, biometric, radio frequency identification
(RFID) and watermarks for printed plastic documents such as ID cards, event badges, and driver’s licenses.
DSS
Digital Group
- Provides data center centric solutions to businesses and governments delivered via the “cloud”.
This division developed and markets AuthentiGuard, an iPhone based application system that integrates traditional printed optical
deterrent technologies with proprietary digital data security based solutions for brand protection and product diversion prevention.
DSS
Technology Management
- Acquires or internally develops patented technology or intellectual property assets
(or interests therein), with the purpose of monetizing these assets through a variety of value-enhancing initiatives, including,
but not limited to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships
and commercial litigation. Since 2013, DSS Technology Management has been involved in several patent litigation lawsuits, and
as of the date of this filing, has active litigation against several companies, as summarized below.
On
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
Inter Partes Review (“
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.
On June 17, 2016, PTAB ruled in favor of Apple on both IPR petitions. The patent assets underlying this matter had no carrying
value as of the date of the decision and therefore, there were no impairment considerations as a result of the decision. DSS Technology
Management has filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit relating to the PTAB’s IPR
decision.
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. 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 April 1, 2016, TSMC and DSS Technology Management reached a confidential settlement, which
included a sale of certain of the Company’s patent assets to TSMC, ending the litigation with TSMC.
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. Intel’s IPRs were instituted by PTAB on June 8, 2016. The Intel
litigation has been stayed pending final determination 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. SK Hynix’s IPR was instituted by PTAB on May 11, 2016. On March 18, 2016, Samsung filed an IPR petition
as well. On September 23, 2016, Samsung’s IPR was instituted by PTAB. On August 16, 2016, DSS Technology Management and
SK Hynix entered into a confidential settlement agreement ending the litigation between them. The SK Hynix IPR was terminated
by mutual agreement of the parties on August 31, 2016.
Results
of Operations for the Three and Nine Months Ended September 30, 2016 as compared to the Three and Nine Months Ended September
30, 2015
This
discussion should be read in conjunction with the financial statements and footnotes contained in this quarterly report and in
our Annual Report on Form 10-K for the year ended December 31, 2015.
Revenue
|
|
Three Months Ended September 30, 2016
|
|
|
Three Months Ended September 30, 2015
|
|
|
% change
|
|
|
Nine Months Ended September 30, 2016
|
|
|
Nine Months Ended September 30, 2015
|
|
|
% change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printed products
|
|
$
|
4,449,000
|
|
|
$
|
3,975,000
|
|
|
|
12
|
%
|
|
$
|
12,148,000
|
|
|
$
|
10,678,000
|
|
|
|
14
|
%
|
Technology sales, services and licensing
|
|
|
531,000
|
|
|
|
445,000
|
|
|
|
19
|
%
|
|
|
1,243,000
|
|
|
|
1,367,000
|
|
|
|
-9
|
%
|
Total revenue
|
|
$
|
4,980,000
|
|
|
$
|
4,420,000
|
|
|
|
13
|
%
|
|
$
|
13,391,000
|
|
|
$
|
12,045,000
|
|
|
|
11
|
%
|
For
the three months ended September 30, 2016, total revenue was approximately $5.0 million, an increase of 13% from the corresponding
three months ended September 30, 2015. Revenues from the sale of printed products increased 12% during the three months ended
September 30, 2016, as compared to the same period in 2015. The increase in sales was primarily due to an increase in sales at
the Company’s packaging division. Technology sales, services and licensing revenue increase 19% during the three months
ended September 30, 2016 as compared to the same period in 2015, which primarily reflected the impact of a $150,000 license settlement
derived by the Company’s IP monetization business in the 2016 period.
For
the nine months ended September 30, 2016, total revenue was approximately $13.4 million, representing an increase of 11% from
the corresponding nine months ended September 30, 2015. Revenues from the sale of printed products increased 14% during the nine
months ended September 30, 2016, as compared to the same period in 2015, with packaging product sales up 16% and plastic card
sales up 9%, respectively, primarily driven by an increase in sales to the Company’s largest packaging customer and an increase
in technology based ID card product sales. Technology sales, services and licensing revenue decreased 9% during the nine months
ended September 30, 2016 as compared to the same period in 2015, which primarily reflected a decrease in sales from the Company’s
digital product group primarily due to a decrease in hardware and software resales during the 2016 period.
