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 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., which also operates under the 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, 2016, cash of $177,609 ($293,043– December 31, 2015) 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, 2016, the Company established a reserve for doubtful accounts of approximately $50,000 ($59,000 – 2015).
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 2016 was approximately $635,000 ($663,000 - 2015).
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.
Goodwill
-
Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired
and liabilities assumed in a business combination. Goodwill is subject to impairment testing at least annually and will be tested
for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired.
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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. 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.
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 5).
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:
|
●
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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 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 Bank 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, 2016 was approximately $45,000 ($64,000 - December 31, 2015).
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
|
$
|
966,786
|
|
|
|
3.77
|
%
|
|
|
5.87
|
%
|
|
August 30, 2021
|
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 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 $27,000 in 2016 ($25,000– 2015).
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 $435,000 and $470,000
on research and development during 2016 and 2015, 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, 2016
and 2015, there were 3,672,878 and 2,968,655, 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 2016 and 2015 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, 2016 and 2015.
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 2016, two customers
accounted for 38% of our consolidated revenue. As of December 31, 2016, these two customers accounted for 31% of our trade accounts
receivable balance. During 2015, these two customers accounted for 35% of our consolidated revenue. As of December 31, 2015, these
two customers accounted for 27% of our trade accounts receivable balance.
Recent Accounting
Pronouncements
–
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 is currently evaluating the effect that the revenue standards will have
on its consolidated financial statements and related disclosures.
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.
In August 2016, the FASB
issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, which clarifies the treatment of several
types of cash receipts and payments for which there was diversity in practice. This update is effective for annual periods beginning
after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an
interim period. We anticipate that the adoption of this guidance will not have a material impact on our consolidated financial
statements.
In November 2016, the
FASB issued ASU 2016-18, “Statement of Cash Flows”, regarding the presentation of restricted cash on the statement
of cash flows. The standards update requires that the reconciliation of the beginning and end of period cash amounts shown in
the statement of cash flows include restricted cash. When restricted cash is presented separately from cash and cash equivalents
on the balance sheet, a reconciliation is required between the amounts presented on the statement of cash flows and the balance
sheet. Also, the new guidance requires the disclosure of information about the nature
of
the restrictions. The standards update is effective retrospectively for fiscal years and interim periods beginning after December
15, 2017, with early adoption permitted.
Newly
Adopted Accounting Pronouncements
– During 2016, the Company adopted Financial Accounting Standards Board
(“FASB”) Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements
– 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 available to be issued and to provide related footnote disclosures in certain
circumstances.
Substantial doubt exists when conditions and events indicate that it is
probable that the entity will be unable to meet its obligations as they become due within one year after the date of
financial statement issuance.
The adoption of this ASU did not have a material impact on the Company’s financial
statements as management concluded that these conditions do not exist as of December 31, 2016. In coming to this conclusion,
management considered the fact that the Company has incurred recurring losses, as well as resources available and expected
future results.
Also
during 2016, the Company adopted FASB ASU 2015-03 – “Interest – Imputation of Interest”. The adoption
of this ASU resulted in debt issuance costs being presented as a reduction to the related debt instrument, as opposed to being
presented as a separate asset on the Company’s balance sheet. Management reclassified approximately $57,000 from “Other
assets” as December 31, 2015, as a reduction to the carrying value of the respective debt instrument.
