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,
including DSS International, which was formed in July of 2017. DSS International has a subsidiary in Hong Kong which had minimal
activity in 2017. 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, 2017, cash of $256,005 ($177,609– December 31, 2016) 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, 2017, the Company established a reserve for doubtful accounts of approximately $50,000 ($50,000
– 2016). 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 or net realizable value 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 2017 was approximately $727,000 ($635,000 - 2016).
Investment
- In accordance with ASC 325-20, the Company records its investment in common stock of Singapore eDevelopment Limited
at cost as the fair market value of the investment is not readily determinable. The Company evaluates investment for indications
of impairment at least annually.
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.
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. The fair value of investments carried at cost is estimated to exceed carrying value;
however the fair value is not considered readily determinable based on the lack of liquidity for the shares owned.
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 non-performance 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 liability as of December 31, 2017 was approximately $23,000 ($45,000
- December 31, 2016).
As
of December 31, 2017 the Company has an interest rate swap agreement for its debt with RBS Citizens, N.A. (“Citizens Bank”)
(see Note 7) which changes a variable rate into a fixed rate on a term loan as follows:
Notional
Amount
|
|
|
Variable
Rate
|
|
|
Fixed
Cost
|
|
|
Maturity
Date
|
$
|
915,107
|
|
|
|
4.512
|
%
|
|
|
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 $23,000 in 2017 ($27,000– 2016).
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
$106,000 and $435,000 on research and development during 2017 and 2016, respectively. Research and development costs decreased
during 2017 as compared to 2016 as the Company moved some personnel from research and development to program support to meet the
requirements of current and prospective customers of the Company’s AuthentiGuard product line.
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, 2017 and 2016, there were 3,177,759 and 3,672,878, 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 2017 and 2016 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, 2017 and 2016.
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
2017, two customers accounted for 46% of our consolidated revenue. As of December 31, 2017, these two customers accounted for
38% of our trade accounts receivable balance. During 2016, these 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.
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 will adopt Topic 606 effective January 1, 2018. Topic 606 will not have
a material impact on our Consolidated Financial Statements.
In
January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”,
which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net
income. Entities will no longer be able to use the cost method of accounting for equity securities. However, for equity investments
without readily determinable fair values, entities may elect a measurement alternative that will allow those investments to be
recorded at cost, less impairment, and adjusted for subsequent observable price changes. The pronouncement also impacts financial
liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This pronouncement
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is
not permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on our Consolidated
Financial Statements.
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
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.
In
January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test
for Goodwill Impairment”, which eliminates the two-step process that required identification of potential impairment and
a separate measure of the actual impairment. The annual assessment of goodwill impairment will be determined by using the difference
between the carrying amount and the fair value of the reporting unit. The standards update are effective for goodwill impairment
tests in fiscal years beginning after December 15, 2019. The Company is currently assessing the impact that adopting this
new accounting standard will have on our Consolidated Financial Statements.
In
May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718) – Scope of Modification
Accounting”, which provides guidance about which changes to the terms or conditions of a share-based payment award require
an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15,
2017 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. ASU 2017-09
is to be applied on a prospective basis to an award modified on or after the adoption date. We do not intend to early adopt ASU
2017-09 and do not expect the adoption of this new accounting standard will have a material impact on our Consolidated Financial
Statements.
In
February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments (Subtopic 825-10)
– Recognition and Measurement of Financial Assets and Financial Liabilities”. This update was issued to clarify certain
narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU No. 2016-01,
“
Financial
Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
”.
This includes an amendment to clarify that an entity measuring an equity security using the measurement alternative may change
its measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable
election that would apply to that security and all identical or similar investments of the same issued. The update is effective
for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years beginning after June 15, 2018.
The Company is currently assessing the impact that adopting this new accounting standard will have on our Consolidated Financial
Statements.
Newly
Adopted Accounting Pronouncements
– In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement
of Inventory,” which simplifies the subsequent measurement of inventory by using only the lower of cost and net realizable
value. This standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and
must be applied on a retrospective basis. We adopted the new accounting standard in the first quarter of 2017. There was no material
impact to the Company’s financial statements as a result of adopting this new accounting standard.
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 was effective for
the Company as of January 1, 2017. Adoption of this new accounting standard resulted in the recognition of an increase in the
Company’s gross deferred tax asset of approximately $350,000 and an offsetting increase in the valuation allowance. There was
no impact to the Company’s retained earnings or other material impact to the financial statements as a result of adopting this
new accounting standard.