Costs
and expenses
|
|
Three Months Ended September 30, 2016
|
|
|
Three Months Ended September 30, 2015
|
|
|
% change
|
|
|
Nine Months Ended September 30, 2016
|
|
|
Nine Months Ended September 30, 2015
|
|
|
% change
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, exclusive of depreciation and amortization
|
|
$
|
2,875,000
|
|
|
$
|
2,556,000
|
|
|
|
12
|
%
|
|
$
|
7,816,000
|
|
|
$
|
7,206,000
|
|
|
|
8
|
%
|
Sales, general and administrative compensation
|
|
|
963,000
|
|
|
|
1,008,000
|
|
|
|
-4
|
%
|
|
|
2,732,000
|
|
|
|
3,021,000
|
|
|
|
-10
|
%
|
Depreciation and amortization
|
|
|
349,000
|
|
|
|
405,000
|
|
|
|
-14
|
%
|
|
|
1,049,000
|
|
|
|
1,175,000
|
|
|
|
-11
|
%
|
Professional fees
|
|
|
162,000
|
|
|
|
508,000
|
|
|
|
-68
|
%
|
|
|
704,000
|
|
|
|
1,534,000
|
|
|
|
-54
|
%
|
Stock based compensation
|
|
|
2,000
|
|
|
|
199,000
|
|
|
|
-99
|
%
|
|
|
88,000
|
|
|
|
842,000
|
|
|
|
-90
|
%
|
Sales and marketing
|
|
|
79,000
|
|
|
|
57,000
|
|
|
|
39
|
%
|
|
|
245,000
|
|
|
|
250,000
|
|
|
|
-2
|
%
|
Rent and utilities
|
|
|
164,000
|
|
|
|
186,000
|
|
|
|
-12
|
%
|
|
|
449,000
|
|
|
|
510,000
|
|
|
|
-12
|
%
|
Other operating expenses
|
|
|
222,000
|
|
|
|
151,000
|
|
|
|
47
|
%
|
|
|
695,000
|
|
|
|
564,000
|
|
|
|
23
|
%
|
Research and development
|
|
|
118,000
|
|
|
|
117,000
|
|
|
|
1
|
%
|
|
|
350,000
|
|
|
|
350,000
|
|
|
|
0
|
%
|
Total costs and expenses
|
|
$
|
4,934,000
|
|
|
$
|
5,187,000
|
|
|
|
-5
|
%
|
|
$
|
14,128,000
|
|
|
$
|
15,452,000
|
|
|
|
-9
|
%
|
Costs
of goods sold, exclusive of depreciation and amortization
includes all direct costs of printed products revenues, including
materials, direct labor, transportation and manufacturing facility costs. In addition, this category includes all direct costs
associated with technology sales, services and licensing including hardware and software that are resold, and fees paid to inventors
or others as a result of technology licenses or settlements, if any. Costs of goods sold increased 12% during the three months
ended September 30, 2016 as compared to the same period in 2015. The increase on a percentage basis was less than the increase
in revenue over the same period which primarily reflected an increase in sales of higher margin products during the quarter. For
the nine months ended September 30, 2016, costs of goods sold increased 8%, which was less than the 11% increase in revenue over
the same period, which also reflected a general increase in the Company’s sales mix to higher margin products.
Sales,
general and administrative compensation
costs, excluding stock-based compensation, decreased 4% and 10% during the three and
nine months ended September 30, 2016, respectively, as compared to the same periods in 2015, primarily due to a reduction of employee
headcount, a reduction in bonus compensation and a reduction in executive management compensation.