NOTE 3 – INVENTORY
Inventory consisted of
the following at December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Finished Goods
|
|
$
|
736,987
|
|
|
$
|
718,601
|
|
Work in process
|
|
|
314,353
|
|
|
|
167,779
|
|
Raw Materials
|
|
|
155,037
|
|
|
|
51,450
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,206,377
|
|
|
$
|
937,830
|
|
NOTE 4 - PROPERTY PLANT AND EQUIPMENT
Property, plant and equipment
consisted of the following at December 31:
|
|
Estimated
Useful Life
|
|
|
2016
|
|
|
|
2015
|
|
Machinery and equipment
|
|
5-10 years
|
|
$
|
5,879,958
|
|
|
$
|
5,615,562
|
|
Building and improvements
|
|
39 years
|
|
|
1,923,027
|
|
|
|
1,923,027
|
|
Land
|
|
|
|
|
185,000
|
|
|
|
185,000
|
|
Leasehold improvements
|
|
See (1)
|
|
|
722,984
|
|
|
|
722,984
|
|
Furniture and fixtures
|
|
7 years
|
|
|
68,272
|
|
|
|
68,272
|
|
Software and websites
|
|
3 years
|
|
|
412,113
|
|
|
|
402,225
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
|
|
9,191,354
|
|
|
|
8,917,070
|
|
Less accumulated depreciation
|
|
|
|
|
4,617,513
|
|
|
|
3,913,252
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
|
$
|
4,573,841
|
|
|
$
|
5,003,818
|
|
(1)
Expected
lease term between 3 and 10 years.
NOTE 5 - INTANGIBLE ASSETS AND GOODWILL
During 2016 and 2015, the
Company spent approximately $74,000 and $5,000, respectively, on patent prosecution costs.
On November 10, 2016,
the Company purchased a portfolio of 122 LED patents and a corresponding license from Intellectual Discovery Co. Ltd. for $3,000,000
with funds it had received from a third party, resulting in a net book value of $0 when purchased.
In May, 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 assets are comprised
of the following:
|
|
|
|
December 31, 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
|
|
|
|
1,721,357
|
|
|
|
275,943
|
|
|
|
1,997,300
|
|
|
|
1,635,257
|
|
|
|
362,043
|
|
Acquired intangibles-patents and patent rights
|
|
Varied
|
(1)
|
|
3,155,000
|
|
|
|
2,092,767
|
|
|
|
1,062,233
|
|
|
|
3,650,000
|
|
|
|
1,562,526
|
|
|
|
2,087,474
|
|
Patent application costs
|
|
Varied
|
(2)
|
|
1,136,465
|
|
|
|
578,623
|
|
|
|
557,842
|
|
|
|
1,062,958
|
|
|
|
494,931
|
|
|
|
568,027
|
|
|
|
|
|
$
|
6,288,765
|
|
|
$
|
4,392,747
|
|
|
$
|
1,896,018
|
|
|
$
|
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 December 31, 2016, the weighted average remaining useful life of these assets in service was approximately 2.4 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, 2016, the weighted average remaining useful life of these assets in service was approximately 8.6 years.
|
Amortization expense for
the year ended December 31, 2016 amounted to approximately $700,000 ($896,000 –2015).
Approximate expected amortization
for each of the five succeeding fiscal years is as follows:
Year
|
|
Amount
|
|
|
|
|
|
2017
|
|
$
|
681,000
|
|
2018
|
|
$
|
537,000
|
|
2019
|
|
$
|
272,000
|
|
2020
|
|
$
|
182,000
|
|
2021
|
|
$
|
77,000
|
|
Goodwill
The
Company performed its annual goodwill impairment test as of December 31, 2016. The Company has goodwill attributed to two of its
reporting units which are its Packaging and Plastics reporting units respectively. 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 these reporting
units. The Company determined that its Packaging and Plastic reporting units each had to fair values in excess of their carrying
value and therefore, did not have an indication of goodwill impairment. 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, 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.
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, 2016 and 2015 are as follows:
|
|
Packaging
|
|
|
Plastics
|
|
|
Technolgy
Management
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 6 – 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% (4.37% as of December 31,
2016) and matures on May 31, 2017. As of December 31, 2016 and 2015, 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, The note is secured by the assets of Company’s wholly-owned subsidiary, Secuprint Inc. 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. 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 December 31, 2016, the balance of the term loan was $230,000 ($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., and carries an interest rate of 9% per annum. The note is secured
by the assets of Company’s wholly-owned subsidiary, Secuprint Inc. 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. 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 December 31, 2016, the balance of the term loan was $505,000 ($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 is secured by the 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, 2016, the loan had a balance of $559,609 ($819,681 at December
31, 2015).
