UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June
30, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________________to______________________.
001-32146 |
Commission file number |
DOCUMENT SECURITY SYSTEMS, INC. |
(Exact name of registrant as specified in its charter) |
New York |
|
16-1229730 |
(State or other Jurisdiction of incorporation- or Organization) |
|
(IRS Employer Identification No.) |
28 Main Street East, Suite 1525 |
Rochester, NY 14614 |
(Address of principal executive offices) |
(585) 325-3610 |
(Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files) Yes x No ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
“large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer ¨ Accelerated
filer ¨ Non-accelerated filer (Do not check if a smaller reporting
company) ¨ Smaller reporting company x
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
As of August 12, 2015, there were 46,302,404 shares of the registrant’s
common stock, $0.02 par value, outstanding.
DOCUMENT SECURITY SYSTEMS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1
- FINANCIAL STATEMENTS
DOCUMENT SECURITY SYSTEMS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash | |
$ | 1,014,857 | | |
$ | 2,343,675 | |
Restricted cash | |
| 306,215 | | |
| 355,793 | |
Accounts receivable, net | |
| 1,667,531 | | |
| 2,097,671 | |
Inventory | |
| 1,120,417 | | |
| 869,262 | |
Prepaid expenses and other current assets | |
| 426,081 | | |
| 425,671 | |
Deferred tax asset, net | |
| 2,499 | | |
| 2,499 | |
Total current assets | |
| 4,537,600 | | |
| 6,094,571 | |
| |
| | | |
| | |
Property, plant and equipment, net | |
| 5,295,495 | | |
| 5,016,539 | |
Investments and other assets, net | |
| 626,337 | | |
| 686,912 | |
Goodwill | |
| 12,046,197 | | |
| 12,046,197 | |
Other intangible assets, net | |
| 3,445,040 | | |
| 3,908,399 | |
Total assets | |
$ | 25,950,669 | | |
$ | 27,752,618 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | |
|
|
|
|
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 1,624,519 | | |
$ | 1,037,359 | |
Accrued expenses and other current liabilities | |
| 1,452,965 | | |
| 1,997,241 | |
Current portion of long-term debt, net | |
| 1,555,222 | | |
| 754,745 | |
Total current liabilities | |
| 4,632,706 | | |
| 3,789,345 | |
| |
| | | |
| | |
Long-term debt, net | |
| 6,791,564 | | |
| 7,439,036 | |
Other long-term liabilities | |
| 517,621 | | |
| 520,180 | |
Deferred tax liability, net | |
| 157,732 | | |
| 148,258 | |
| |
| | | |
| | |
Commitments and contingencies (Note 7) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders' equity | |
| | | |
| | |
Common stock, $.02 par value; 200,000,000 shares authorized, 46,302,404 shares
issued and outstanding (46,172,404 on December 31, 2014) | |
| 926,048 | | |
| 923,448 | |
Additional paid-in capital | |
| 101,692,748 | | |
| 101,012,659 | |
Accumulated other comprehensive loss | |
| (58,621 | ) | |
| (61,180 | ) |
Accumulated deficit | |
| (88,709,129 | ) | |
| (86,019,128 | ) |
Total stockholders' equity | |
| 13,851,046 | | |
| 15,855,799 | |
Total liabilities and stockholders' equity | |
$ | 25,950,669 | | |
$ | 27,752,618 | |
See accompanying notes to the condensed
consolidated financial statements
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Operations and Comprehensive Loss
(unaudited)
| |
For the Three Months Ended June 30, | | |
For the Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Revenue | |
| | | |
| | | |
| | | |
| | |
Printed products | |
$ | 3,683,311 | | |
$ | 4,407,261 | | |
$ | 6,703,197 | | |
$ | 7,570,761 | |
Technology sales, services and licensing | |
| 512,789 | | |
| 476,130 | | |
| 922,434 | | |
| 940,361 | |
Total revenue | |
| 4,196,100 | | |
| 4,883,391 | | |
| 7,625,631 | | |
| 8,511,122 | |
Costs and expenses | |
| | | |
| | | |
| | | |
| | |
Cost of goods sold, exclusive of depreciation and amortization | |
| 2,663,378 | | |
| 3,196,633 | | |
| 4,649,679 | | |
| 5,394,895 | |
Selling, general and administrative (including stock based compensation) | |
| 2,236,713 | | |
| 2,613,781 | | |
| 4,844,828 | | |