NOTE
3 – INVENTORY
Inventory
consisted of the following at December 31:
|
|
2017
|
|
|
2016
|
|
Finished
Goods
|
|
$
|
965,757
|
|
|
$
|
736,987
|
|
Work
in process
|
|
|
383,270
|
|
|
|
314,353
|
|
Raw
Materials
|
|
|
302,219
|
|
|
|
155,037
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,651,246
|
|
|
$
|
1,206,377
|
|
NOTE
4 – RELATED PARTY INVESTMENT
On
September 12, 2017, the Company and Hengfai Business Development Pte Ltd. (“HBD”) entered into a Securities Exchange
Agreement whereby the Company agreed to issue and sell to HBD 683,000 shares of its common stock, which had a market value on
that date of $484,930, in exchange for 21,196,552 ordinary shares and an existing three-year warrant to purchase up to 105,982,759
of ordinary shares at an exercise price of SGD$0.040 (US$0.0298) per share of Singapore eDevelopment Limited (“SED”),
a company incorporated in Singapore and publicly-listed on the Singapore Exchange Limited. The SED shares and warrants were owned
by HBD. One of the directors of the Company, Mr. Heng Fai Ambrose Chan, is a related party to each of HBD and SED. The cost of
the investment was determined to be the fair value of the Company’s common stock issued in the transaction, which was determined
to have the most readily determinable fair value. In making this assessment, the Company determined, that the SED shares trade
on the Singapore Stock Exchange and had a market value of $900,112 and the warrant had an aggregate intrinsic value of approximately
$1,343,000 based on a share price of SGD $0.057 (US$ 0.042) as of December 31, 2017. However, the Company determined that these
values did not represent a readily determinable fair value due to a potential lack of liquidity of the SED shares and warrants
due to a low average trading volume of the SED shares. As a result, as of December 31, 2017, the investment is carried at cost
of approximately $485,000.
NOTE
5 - PROPERTY PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following at December 31:
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Estimated
Useful Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
5-10
years
|
|
$
|
6,796,617
|
|
|
$
|
5,879,958
|
|
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
|
|
|
71,903
|
|
|
|
68,272
|
|
Software
and websites
|
|
3
years
|
|
|
171,007
|
|
|
|
412,113
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost
|
|
|
|
|
9,870,538
|
|
|
|
9,191,354
|
|
Less
accumulated depreciation
|
|
|
|
|
5,064,898
|
|
|
|
4,617,513
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, net
|
|
|
|
$
|
4,805,640
|
|
|
$
|
4,573,841
|
|
(1)
Expected lease term between 3 and 10 years.
NOTE
6 - INTANGIBLE ASSETS AND GOODWILL
During
2017 and 2016, the Company spent approximately $12,000 and $74,000, respectively, on capitalized 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, 2017
|
|
|
December
31, 2016
|
|
|
|
Useful
Life
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
intangibles - customer lists and non-compete agreements
|
|
5-10
years
|
|
|
1,997,300
|
|
|
|
1,810,750
|
|
|
|
186,550
|
|
|
|
1,997,300
|
|
|
|
1,721,357
|
|
|
|
275,943
|
|
Acquired
intangibles - patents and patent rights
|
|
Varied
(1)
|
|
|
3,155,000
|
|
|
|
2,603,942
|
|
|
|
551,058
|
|
|
|
3,155,000
|
|
|
|
2,092,767
|
|
|
|
1,062,233
|
|
Patent
application costs
|
|
Varied
(2)
|
|
|
1,148,017
|
|
|
|
664,873
|
|
|
|
483,144
|
|
|
|
1,136,465
|
|
|
|
578,623
|
|
|
|
557,842
|
|
|
|
|
|
$
|
6,300,317
|
|
|
$
|
5,079,565
|
|
|
$
|
1,220,752
|
|
|
$
|
6,288,765
|
|
|
$
|
4,392,747
|
|
|
$
|
1,896,018
|
|
|
(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, 2017, the weighted average
remaining useful life of these assets in service was approximately 1.7 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, 2017, the weighted average remaining
useful life of these assets in service was approximately 6.3 years.
|
Amortization
expense for the year ended December 31, 2017 amounted to approximately $687,000 ($700,000 –2016).
Expected
amortization for each of the five succeeding fiscal years is as follows:
Year
|
|
Amount
|
|
|
|
|
|
2018
|
|
$
|
542,089
|
|
2019
|
|
$
|
277,570
|
|
2020
|
|
$
|
183,606
|
|
2021
|
|
$
|
81,731
|
|
2022
|
|
$
|
80,102
|
|
Goodwill
The
Company performed its annual goodwill impairment test as of December 31, 2017. 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 it’s 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.
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, 2017 and 2016 are as follows:
|
|
Packaging
|
|
|
Plastics
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,768,400
|
|
|
$
|
684,949
|
|
|
$
|
2,453,349
|
|
Accumulated
impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,768,400
|
|
|
|
684,949
|
|
|
|
2,453,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,768,400
|
|
|
|
684,949
|
|
|
|
2,453,349
|
|
Accumulated
impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,768,400
|
|
|
|
684,949
|
|
|
|
2,453,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,768,648
|
|
|
|
684,949
|
|
|
|
2,453,597
|
|
Accumulated
impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
1,768,648
|
|
|
$
|
684,949
|
|
|
$
|
2,453,597
|
|
NOTE
7 – SHORT TERM AND LONG TERM DEBT
Revolving
Credit Lines
- The Company’s subsidiary Premier Packaging Corporation (“Premier Packaging”) has a revolving
credit line with Citizens Bank of up to $800,000 that bears interest at 1 Month LIBOR plus 3.75% (5.12% as of December 31, 2017)
and matures on May 31, 2018. As of December 31, 2017 and 2016, the revolving line had a balance of $0.