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 until April 28, 2020. Premier Packaging used the proceeds of the term note
to acquire a HP Indigo 7800 Digital press. The loan is secured by the printing press. As of December 31, 2016, the loan had a balance
of $360,611 ($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% (3.77% at December 31, 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 December 31, 2016, the Promissory Note had a
balance of $966,786 ($1,021,926 at December 31, 2015).
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% (3.77% at December 31, 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 December 31, 2016, the note had a balance of $375,000 ($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,
September 30, 2016, and December 31, 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.
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, 2016 are as follows:
Year
|
|
Amount
|
|
|
|
|
|
2017
|
|
$
|
1,202,335
|
|
2018
|
|
|
486,699
|
|
2019
|
|
|
206,200
|
|
2020
|
|
|
136,163
|
|
2021
|
|
|
740,610
|
|
Thereafter
|
|
|
225,000
|
|
Total
|
|
$
|
2,997,007
|
|
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 5) to Fortress under the terms of the Agreement. On September 20, 2016, DSSTM remitted
$125,250 in proceeds received from a settlement to Fortress as repayment of the note principal balance under the terms of the Agreement.
The Agreement defines certain
events as Events of Default, one of which is the failure by DSSTM, on or before the second anniversary of the Effective Date, to
make payments to the Investors equal to the outstanding Advances. On February 13, 2016, being the second anniversary date of the
Effective Date, DSSTM had failed to make these payments and was therefore in default of the Agreement. On December 2, 2016, the
parties entered into a First Amendment to Investment Agreement and Certain Other Documents (the “Amendment”). The purpose
of the Amendment was to vacate DSSTM’s ongoing non-payment default under the Agreement, and to amend certain provisions of
the Agreement.
The Agreement was amended
to add expenses in the amount of $150,000 to DSSTM’s payment obligation, payable on the Maturity Date. This amount was recorded
as debt issuance costs and is being amortized on a straight line basis through the amended maturity date of February 13, 2018.
The Amendment added a provision whereby DSSTM is required to deposit $300,000 on or before March 2, 2017 and (ii) a further sum
of $300,000 on or before March 2, 2018, into a deposit account (collectively, the “Deposit”). The March 2, 2017 deposit
was made in a timely manner. The Deposit funds will be restricted to pay certain expenses, consisting of out-of-pocket expenses
incurred in connection with certain existing patent litigation matters and other patent litigation matters which may occur after
the Amendment Effective Date (the “Qualified Expenses”). In the Event of Default, the Investors may apply the then
remaining Deposit to the then outstanding Obligations, if any.
Additionally per the Amendment,
DSSTM agrees to pay to the Investors an amount equal to 25% of any amounts received by DSSTM for any and all types of monetization
activities related to certain of its patents covering systems and methods of using low power wireless peripheral devices (collectively,
“BlueTooth Patents”), but only until the Investors have received payments under the Agreement totaling the sum of (i)
the Capitalized Expenses plus (ii) payments of principal and interest on the Notes totaling the sum of (x) $4,500,000 (consisting
of the previously made Advances) plus (y) additional amounts, if any, advanced by the Investors pursuant to the Agreement. In addition
to the monetization interest granted the Investors in the BlueTooth Patents, DSSTM also granted the Collateral Agent and the Investors
a security interest in certain of DSSTM’s unencumbered semiconductor patents to further collateralize the amounts owed under
the Agreement.