| 5,687,979 | |
Depreciation and amortization | |
| 390,533 | | |
| 1,288,313 | | |
| 770,126 | | |
| 2,601,684 | |
Total costs and expenses | |
| 5,290,624 | | |
| 7,098,727 | | |
| 10,264,633 | | |
| 13,684,558 | |
Operating loss | |
| (1,094,524 | ) | |
| (2,215,336 | ) | |
| (2,639,002 | ) | |
| (5,173,436 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income and (expense): | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (90,330 | ) | |
| (88,905 | ) | |
| (168,712 | ) | |
| (163,855 | ) |
Net loss on debt modification and extinguishment | |
| - | | |
| (34,548 | ) | |
| (19,096 | ) | |
| (51,915 | ) |
Gains on sales of investment and equipment | |
| 146,283 | | |
| - | | |
| 146,283 | | |
| - | |
Loss before income taxes | |
| (1,038,571 | ) | |
| (2,338,789 | ) | |
| (2,680,527 | ) | |
| (5,389,206 | ) |
Income tax expense | |
| 4,737 | | |
| 4,737 | | |
| 9,474 | | |
| 9,474 | |
Net loss | |
$ | (1,043,308 | ) | |
$ | (2,343,526 | ) | |
$ | (2,690,001 | ) | |
$ | (5,398,680 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive loss: | |
| | | |
| | | |
| | | |
| | |
Interest rate swap gain (loss) | |
| 18,311 | | |
| (15,274 | ) | |
| 2,559 | | |
| (25,217 | ) |
Comprehensive loss: | |
$ | (1,024,997 | ) | |
$ | (2,358,800 | ) | |
$ | (2,687,442 | ) | |
$ | (5,423,897 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per share: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.02 | ) | |
$ | (0.06 | ) | |
$ | (0.06 | ) | |
$ | (0.13 | ) |
| |
| | | |
| | | |
| | | |
| | |
Shares used in computing loss per share: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 46,302,404 | | |
| 42,040,907 | | |
| 46,271,078 | | |
| 41,982,770 | |
See accompanying notes to condensed consolidated financial statements
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Cash Flows
For the Six Months Ended June 30,
(unaudited)
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (2,690,001 | ) | |
$ | (5,398,680 | ) |
Adjustments to reconcile net loss to net cash used by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 770,126 | | |
| 2,601,684 | |
Stock based compensation | |
| 643,138 | | |
| 840,879 | |
Paid in-kind interest | |
| 44,000 | | |
| - | |
Gain on sale of equipment | |
| (46,283 | ) | |
| - | |
Net loss on debt modification and extinguishment | |
| 19,096 | | |
| 51,915 | |
Change in deferred tax provision | |
| 9,474 | | |
| 9,474 | |
Foreign currency translation (gain) loss | |
| (29,400 | ) | |
| 16,420 | |
Decrease (increase) in assets: | |
| | | |
| | |
Accounts receivable | |
| 430,140 | | |
| 359,137 | |
Inventory | |
| (251,155 | ) | |
| (84,680 | ) |
Prepaid expenses and other assets | |
| 60,165 | | |
| (174,616 | ) |
Restricted cash | |
| 49,578 | | |
| 254,521 | |
Increase (decrease) in liabilities: | |
| | | |
| | |
Accounts payable | |
| 587,160 | | |
| 33,081 | |
Accrued expenses and other liabilities | |
| (523,629 | ) | |
| 387,188 | |
Net cash used by operating activities | |
| (927,591 | ) | |
| (1,103,677 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of property, plant and equipment | |
| (57,486 | ) | |
| (157,789 | ) |
Proceeds from the sale of equipment | |
| 46,283 | | |
| - | |
Purchase of investments | |
| - | | |
| (750,000 | ) |
Purchase of intangible assets | |
| (3,237 | ) | |
| (1,196,980 | ) |
Net cash used by investing activities | |
| (14,440 | ) | |
| (2,104,769 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Net payments on revolving lines of credit | |
| - | | |
| (158,087 | ) |
Payments of long-term debt | |
| (386,787 | ) | |
| (298,816 | ) |
Borrowings of long-term debt | |
| - | | |
| 2,691,000 | |
Issuances of common stock, net of issuance costs | |
| - | | |
| 301,974 | |
Net cash (used) provided by financing activities | |
| (386,787 | ) | |
| 2,536,071 | |
| |
| | | |
| | |
Net decrease in cash | |
| (1,328,818 | ) | |
| (672,375 | ) |
Cash beginning of period | |
| 2,343,675 | | |
| 1,977,031 | |
Cash end of period | |
$ | 1,014,857 | | |
$ | 1,304,656 | |
See accompanying notes to the condensed consolidated financial
statements.