Depreciation
and amortization
includes the depreciation of machinery and equipment used for production, depreciation of office equipment
and building and leasehold improvements, amortization of software, and amortization of acquired intangible assets such as customer
lists, trademarks, non-compete agreements and patents, and internally developed patent assets. Depreciation and amortization expense
decreased 14% and 11% during the three and nine months ended September 30, 2016, respectively, as compared to the same periods
in 2015, primarily due to the elimination of amortization expense associated with a group of patent assets that became fully-amortized
in the first quarter of 2016.
Professional
fees
decreased 68% and 54% during the three and nine months ended September 30, 2016, respectively, as compared to the same
periods in 2015. The decreases are primarily due to a significant decrease in legal and consulting fees incurred by the Company
related to the intellectual property infringement suits that the Company’s subsidiary, DSS Technology Management, is currently
involved in, and the elimination of legal fees associated with a derivative suit that was filed against the Company and its officers
and directors in April 2015 which was dismissed in January 2016.
Stock-based
compensation
includes expense charges for all stock-based awards to employees, directors and consultants. Such awards include
option grants, warrant grants, and restricted stock awards. Stock-based compensation decreased 99% and 90% during the three and
nine months ended September 30, 2016, respectively, as compared to the same periods in 2015, which reflects a significant decrease
in the number and value of equity compensation granted by the Company since 2014.
Sales
and marketing
costs, which includes internet and trade publication advertising, travel and entertainment costs, sales-broker
commissions, and trade show participation expenses, increased 39% during the three months ended September 30, 2016 as compared
to the three months ended September 30, 2015, primarily due to an increase in trade-show costs and direct sales travel costs.
During the nine months ended September 30, 2016, sales and marketing costs were essentially flat.
Rent
and utilities
decreased 12% during the three and nine months ended September 30, 2016, respectively, as compared to the same
periods in 2015, primarily due to a decrease in rent costs as the result of the move of the Company’s corporate and digital
group to a new location in Rochester, New York in December 2015.
Other
operating expenses
consist primarily of equipment maintenance and repairs, office supplies, IT support, bad debt expense and
insurance costs.
Other operating expenses
increased 47% and 23% during the three
and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015.
The
increases are primarily due to an increase in corporate insurance expense in the 2016 periods.
Research
and development
costs consist primarily of compensation costs for research personnel, third-party research costs, and consulting
costs. Research and development costs were virtually flat for the three and nine months ended September 30, 2016 as compared to
same periods in 2015 as the Company has made no changes to the number or compensation of research personnel involved in the research
and development of the Company’s AuthentiGuard product line.
Other
Income and Expense
|
|
Three Months Ended September 30, 2016
|
|
|
Three Months Ended September 30, 2015
|
|
|
% change
|
|
|
Nine Months Ended September 30, 2016
|
|
|
Nine Months Ended September 30, 2015
|
|
|
% change
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(68,000
|
)
|
|
$
|
(89,000
|
)
|
|
|
-24
|
%
|
|
$
|
(218,000
|
)
|
|
$
|
(257,000
|
)
|
|
|
-15
|
%
|
Gain on sales of investment and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
146,000
|
|
|
|
-100
|
%
|
Net loss on debt modification and extinguishment
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
(19,000
|
)
|
|
|
-100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
$
|
(68,000
|
)
|
|
$
|
(89,000
|
)
|
|
|
-24
|
%
|
|
$
|
(218,000
|
)
|
|
$
|
(130,000
|
)
|
|
|
68
|
%
|
Interest
expense
decreased 24% and 15% during the three and nine months ended September 30, 2016, respectively, as compared to the
same periods in 2015, due to a decrease in the total debt carried by the Company in 2016 compared to 2015.
During
the nine months ended September 30, 2015, the Company recognized gains on sales of investments and equipment which consisted of
approximately $46,000 received by the Company’s subsidiary Premier Packaging for the sale of a printing press and $100,000
received by the Company’s subsidiary DSS Technology Management as a distribution from its investment in VirtualAgility Technology
Investment LLC that the Company had previously written down to zero.