As of December 31, 2016,
DSSTM has made aggregate principal payments of $770,250 on the notes. As of December 31, 2016, total net advances equaled $3,729,750,
which consisted of $4,041,000 in notes and an aggregate of $459,000 of fixed and contingent equity interests, less aggregate principal
payments of $770,250. Aggregate accrued interest totaled $209,500 as of December 31, 2016 ($132,000 as of December 31, 2015). Unamortized
debt issuance costs totaled $175,231 as of December 31, 2016 ($56,582 as of December 31, 2015). As a result of the event of default,
the Company had classified the remainder of the amounts due on the notes of approximately $4,023,000 as short-term debt as of December
31, 2015. As a result of the Amendment on December 2, 2016, the Company has classified the remainder of the amount due as long-term
debt. The $495,000 of fixed and contingent equity interests are recorded in other liabilities. The Company will reduce the liability
upon payment to the Investor from available proceeds from litigation, or if none by the maturity date of February 13, 2018, then
such amounts will be reversed from other liabilities and recorded as other income as of the maturity date.
NOTE 7 – OTHER LIABILITIES
On November 14, 2016,
the Company entered into a Proceeds Investment Agreement (the “Agreement”) with Brickell Key Investments LP (“BKI”).
Pursuant to the Agreement, BKI financed an aggregate of $13,500,000 in a patent purchase and monetization program to be implemented
and managed by the Company (the “Financing”). Pursuant to Agreement. $3,000,000 of the Financing was used to cover
the Company’s purchase of a portfolio of U.S. and foreign LED patents and a license from Intellectual Discovery Co., Ltd.,
a Korean company (collectively, the “LED Patent Portfolio”), resulting in a basis in these assets of $0. $6,000,000
of the Financing was directed by BKI to attorneys to cover those attorneys’ fees and out-of-pocket expenses for legal proceedings
that may transpire relating to enforcement of the LED Patent Portfolio. This amount is not included in the Company’s
financial statements as the Company has no control over these funds.
In addition, the Company
received $4,500,000 of the Financing which is required to be used by the Company to pay for the defense of
Inter Partes Review
or other similar proceedings that may be filed from time to time by defendants with the U.S. Patent & Trademark Office
relating to the LED Patent Portfolio, with excess amounts available for general working capital needs. As of December 31, 2016,
an aggregate of $4,209,000 was recorded as other liabilities by the Company, of which $2,070,000 is classified as short-term. Of
this amount, the Company has allocated $2,500,000 for the payment of estimated future Inter Partes Review costs as described above.
The Company will reduce the liability as it pays legal and other expenses related to the the
Inter Partes Review
matters
involving the LED patents as incurred. For the remaining $1,709,000 in other liabilities allocated to working capital, the Company
will amortize this amount on a pro-rata basis over the expected life of the monetization period of the LED Patent Portfolio which
the Company estimates at 36 months. For this amount, the Company will reduce the liability with an offset to selling, general and
administrative costs each reporting period.
In consideration for its
portion of the Financing, the Company assigned to BKI its rights to the Patent Asset Proceeds, defined as any and all monetary
recoveries (whether through damages, recoveries, royalties, monies, lump-sum payments, up-front payments, settlement amounts, distribution
of property, cash value of equities, license fees or other revenues or other assets or amounts) paid by a defendant or defendants
or a third-party to the Company as a result of or in connection with the LED Patent Portfolio, in an amount equal to the Minimum
Return and the Additional Return as hereinafter defined (the “Assigned Rights”). Under the Assigned Rights, in addition
to repayment in full of the Financing, the Company will pay BKI, solely from realized Patent Asset Proceeds, a return equal to
the sum of (A) a certain multiple of the Financing or a designated annualized IRR Return on the Financing, whichever is greater
(the “Minimum Return”), plus (B) an additional designated percentage of the Patent Asset Proceeds net of the Minimum
Return (the “Additional Return”). Once the Minimum Return and Additional Return to BKI are satisfied, Intellectual
Discovery Co., Ltd. will be entitled to a payment of a certain percentage of the Patent Asset Proceeds with the remaining balance
of Patent Asset Proceeds to be retained by the Company.
In consideration of the
Financing, the Company also issued to BKI a five-year warrant to purchase up to 750,000 shares of the Company’s common stock
at an exercise price of $1.00 per share (the “Warrant”).