On
July 26, 2017, Premier Packaging entered into a Modification and Extension Agreement and accompanying Term Note Non-Revolving
Line of Credit Agreement with Citizens Bank pursuant to which Citizens agrees to lend up to $1,200,000 for the purpose of enabling
Premier Packaging to purchase equipment from time to time that it may need for use in its business. As of the date of this report,
the revolving line had a balance of $0.
On
December 1, 2017, the Company’s subsidiary Plastic Printing Professionals entered into a Loan Agreement and accompanying
Term Note Non-Revolving Line of Credit Agreement with Citizens Bank pursuant to which Citizens agreed to lend up to $800,000 for
the purpose of enabling Plastic Printing Professionals to purchase equipment from time to time that it may need for use in its
business. Advances may be made under this Equipment Acquisition Line of Credit, from time to time, from December 1, 2017 until
December 1, 2018. The aggregate principal balance outstanding under the Equipment Acquisition Line of Credit bears interest at
2% above the LIBOR Advantage Rate (as defined in the Agreement) (3.44% at December 31, 2017) until converted. Effective on conversion,
the interest rate payable on the aggregate principal balance outstanding shall be adjusted to a fixed rate equal to 2% above Citizens’
cost of funds as determined by Citizens. Prior to conversion, interest on the outstanding principal is payable in arrears monthly.After
conversion, the aggregate principal balance may be repaid in (i) up to 84 installments comprised of principal and interest for
new equipment or (ii) up to 60 installments comprised of principal and interest for used equipment. An initial advance was made
under the Equipment Acquisition Line of Credit on December 1, 2017, in the amount of $522,000, to fund the purchase of a used
6-color commercial press.
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. On May 31, 2017, the Company entered into Convertible
Promissory Note Amendment No. 4 to extend the maturity date to April 30, 2018 at which point the note is scheduled to be paid
in full. In exchange for the extension, the Company also issued the lender an additional consideration of 18,000 shares of the
Company’s common stock which had a fair value of $17,640. As of December 31, 2017, the balance of the term loan was $50,000
($230,000 at December 31, 2016).
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. On May 31, 2017, the Company
entered into Convertible Promissory Note Amendment No. 4 to extend the maturity date to December 31, 2018 at which point the note
is scheduled to be paid in full. In exchange for the extension, the Company also issued the lender as additional consideration
18,000 shares of the Company’s common stock which had a fair value of $17,640. As of December 31, 2017, the balance of the
term loan was $325,000 ($505,000 at December 31, 2016).
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, 2017, the loan had a balance of $286,560
($559,609 at December 31, 2016).
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 3.62% 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, 2017, the loan had a balance of $257,007 ($360,611 at December 31, 2016).
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% (4.51% at December 31, 2017). 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, 2017, the Promissory Note had
a balance of $915,107 ($966,786 at December 31, 2016).
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% (4.52% at December 31, 2017),
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, 2017, the note had a balance of $345,000 ($375,000 at December 31, 2016).
The
Citizens Bank credit facilities to each of the Company’s subsidiaries, Premier Packaging and Plastic Printing Professionals,
contain various covenants including fixed charge coverage ratio, tangible net worth and current ratio covenants. For the year
December 31, 2017, both Premier Packaging and Plastic Printing Professionals were in compliance with the covenants.
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 and net of deferred financing costs, subsequent to December 31, 2017 are as follows:
Year
|
|
Amount
|
|
|
|
|
|
2018
|
|
$
|
966,506
|
|
2019
|
|
|
596,018
|
|
2020
|
|
|
209,528
|
|
2021
|
|
|
824,226
|
|
2022
|
|
|
104,400
|
|
|
|
|
|
|
Total
|
|
$
|
2,700,678
|
|
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 6) 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, 2017, DSSTM has made aggregate principal payments of $770,250 on the notes. As of December 31, 2017, $3,702,129
is recorded as a short-term debt under the arrangement, which includes $281,500 of accrued interest, less unamortized debt issuance
costs of $29,994. In addition, as of December 31, 2017, $459,000 of fixed and contingent equity interests is recorded in other
short-term liabilities. On February 13, 2018, the Maturity Date, DSS Technology Management again defaulted by failing to pay the
investors an amount equal to (x) two times the aggregate amount of all advances made by the investors as of such date plus (y)
the Capitalized Expenses. The sole recourse available to the investors under the agreement is the establishment of a special purpose
entity controlled by the investors which would take ownership of the collateral consisting of the patents covered under the agreement,
as amended. Each of the investors and the collateral agent have contractually agreed that they will not, individually or collectively,
seek to enforce any monetary judgment with respect to or against any assets of the Company other than the patents and the monetization
payments and the remaining deposit.