Net
Loss
|
|
Three Months Ended September 30, 2016
|
|
|
Three Months Ended September 30, 2015
|
|
|
% change
|
|
|
Nine Months Ended September 30, 2016
|
|
|
Nine Months Ended September 30, 2015
|
|
|
% change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(27,000
|
)
|
|
|
(860,000
|
)
|
|
|
-97
|
%
|
|
|
(969,000
|
)
|
|
|
(3,550,000
|
)
|
|
|
-73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.07
|
)
|
|
|
-100
|
%
|
|
$
|
(0.07
|
)
|
|
$
|
(0.31
|
)
|
|
|
-77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
12,977,903
|
|
|
|
11,703,442
|
|
|
|
11
|
%
|
|
|
12,975,053
|
|
|
|
11,613,491
|
|
|
|
12
|
%
|
For
the three months ended September 30, 2016, net loss was approximately $27,000, a 97% decrease from a net loss of $860,000 in the
three months ended September 30, 2015. The decrease is primarily due to the combined impact of increases in sales of the Company’s
packaging and plastic products and a one-time settlement license of $150,000 and significant reductions in professional fees and
stock based compensation costs.
For
the nine months ended September 30, 2016, net loss was $969,000, a 73% decrease from a net loss of $3.6 million in the nine months
ended September 30, 2015. The decrease is primarily due to the combined impact of increases in sales of the Company’s packaging
and plastic products and significant reductions in professional fees and stock based compensation costs.
LIQUIDITY
AND CAPITAL RESOURCES
As
of September 30, 2016, the Company had cash of approximately $823,000 and restricted cash of approximately $188,000. In addition,
the Company had $800,000 available to its packaging division under a revolving credit line.
Operating
Cash Flow
– During the first nine months of 2016, the Company generated approximately $384,000 of cash for operations
as compared to a use of cash for operations of approximately $1.2 million during the same period in 2015. The significant improvement
in operating cash flow in 2016 generally reflects the significant reduction in the Company’s net loss during the first nine
months of 2016 over the same period in 2015.
Investing
Cash Flow
– During the first nine months of 2016, the Company expended approximately $193,000 on equipment for its packaging
and plastic card operations and approximately $73,000 for the prosecution of several patent applications. The Company also received
$495,000 for the sale of certain of its patent assets in conjunction with a settlement with a former litigant in one of the Company’s
patent infringement suits.
Financing
Cash Flows
- During the first nine months of 2016, the Company made aggregate principal payments for long-term debt of approximately
$1,230,000, which included a one-time payment of $495,000 to one of its third-party funding providers.
Future
Capital Needs
-As of September 30, 2016, the Company had cash of approximately $823,000 and restricted cash of approximately
$188,000. In addition, the Company had $800,000 available to its packaging division under a revolving credit line,
which
may not be sufficient to cover the Company’s future cash requirements. The Company has negative working capital of approximately
$4,299,000 as of September 30, 2016, of which approximately $3,462,000 is related to short-term debt that could be paid by non-cash
assets when due. The Company believes that its current cash resources and credit line resources provide it with sufficient resources
to fund its operations and meet its obligations for at least the next twelve months, provided that the Company achieves or substantially
achieves the key factors of its business plan over the next twelve months, including but not limited to (i) increasing sales of
the Company’s digital products, especially of its AuthentiGuard products; (ii) continuing to decrease legal and professional
expenses for the Company’s intellectual property monetization business; and (iii) continuing to generate operating profits
from the Company’s packaging and plastic printing operations. In the absence of any of these, we will likely need to raise
capital of approximately $500,000 to $1,000,000 to fund our operations through September 30, 2017. The Company believes that it
will be able to extend maturities of current debt, and, if necessary, raise additional equity and/or debt funding to fund its
working capital requirements not met by its current cash and credit resources. However, there is no assurance the Company will
be able to raise sufficient funds in the future if necessary to do so.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition,
financial statements, revenues or expenses.
Critical
Accounting Policies and Estimates
As
of September 30, 2016, our critical accounting policies and estimates have not changed materially from those set forth in our
Annual Report on Form 10-K for the year ended December 31, 2015.