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, 2016, the Company had received an aggregate of $650,000 ($650,000
in 2015) from the investors pursuant to the agreement of which approximately $467,000 was in other liabilities in the consolidated
balance sheets ($551,000 as December 31, 2015). The Company will reduce the liability as it pays legal and other expenses related
to its litigation involving the Bluetooth patents, for which the amount is available to be used for 50% of all such expenses.
As described in Note 6,
On February 13, 2014, the Company’s subsidiary, DSSTM entered into an Investment Agreement with Fortress pursuant to which
DSSTM contracted to receive a series of advances up to $4,500,000. 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. 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. The $495,000 of aggregate fixed and contingent equity interests received are recorded in other liabilities. The Company
will reduce the liability upon payment to the Investor from available proceeds from litigation, or if none by the maturity date
of February 13, 2018, then such amounts will be reversed from other liabilities and recorded as other income as of the maturity
date.
NOTE 8 - 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 an aggregate of $92 to buy-out the fractional shares of holders with less than four shares immediately preceding the reverse
stock split. All references in these financial statements 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.
Sales of Equity
–
On December 29, 2016, the Company completed the sale of 300,000 shares of its common stock and a warrant to purchase
up to 200,000 shares of the Company’s common stock at an exercise price of $1.00 per share for an aggregate purchase price
of $225,000 pursuant to a securities purchase agreement. The warrants had an estimated aggregate fair value of approximately $87,000
which was determined by utilizing the Black-Scholes-Merton option pricing model with a volatility of 86.4%, a risk free rate of
return of 1.96% and zero dividend and forfeiture estimates. The Company was assessed $25,000 in listing fees by the NYSE MKT for
equity issuances during 2016.
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 1,079,545 shares of common stock at a purchase price of $0.88 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 215,910 additional
shares of common stock at an exercise price of $1.60 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 284,091 shares of common stock at a purchase
price of $0.88 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 56,818 additional shares of common stock at an exercise price of $1.60 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.
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 25,000 shares of its common stock with a grant date fair value of $41,000.
Stock Warrants
– On November 29, 2016, in consideration of the financing described in Note 8 the Company issued a five-year warrant to purchase
up to 750,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrants had an estimated
aggregate fair value of approximately $199,000 which was determined by utilizing the Black-Scholes-Merton option pricing model
with a volatility of 86.4%, a risk free rate of return between of 1.78% and zero dividend and forfeiture estimates. The Company
recorded $198,000 of stock based compensation in the fourth quarter of 2016 in conjunction with these warrants.
The Company issued five-year
warrants to purchase up to 200,000 shares of the Company’s common stock as part of the December 29, 2016 equity sale at an
exercise price of $1.00 per share.
The Company issued warrants
to purchase 272,728 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 $1.60 per share.
The following is a summary
with respect to warrants outstanding and exercisable at December 31, 2016 and 2015 and activity during the years then ended:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1:
|
|
|
1,862,515
|
|
|
$
|
16.40
|
|
|
|
1,641,596
|
|
|
$
|
18.80
|
|
Granted during the year
|
|
|
950,000
|
|
|
|
1.00
|
|
|
|
272,728
|
|
|
|
1.60
|
|
Lapsed/terminated
|
|
|
-
|
|
|
|
-
|
|
|
|
(51,809
|
)
|
|
|
14.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31:
|
|
|
2,812,515
|
|
|
$
|
11.20
|
|
|
|
1,862,515
|
|
|
$
|
16.40
|
|
Exercisable at December 31
:
|
|
|
2,812,515
|
|
|
$
|
11.20
|
|
|
|
1,589,788
|
|
|
$
|
16.40
|
|
Weighted average months remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.6
|
|
|
|
|
|
|
|
34.3
|
|
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, 2016 and 2015 and activity during the years then ended:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
1,106,140
|
|
|
|
11.56
|
|
|
|
|
|
|
|
1,232,073
|
|
|
|
11.68
|
|
|
|
|
|
Granted
|
|
|
37,500
|
|
|
|
1.00
|
|
|
|
|
|
|
|
13,388
|
|
|
|
2.40
|
|
|
|
|
|
Lapsed/terminated
|
|
|
(508,043
|
)
|
|
|
13.56
|
|
|
|
|
|
|
|
(139,321
|
)
|
|
|
11.80
|
|
|
|
|
|
Outstanding
at December 31:
|
|
|
635,597
|
|
|
|
9.33
|
|
|
|
3.7
|
|
|
|
1,106,140
|
|
|
|
11.56
|
|
|
|
4.0
|
|
Exercisable
at December 31:
|
|
|
610,611
|
|
|
|
10.85
|
|
|
|
3.7
|
|
|
|
907,124
|
|
|
|
11.08
|
|
|
|
4.6
|
|
Expected
to vest at December 31:
|
|
|
25,000
|
|
|
|
1.00
|
|
|
|
4.3
|
|
|
|
86,516
|
|
|
|
8.00
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
The weighted-average grant
date fair value of options granted during the year ended December 31, 2016 was $0.10 ($0.12 -2015). The aggregate grant date fair
value of options that vested during the year was approximately $71,000 ($988,000 -2015). There were no options exercised during
2016 or 2015.