NOTE
8 – 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 the 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. A total of $6,000,000 of the Financing was directed by BKI to attorneys to cover anticipated 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, which are segregated
and escrowed in the attorneys’ trust account.
In
addition, on November 14, 2016, the Company received $4,500,000 of the Financing, which was 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, 2017, an aggregate of approximately $3,447,000 is recorded as other liabilities by the Company,
of which approximately $2,062,500 is classified as short-term. Of this amount, the Company allocated $2,500,000 which it subsequently
adjusted to $1,500,000 for the payment of estimated future
Inter Partes Review
costs. The Company will reduce this liability
as it pays legal and other expenses related to the
Inter Partes Review
matters involving the LED Patent Portfolio as incurred.
The remaining $1,997,000 in other liabilities is allocated to working capital, which the Company is amortizing this amount on
a pro-rata basis over the expected remaining life of the monetization period of the LED Patent Portfolio through November 31,
2019. For this amount, the Company reduced the liability with an offset to selling, general and administrative costs by $47,500
per month from January 2017 through July 2017 and $80,000 per month for the remainder of 2017. During the year ended December
31, 2017, there was $30,000 of
Inter Partes Review
costs and an aggregate of $732,500 was recorded as a reduction of the
liability allocated to working capital.
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, 2017, the Company had received
an aggregate of $650,000 ($650,000 in 2016) from the investors pursuant to the agreement of which approximately $432,000 was in
other liabilities in the consolidated balance sheets ($467,000 as December 31, 2016). 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 7, 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 sometime in 2018.
NOTE
9 - STOCKHOLDERS’ EQUITY
On
August 26, 2016, the Company affected a one-for-four reverse stock split of the Company’s common stock. 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.
Sales
of Equity
–
On August 30, 2017, the Company sold 1,200,000 shares of unregistered common stock and five-year warrants
to purchase up to an aggregate of 240,000 additional shares of the Company’s common stock at an exercise price of $1.00
to a total of two related party accredited investors for an aggregate purchase price of $900,000, of which $300,000 was receivable
as of December 31, 2017. On September 7, 2017, the Company sold 133,333 shares of unregistered common stock and five-year warrants
to purchase up to an aggregate of 26,667 additional shares of the Company’s common stock at an exercise price of $1.00 to
two related party accredited investors for an aggregate purchase price of $100,000. In conjunction with these transactions, the
Company recorded $62,000 in related costs for placement agent fees and stock listing fees. The warrants had an estimated aggregate
fair value of approximately $112,000 which was determined by utilizing the Black-Scholes-Merton option pricing model with a volatility
of 89.3%, a risk free rate of return of 1.7% and zero dividend and forfeiture estimates.
On
September 12, 2017, the Company and Hengfai Business Development Pte Ltd. (“HBD”) entered into a Securities Exchange
Agreement whereby the Company agreed to issue and sell to HBD 683,000 shares of its common stock, which had a market value on
that date of $484,930, in exchange for 21,196,552 ordinary shares and an existing three-year warrant to purchase up to 105,982,759
of common shares at an exercise price of SGD$0.040 (US$0.0298) per share of Singapore eDevelopment Limited (“SED”),
a company incorporated in Singapore and publicly-listed on the Singapore Exchange Limited. The SED shares and warrants were owned
by HBD. The cost of the investment was the fair value of the Company’s common stock issued in the transaction which was
determined to have the most readily determinable fair value. In conjunction with these transactions, the Company recorded $13,660
in stock listing fees. As of December 31, 2017, the investment is carried at cost of approximately $485,000.
On
November 1, 2017, the Company issued 500,000 shares of its common stock, and a three-year warrant to purchase up to 125,000 additional
shares of the Company’s common stock at an exercise price of $1.00 per share, along with a cash payment of $125,000, to
Nix, Patterson & Roach LLP (“NPR”), a law firm, for the purpose of settling all accrued and outstanding billed
and unbilled invoices for expenses owed by the Company to NPR of approximately $714,000 in connection with various litigation
matters handled by NPR on behalf of the Company. The warrants had an estimated aggregate fair value of approximately $40,000 which
was determined by utilizing the Black-Scholes-Merton option pricing model with a volatility of 89.1%, a risk free rate of return
of 2.0% and zero dividend and forfeiture estimates. The aggregate estimated fair value of the cash payment and equity instruments
issued to NPR was approximately $495,000 which resulted in a reduction of approximately $219,000 of legal expense recorded by
the Company, and presented in general and administrative expenses on the Company’s financial statements, in conjunction
with the agreement.
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 American for
equity issuances during 2016.
Stock
Warrants
– During 2017, the Company received an aggregate of approximately $336,000 in proceeds from the exercise
of warrants for 394,091 shares of the Company’s common stock. 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
following is a summary with respect to warrants outstanding and exercisable at December 31, 2017 and 2016 and activity during
the years then ended:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1:
|
|
|
2,812,515
|
|
|
$
|
11.20
|
|
|
|
1,862,515
|
|
|
|
16.40
|
|
Granted
during the year
|
|
|
391,667
|
|
|
|
1.00
|
|
|
|
950,000
|
|
|
|
1.00
|
|
Exercised/lapsed/terminated
|
|
|
(559,092
|
)
|
|
|
5.11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31:
|
|
|
2,645,090
|
|
|
$
|
10.98
|
|
|
|
2,812,515
|
|
|
|
11.20
|
|
Exercisable
at December 31:
|
|
|
2,645,090
|
|
|
$
|
10.98
|
|
|
|
2,812,515
|
|
|
|
11.20
|
|
Weighted
average months remaining
|
|
|
|
|
|
|
24.3
|
|
|
|
|
|
|
|
34.6
|
|
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 1,500,000 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, 2017 and 2016 and activity during the years then ended:
|
|
2017
|
|
|
2016
|
|
|
|
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:
|
|
|
635,597
|
|
|
|
9.33
|
|
|
|
|
|
|
|
1,106,140
|
|
|
|
11.56
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
37,500
|
|
|
|
1.00
|
|
|
|
|
|
Lapsed/terminated
|
|
|
(152,930
|
)
|
|
|
9.67
|
|
|
|
|
|
|
|
(508,043
|
)
|
|
|
13.56
|
|
|
|
|
|
Outstanding
at December 31:
|
|
|
482,667
|
|
|
|
10.72
|
|
|
|
3.3
|
|
|
|
635,597
|
|
|
|
9.33
|
|
|
|
3.7
|
|
Exercisable
at December 31:
|
|
|
478,500
|
|
|
|
9.29
|
|
|
|
3.3
|
|
|
|
610,611
|
|
|
|
10.85
|
|
|
|
3.7
|
|
Expected
to vest at December 31:
|
|
|
4,167
|
|
|
|
1.00
|
|
|
|
3.3
|
|
|
|
25,000
|
|
|
|
1.00
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value of outstanding options at December 31:
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value of exercisable options at December 31:
|
|
$
|
6,667
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value of options expected to vest at December 31:
|
|
$
|
3,333
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
There
were no options granted in 2017. The weighted-average grant date fair value of options granted during the year ended December
31, 2016 was $0.10. The aggregate grant date fair value of options that vested during 2017 was approximately $417 ($71,000 -2016).
There were no options exercised during 2017 or 2016.
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 year ended December 31, 2016. There were no options or warrants granted for compensation during
the year ended December 31, 2017.
Volatility
|
|
|
85.6
|
%
|
Expected
option term
|
|
|
3.5
years
|
|
Risk-free
interest rate
|
|
|
1.3
|
%
|
Expected
forfeiture rate
|
|
|
0.0
|
%
|
Expected
dividend yield
|
|
|
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.
On
January 12, 2017, the Company issued an aggregate of 150,000 shares of restricted stock to members of the Company’s management
team of which 100,000 vested on May 17, 2017 and had an aggregated grant date fair value of approximately $126,000. The remaining
50,000 vested if the Company achieved adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of at least
$500,000 and a stock trading price of at least $1.00 per share by the close of the fourth quarter of 2017, both of which were
achieved.
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.
The
following is a summary of activity of restricted stock during the years ended at December 31, 2017 and 2016:
|
|
Shares
|
|
|
Weighted
- average Grant Date Fair Value
|
|
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
|
|
Restricted
shares granted
|
|
|
150,000
|
|
|
|
0.84
|
|
Restricted
shares vested
|
|
|
(331,000
|
)
|
|
|
0.64
|
|
Restriced
shares outstanding, December 31, 2017
|
|
|
50,000
|
|
|
$
|
0.64
|
|
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 2017, the Company had
stock compensation expense of approximately $215,000 or $0.01 basic earnings per share ($329,000; $0.03 basic earnings per share
- 2016). As of December 31, 2017, there was approximately $1,700 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
10 - INCOME TAXES
Following
is a summary of the components giving rise to the income tax expense (benefit) for the years ended December 31:
The
expense (benefit) for income taxes consists of the following:
|
|
2017
|
|
|
2016
|
|
Currently
payable:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(16,694
|
)
|
|
$
|
132,835
|
|
State
|
|
|
8,572
|
|
|
|
(5,617
|
)
|
Total
currently payable
|
|
|
(8,122
|
)
|
|
|
127,218
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(410,402
|
)
|
|
|
(379,710
|
)
|
State
|
|
|
(58,001
|
)
|
|
|
(111,642
|
)
|
Total
deferred
|
|
|
(468,403
|
)
|
|
|
(491,352
|
)
|
Less:
increase in valuation allowance
|
|
|
524,381
|
|
|
|
374,864
|
|
Plus:
effect of tax change
|
|
|
(68,818
|
)
|
|
|
-
|
|
Net
deferred
|
|
|
(12,840
|
)