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 March 2016, three of the Company’s senior
management voluntarily cancelled an aggregate of 75,000 options to purchase shares of the Company’s common stock with exercise
prices of $12.00 per share, of which 41,667 of the options were unvested on the date of cancellation resulting in a reversal of
previously recognized stock based compensation expense of approximately $36,000.
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, 2016 and 2015:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Volatility
|
|
|
85.6
|
%
|
|
|
72.6
|
%
|
Expected option term
|
|
|
3.5 years
|
|
|
|
2.9 years
|
|
Risk-free interest rate
|
|
|
1.3
|
%
|
|
|
1.7
|
%
|
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.
During 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. In addition, during 2016 the Company
issued an aggregate of 224,750 shares of restricted stock to members of the Company’s management which will vest on May 17,
2017 and had an aggregated grant date fair value of approximately $124,000. In January 2015, the Company issued an aggregate of
7,500 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 31,250 restricted shares to a
consultant in exchange for media advertising services agreement. The restricted shares vested over a 90-day period and had a grant
date fair value of $27,500. On January 12, 2017, the Company issued an aggregate of 150,000 shares of restricted stock to members
of the Company’s management which will vest on May 17, 2017 and had an aggregated grant date fair value of approximately
$126,000.
The following is a summary
of activity of restricted stock during the years ended at December 31, 2016 and 2015:
|
|
Shares
|
|
|
Weighted- average
Grant Date Fair
Value
|
|
|
|
|
|
|
|
|
Restricted shares outstanding, December 31, 2014
|
|
|
66,085
|
|
|
$
|
2.80
|
|
Restricted shares granted
|
|
|
38,750
|
|
|
|
1.00
|
|
Restricted shares vested
|
|
|
(89,835
|
)
|
|
|
2.36
|
|
Restricted shares outstanding, December 31, 2015
|
|
|
15,000
|
|
|
$
|
0.88
|
|
Restricted shares granted
|
|
|
231,000
|
|
|
|
0.56
|
|
Restricted shares vested
|
|
|
(15,000
|
)
|
|
|
0.88
|
|
Restricted shares outstanding, December 31, 2016
|
|
|
231,000
|
|
|
$
|
0.56
|
|
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 2016, the Company had stock compensation
expense of approximately $329,000 or $0.03 basic earnings per share ($974,000; $0.12 basic earnings per share - 2015). As of December
31, 2016, there was approximately $89,000 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.
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:
The provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Currently payable:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
132,835
|
|
|
$
|
-
|
|
State
|
|
|
(5,617
|
)
|
|
|
5,836
|
|
Total currently payable
|
|
|
127,218
|
|
|
|
5,836
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(379,710
|
)
|
|
|
(990,745
|
)
|
State
|
|
|
(111,642
|
)
|
|
|
(147,674
|
)
|
Total deferred
|
|
|
(491,352
|
)
|
|
|
(1,138,419
|
)
|
Less: increase in allowance
|
|
|
374,864
|
|
|
|
1,154,767
|
|
Net deferred
|
|
|
(116,488
|
)
|
|
|
16,348
|
|
Total income tax provision
|
|
$
|
10,730
|
|
|
$
|
22,184
|
|
Individual components of deferred taxes are as follows:
|
|
|
2016
|
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
15,302,177
|
|
|
$
|
17,383,770
|
|
Equity issued for services
|
|
|
280,975
|
|
|
|
855,139
|
|
Goodwill and other intangibles
|
|
|
1,684,346
|
|
|
|
692,470
|
|
Investment in pass-through entity
|
|
|
17,898
|
|
|
|
268,476
|
|
Deferred revenue
|
|
|
1,522,258
|
|
|
|
-
|
|
Other
|
|
|
849,325
|
|
|
|
681,889
|
|
Gross deferred tax assets
|
|
|
19,656,979
|
|
|
|
19,881,744
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles
|
|
|
277,231
|
|
|
|
291,706
|
|
Depreciation and amortization
|
|
|
272,406
|
|
|
|
289,534
|
|
Gross deferred tax liabilities
|
|
|
549,637
|
|
|
|
581,240
|
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
(19,152,961
|
)
|
|
|
(19,462,611
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(45,619
|
)
|
|
$
|
(162,107
|
)
|
The Company has approximately
$46,038,000 in federal net operating loss carryforwards (“NOLs”) available to reduce future taxable income, which will
expire at various dates from 2022 through 2036. 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 are subject to annual limitations as a result of a change in its equity ownership as defined under the
Internal Revenue Code Section 382. These limitations, 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 pre-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.
Stock options granted by the Company in prior years as compensation for services
were forfeited. This resulted in the reversal of approximately $678,000 of deferred tax assets and a corresponding reduction of
the valuation allowance.
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:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Statutory United States federal rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes net of federal benefit
|
|
|
5.0
|
|
|
|
0.7
|
|
Permanent differences
|
|
|
(3.9
|
)
|
|
|
(23.3
|
)
|
Other
|
|
|
(0.4
|
)
|
|
|
(3.5
|
)
|
Change in valuation reserves
|
|
|
(35.8
|
)
|
|
|
(8.1
|
)
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(1.1
|
)%
|
|
|
(0.2
|
)%
|
At
December 31, 2016 and 2015, 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, 2016 and
2015, 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 2013-2016 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 2016 were approximately $101,000 ($109,000 -2015).
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Facilities
-
Our corporate group and digital division together occupy approximately 5,700 square feet of commercial office space located
at 200 Canal View Boulevard, Rochester, New York under a lease that expires in December 2020, at a rental rate of approximately
$6,100 per month. 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 2017 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 2017 for approximately $1,200 per month.
The Company believes that it can negotiate renewals or similar lease arrangements on acceptable terms when our current leases expire.
We believe that our facilities are adequate for our 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. As of December 31, 2016 and 2015, the Company did not have any capitalized leases.
The
following table summarizes the Company’s lease commitments.
|
|
Operating Leases
|
|
|
|
Equipment
|
|
|
Facilities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Payments made in 2016
|
|
$
|
48,499
|
|
|
$
|
247,937
|
|
|
$
|
296,436
|
|
Future minimum lease commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
44,131
|
|
|
$
|
259,385
|
|
|
$
|
303,516
|
|
2018
|
|
|
43,258
|
|
|
|
243,002
|
|
|
|
286,260
|
|
2019
|
|
|
14,419
|
|
|
|
68,820
|
|
|
|
83,239
|
|
2020
|
|
|
14,419
|
|
|
|
68,820
|
|
|
|
83,239
|
|
2021
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total future minimum lease commitments
|
|
$
|
116,227
|
|
|
$
|
640,027
|
|
|
$
|
756,254
|
|
Employment Agreements
- The Company has employment or severance agreements with five 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, 2016, the minimum annual severance payments under these employment agreements are, in aggregate,
approximately $840,000.