|
|
|
(116,488
|
)
|
Total
income tax expense (benefit)
|
|
$
|
(20,962
|
)
|
|
$
|
10,730
|
|
Individual
components of deferred taxes are as follows:
|
|
2017
|
|
|
2016
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
10,063,436
|
|
|
$
|
15,302,177
|
|
Equity
issued for services
|
|
|
146,029
|
|
|
|
280,975
|
|
Goodwill
and other intangibles
|
|
|
997,676
|
|
|
|
1,684,346
|
|
Investment
in pass-through entity
|
|
|
11,575
|
|
|
|
17,898
|
|
Deferred
revenue
|
|
|
807,959
|
|
|
|
1,522,258
|
|
Other
|
|
|
523,937
|
|
|
|
849,325
|
|
Gross
deferred tax assets
|
|
|
12,550,612
|
|
|
|
19,656,979
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
and other intangibles
|
|
|
169,170
|
|
|
|
277,231
|
|
Depreciation
and amortization
|
|
|
62,288
|
|
|
|
272,406
|
|
Gross
deferred tax liabilities
|
|
|
231,458
|
|
|
|
549,637
|
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
(12,445,136
|
)
|
|
|
(19,152,961
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$
|
(125,982
|
)
|
|
$
|
(45,619
|
)
|
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to,
(1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate alternative minimum
tax (AMT) and changing how existing AMT credits can be realized; and (3) changing rules related to usage and limitation of net
operating loss carryforwards created in tax years beginning after December 31, 2017, The effect of the rate change attributable
to the Tax Act on the Company’s effective tax rate was 11.5% (or $68,818) decrease in the net deferred tax liability.
The
Tax Act repeals the corporate alternative minimum tax (AMT) and permits existing minimum tax credits carryovers to offset the
regular tax liability for any tax year. Further, the credit is refundable for any tax year beginning after December 31, 2017 and
before December 31, 2020 in an amount equal to 50 percent of the excess of the minimum tax credit over regular liability. Any
remaining credit will be fully refundable for the year ended December 31, 2021. As of December 31, 2017, the Company had $93,201
of minimum tax credit recorded as a deferred tax asset, which was reclassified as to a current and non-current receivable of 46,600
and 46,601 respectively.
The
Company has approximately $47.2 million 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 and any other deferred tax assets,
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 valuation allowance for deferred tax assets decreased by approximately $6.9 million
in the year ended December 31, 2017. The decreases in the valuation allowance was primarily due to the revaluation of the deferred
taxes due to the enactment of the Tax Cuts and Jobs Act.
The
Company has adopted the provisions of ASU 2016-09 as of the beginning of the year which requires recognition through opening retained
earnings of any pre-adoption date NOL carryforwards from nonqualified stock options and other employee share-based payments (e.g.,
restricted shares and share appreciation rights), as well as recognition of all income tax effects from share-based payments arising
on or after January 1, 2017 (our adoption date) in income tax expense. In light of the Company’s valuation allowance on
its deferred tax assets there was no adjustment required to its retained earnings nor was there any windfall tax benefit to recognize
in the Company’s income tax provision.
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:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Statutory
United States federal rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State
income taxes net of federal benefit
|
|
|
5.5
|
|
|
|
5.0
|
|
Permanent
differences
|
|
|
0.8
|
|
|
|
(3.9
|
)
|
Other
|
|
|
-
|
|
|
|
(0.4
|
)
|
Tax
rate change
|
|
|
11.5
|
|
|
|
-
|
|
Change
in valuation reserves
|
|
|
(48.2
|
)
|
|
|
(35.8
|
)
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
3.6
|
%
|
|
|
(1.1
|
)%
|
The
Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended
December 31, 2017 and 2016, 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 2014-2017 generally remain
open to examination by major taxing jurisdictions to which the Company is subject.
NOTE
11 - DEFINED CONTRIBUTION PENSION PLAN
The
Company maintains a qualified employee savings plans (the “401(k) Plan”) that qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code and which covers all eligible employees. Employees generally become eligible
to participate in the 401(k) Plan two months following the employee’s hire date. Employees may contribute a percentage of
their earnings, subject to the limitations of the Internal Revenue Code. Until December 31, 2017, the Company matched up to 50%
of the employee’s contribution up to a maximum match of 3%. The total matching contributions for 2017 were approximately
$103,000 ($101,000 -2016). Commencing on January 1, 2018, the Company will match 100% of the first 1% of employee contributions,
then 50% of additional contributions up to an aggregate maximum match of 3.5%.