Related Party Payments
-
During 2015, the Company paid consulting fees of approximately $35,000 to Patrick White, its former CEO, under
a consulting agreement that expired on February 28, 2015. The Company did not have any payments to Mr. White in 2016.
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, 2016 and 2015, the Company has not accrued
any contingent legal fees pursuant to these arrangements.
Legal Proceedings
- 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. The California District Court then stayed the case pending the outcome of those IPR proceedings. Oral arguments
of the IPRs took place on March 15, 2016, and on June 17, 2016, PTAB ruled in favor of Apple on both IPR petitions. DSS Technology
Management has filed an appeal with the Federal Circuit seeking reversal of the PTAB decisions. The appeal is still pending as
of the date of this Report. The patent assets underlying this matter had no carrying value as of the date of the PTAB decision
and therefore, there were no impairment considerations as a result of the 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. 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. On March 22, 2016, the Federal Circuit ruled
in favor of TSMC in the appeal, effectively ending the litigation with TSMC and Samsung. On April 28, 2015, DSS Technology Management
reached a confidential settlement with NEC, ending the litigation with NEC.
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 by the District
Court 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 the PTAB on May 11, 2016. On August 16, 2016, DSS Technology Management and SK Hynix entered
into a confidential settlement agreement ending the litigation between them. The pending SK Hynix IPR was then terminated by mutual
agreement of the parties on August 31, 2016. On March 18, 2016, Samsung also filed an IPR petition. On September 23, 2016, Samsung’s
IPR was instituted by PTAB. Qualcomm then filed its IPR proceeding on July 1, 2016, which was later joined with Intel’s IPRs
in August 2016 by PTAB. As of the date of this Report, PTAB has not yet issued a decision on any of the pending IPR proceedings.
In addition to the foregoing,
the Company may be subject to other legal proceedings that arise in the ordinary course of business and have not been finally adjudicated.
Adverse decisions in the foregoing may 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:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
210,000
|
|
|
$
|
251,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Financing of equipment purchases
|
|
$
|
-
|
|
|
$
|
525,000
|
|
Gain (Loss) from change in fair value of interest rate swap derivative
|
|
$
|
18,000
|
|
|
$
|
(2,500
|
)
|
Capitalized debt
modifcation costs that increase debt balance
|
|
$
|
150,000
|
|
|
$
|
-
|
|
NOTE 13 - 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, 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, 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:
Year Ended December 31, 2016
|
|
Packaging and
Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
12,934,000
|
|
|
|
4,344,000
|
|
|
|
1,900,000
|
|
|
|
-
|
|
|
$
|
19,178,000
|
|
Depreciation and amortization
|
|
|
617,000
|
|
|
|
122,000
|
|
|
|
649,000
|
|
|
|
4,000
|
|
|
|
1,392,000
|
|
Interest expense
|
|
|
123,000
|
|
|
|
-
|
|
|
|
70,000
|
|
|
|
86,000
|
|
|
|
279,000
|
|
Stock based compensation
|
|
|
17,000
|
|
|
|
10,000
|
|
|
|
26,000
|
|
|
|
276,000
|
|
|
|
329,000
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,000
|
|
|
|
11,000
|
|
Net income (loss) to common shareholders
|
|
|
1,533,000
|
|
|
|
447,000
|
|
|
|
(1,271,000
|
)
|
|
|
(1,659,000
|
)
|
|
|
(950,000
|
)
|
Capital expenditures
|
|
|
251,000
|
|
|
|
18,000
|
|
|
|
3,117,000
|
|
|
|
-
|
|
|
|
3,386,000
|
|
Identifiable assets
|
|
|
9,484,000
|
|
|
|
2,335,000
|
|
|
|
1,942,000
|
|
|
|
4,705,000
|
|
|
|
18,466,000
|
|
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 shareholders
|
|
|
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
|
|
|
|
600,000
|
|
|
|
15,601,000
|
|
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 2016 (2%- 2015). 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.