NOTE
12 – 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 month-to-month lease for approximately $600 per month. The Company’s Technology Management
division also leases a sales and research and development facility in Plano, Texas under a renewable 12-month lease that expired
in December 2017 for approximately $1,200 per month. The Company renewed the Plano lease for an additional 12 months until December
21, 2018 for approximately $1,300 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, 2017 and 2016, 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 2017
|
|
$
|
44,131
|
|
|
$
|
259,385
|
|
|
$
|
303,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
minimum lease commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
43,258
|
|
|
$
|
258,530
|
|
|
$
|
301,788
|
|
2019
|
|
|
14,419
|
|
|
|
68,820
|
|
|
|
83,239
|
|
2020
|
|
|
-
|
|
|
|
68,820
|
|
|
|
68,820
|
|
Total
|
|
|
57,677
|
|
|
|
396,170
|
|
|
|
453,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
future minimum lease commitments
|
|
$
|
57,677
|
|
|
$
|
396,170
|
|
|
$
|
453,847
|
|
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, 2017, the minimum annual severance payments under these employment agreements
are, in aggregate, approximately $735,000.
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 judgment for infringement, injunctive relief,
and compensatory damages from Apple. On October 28, 2014, the case was stayed by the District Court pending a determination of
Apple’s motion to transfer the case to the Northern District of California. On November 7, 2014, Apple’s motion to
transfer the case to the Northern District of California was granted. On December 30, 2014, Apple filed two Inter Partes Review
(“IPR”) petitions with the 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. 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 U.S. Court of Appeals for the Federal Circuit
(the “Federal Circuit”) seeking reversal of the PTAB decisions. Oral arguments for the appeal were held on August
9, 2017, and 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
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. On June
1, 2017, the PTAB ruled in favor of Intel for all the challenged claims. On July 28, 2017, DSS Technology Management filed a notice
of appeal of the PTAB’s decision relating to U.S. Patent 6,784,552 with the Federal Circuit. 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,
which was instituted by the PTAB. On September 20, 2017, PTAB ruled in favor of Samsung for all the challenged claims relating
to U.S. Patent 6,784,552. DSS Technology Management then appealed this PTAB ruling to the Federal Circuit on November 17, 2017.
The Federal Circuit joined this appeal with the Intel appeal effective on December 7, 2017. The appeal is still pending as of
the date of this Report. Qualcomm filed its IPR proceeding on July 1, 2016, which was then later joined with Intel’s IPRs
in August 2016 by PTAB. On June 1, 2017, the PTAB ruled in favor of Intel/Qualcomm for all the challenged claims. On July 28,
2017, DSS Technology Management filed a notice of appeal of the PTAB’s decision relating to U.S. Patent 6,784,552 with the
Federal Circuit. As indicated above, this joint appeal is still pending as of the date of this Report.
On
April 13, 2017, Document Security Systems, Inc. (“DSS”) filed a patent infringement lawsuit against Seoul Semiconductor
Co., Ltd. and Seoul Semiconductor, Inc. (collectively, “Seoul Semiconductor”) in the United States District Court
for the Eastern District of Texas, alleging infringement of certain of DSS’s Light-Emitting Diode (“LED”) patents.
DSS is seeking a judgement for infringement of the patents along with other relief including, but not limited to, money damages,
costs and disbursements. On June 7, 2017, DSS refiled its patent infringement complaint against Seoul Semiconductor in the United
States District Court for the Central District of California, Southern Division. The case is currently pending. On December 3,
2017, Seoul Semiconductor filed an IPR challenging the validity of certain claims of U.S. Patent No. 6,949,771. On December 21,
2017, Seoul Semiconductor filed an IPR challenging the validity of certain claims of U.S. Patent No. 7,256,486. On January 25,
2018, Seoul Semiconductor filed an IPR challenging the validity of certain claims of U.S. Patent No. 7,524,087. These challenged
patents the patents that are the subject matter of the infringement lawsuit, and are still pending as of the date of this Report.
On
April 13, 2017, DSS filed a patent infringement lawsuit against Everlight Electronics Co., Ltd. and Everlight Americas, Inc. (collectively,
“Everlight”) in the United States District Court for the Eastern District of Texas, Marshall Division, alleging infringement
of certain of DSS’s LED patents. DSS is seeking a judgement for infringement of the patents along with other relief including,
but not limited to, money damages, costs and disbursements. On June 8, 2017, DSS refiled its patent infringement complaint against
Everlight in the United States District Court for the Central District of California. The case is currently pending as of the
date of this Report.
On
April 13, 2017, DSS filed a patent infringement lawsuit against Cree, Inc. (“Cree”) in the United States District
Court for the Eastern District of Texas, Marshall Division, alleging infringement of certain of DSS’s LED patents. DSS is
seeking a judgement for infringement of the patents along with other relief including, but not limited to, money damages, costs
and disbursements. On June 8, 2017, DSS refiled its patent infringement complaint against Cree in the United States District Court
for the Central District of California, and thereafter filed a first amended complaint for patent infringement against Cree in
that same court on July 14, 2017. The case is currently pending as of the date of this Report.
On
July 13, 2017, DSS filed a patent infringement lawsuit against Osram GMBH, Osram OPTO Semiconductors GMBH & Co., and Osram
Sylvania Inc. (collectively, “Osram”) in the United States District Court for the Central District of California,
alleging infringement of certain of DSS’s LED patents. DSS is seeking a judgment for infringement of the patents along with
other relief including, but not limited to, money damages, costs and disbursements. On February 21, 2018, DSS and Osram executed
a confidential settlement agreement ending the litigation between them.
On
August 15, 2017, DSS filed a patent infringement lawsuit against Lite-On, Inc., and Lite-On Technology Corporation in the United
States District Court for the Central District of California, alleging infringement of certain of DSS’s LED patents. DSS
is seeking a judgement for infringement of the patents along with other relief including, but not limited to, money damages, costs
and disbursements. The case is currently pending as of the date of this Report.
On
December 7, 2017, DSS filed a patent infringement lawsuit against Nichia Corporation and Nichia America Corporation in the United
States District Court for the Central District of California, alleging infringement of certain of DSS’s LED patents. DSS
is seeking a judgement for infringement of the patents along with other relief including, but not limited to, money damages, costs
and disbursements. The case is currently pending as of the date of this Report.
In
addition to the foregoing, we may become subject to other legal proceedings that arise in the ordinary course of business and
have not been finally adjudicated. Adverse decisions in any of the foregoing may have a material adverse effect on our results
of operations, cash flows or our financial condition. The Company accrues for potential litigation losses when a loss is probable
and estimable.
Contingent
Litigation Payments
– The Company retains the services of professional service providers, including law firms that
specialize in intellectual property licensing, enforcement and patent law. These service providers are often retained on an hourly,
monthly, project, contingent or a blended fee basis. In contingency fee arrangements, a portion of the legal fee is based on predetermined
milestones or the Company’s actual collection of funds. The Company accrues contingent fees when it is probable that the
milestones will be achieved and the fees can be reasonably estimated. As of December 31, 2017, the Company had 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 December 31, 2017, there are no contingent payments due.
NOTE
13 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental
cash flow information for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
141,000
|
|
|
$
|
210,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Gain
from change in fair value of interest rate swap derivative
|
|
|
22,000
|
|
|
|
18,000
|
|
Capitalized
debt modification costs that increase debt balance
|
|
$
|
-
|
|
|
$
|
150,000
|
|
Account
payable settled with issuance of equity instruments
|
|
$
|
370,000
|
|
|
$
|
-
|
|
Common
Stock issued for investment
|
|
$
|
485,000
|
|
|
$
|
-
|
|
NOTE
14 - 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, 2017 and 2016 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, 2017
|
|
Packaging
and Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
12,556,000
|
|
|
|
4,470,000
|
|
|
|
1,636,000
|
|
|
|
-
|
|
|
$
|
18,662,000
|
|
Depreciation
and amortization
|
|
|
663,000
|
|
|
|
134,000
|
|
|
|
614,000
|
|
|
|
3,000
|
|
|
|
1,414,000
|
|
Interest
expense
|
|
|
107,000
|
|
|
|
-
|
|
|
|
62,000
|
|
|
|
54,000
|
|
|
|
223,000
|
|
Amortized
Debt Discount
|
|
|
1,000
|
|
|
|
-
|
|
|
|
131,000
|
|
|
|
22,000
|
|
|
|
154,000
|
|
Stock
based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
40,000
|
|
|
|
175,000
|
|
|
|
215,000
|
|
Income
tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21,000
|
)
|
|
|
(21,000
|
)
|
Net
Income (loss) to common shareholders
|
|
|
1,453,000
|
|
|
|
385,000
|
|
|
|
(1,219,000
|
)
|
|
|
(1,197,000
|
)
|
|
|
(578,000
|
)
|
Capital
Expenditures
|
|
|
439,000
|
|
|
|
520,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
959,000
|
|
Identifiable
assets
|
|
|
9,331,000
|
|
|
|
2,933,000
|
|
|
|
1,725,000
|
|
|
|
3,442,000
|
|
|
|
17,431,000
|
|
Year
Ended December 31, 2016
|
|
Packaging
and Printing
|
|
|
Plastics
|
|
|
Technology
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
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
|
|
|
121,000
|
|
|
|
-
|
|
|
|
41,000
|
|
|
|
86,000
|
|
|
|
248,000
|
|
Amortized
Debt Discount
|
|
|
2,000
|
|
|
|
-
|
|
|
|
29,000
|
|
|
|
-
|
|
|
|
31,000
|
|
Stock
based compensation
|
|
|
17,000
|
|
|
|
10,000
|
|
|
|
26,000
|
|
|
|
276,000
|
|
|
|
329,000
|
|
Income
tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
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
|
|
International
revenue, which consists of sales to customers with operations in Canada, Western Europe, Latin America, Africa, the Middle East
and Asia comprised 3.2% of total revenue for 2017 (2%- 2016). Revenue is allocated to individual countries by customer based on
where the product is shipped. The Company had no long-lived assets in any country other than the United States for any period
presented.