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
| 1. | Basis of Presentation and Significant Accounting Policies |
Document Security Systems,
Inc. (the “Company”), through two of its subsidiaries, Premier Packaging Corporation, which operates under the assumed
name of DSS Packaging Group, and Plastic Printing Professionals, Inc., which operates under the assumed name of DSS Plastics Group,
operates in the security and commercial printing, packaging and plastic ID markets. The Company develops, markets, manufactures
and sells paper and plastic products designed to protect valuable information from unauthorized scanning, copying, and digital
imaging. The Company’s subsidiary, Extradev, Inc., which operates under the assumed name of DSS Digital Group, develops,
markets and sells digital information services, including data hosting, disaster recovery and data back-up and security services.
The Company’s subsidiary, DSS Technology Management, Inc., acquires intellectual property (“IP”) assets, interests
in companies owning intellectual property assets, or assists others in managing their intellectual property monetization efforts,
for the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments
in the development and commercialization of patented technologies, licensing, strategic partnerships and commercial litigation.
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles
(“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation
S-X for smaller reporting companies. Accordingly, these statements do not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying balance sheets and related interim
statements of operations and comprehensive loss and cash flows include all adjustments, considered necessary for their fair presentation
in accordance with U.S. GAAP. All significant intercompany transactions have been eliminated in consolidation.
Interim results are
not necessarily indicative of results expected for the full year. For further information regarding the Company’s accounting
policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company's Form 10-K for
the fiscal year ended December 31, 2014.
Use of Estimates
- The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
materially from those estimates and assumptions. In preparing these financial statements, the Company has evaluated events and
transactions for potential recognition or disclosure.
Restricted
Cash – As of June 30, 2015, cash of $306,215 ($355,793 – December
31, 2014) is restricted for payments of costs and expenses associated with one of the Company’s IP monetization programs.
Derivative Instruments
- The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate
swap contracts to minimize significant fluctuations in earnings that are caused by interest rate volatility. The Company has an
interest rate swap that changes a variable rate into a fixed rate on a term loan. The swap qualifies as a Level 2 fair value financial
instrument. The swap agreement is not held for trading purposes and the Company does not intend to sell the derivative swap financial
instrument. The Company records the interest swap agreement on the balance sheet at fair value because the agreement qualifies
as a cash flow hedge under U.S. GAAP. Gains and losses on the instrument are recorded in other
comprehensive income (loss) until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or
losses are reclassified from accumulated other comprehensive income (loss) (“AOCI”) to the Condensed Consolidated Statement
of Operations on the same line item as the underlying transaction. The valuation of the interest rate swap is derived from proprietary
models of Citizens Bank (defined below) based upon recognized financial principles and reasonable estimates about relevant future
market conditions and may reflect certain other financial factors such as anticipated profit or hedging, transactional, and other
costs. The notional amounts of the swap decreases over the life of the agreement. The Company is exposed to a credit loss in the
event of nonperformance by the counter parties to the interest rate swap agreement. However, the Company does not anticipate non-performance
by the counter parties. The cumulative net loss attributable to this cash flow hedge recorded in accumulated other comprehensive
loss and other liabilities at June 30, 2015 was approximately $59,000 ($61,000 - December 31, 2014), which is included in other
long-term liabilities on the balance sheet.
The Company has a notional
amount of approximately $1,050,000 as of June 30, 2015 on its interest rate swap agreement for its debt with RBS Citizens, N.A.
(“Citizens Bank”) (See Note 5) which changes a variable rate into a fixed rate on a term loan as follows:
Notional | | |
Variable | | |
| | |
|
Amount | | |
Rate | | |
Fixed Cost | | |
Maturity Date |
$ | 1,050,203 | | |
| 3.33 | % | |
| 5.87 | % | |
August 30, 2021 |
Impairment
of Long Lived Assets and Goodwill -
Long-lived and intangible assets and goodwill are assessed for potential impairment whenever events or changes in
circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Goodwill and
indefinite-lived intangible assets are assessed at least annually, but also whenever events or changes in circumstances
indicate the carrying values may not be recoverable. Factors that could trigger an impairment review, include (a) significant
underperformance relative to historical or projected future operating results; (b) significant changes in the manner of or
use of the acquired assets or the strategy for our overall business; (c) significant negative industry or economic trends;
(d) significant decline in our stock price for a sustained period; and (e) a decline in our market capitalization below net
book value.
Goodwill
- Goodwill is the excess of cost of an acquired entity over the fair value
of amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is
subject to impairment testing at least annually and will be tested for impairment between annual tests if an event occurs or circumstances
change that would indicate the carrying amount may be impaired. Financial Accounting Standards Board (“FASB”) Accounting
Standard Classification (“ASC”) Topic 350 provides an entity with the option to first assess qualitative factors to
determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity
determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing
the two-step impairment test is unnecessary. If the two-step impairment test is necessary, a fair-value-based test is applied at
the reporting unit level, which is generally one level below the operating segment level. The test compares the fair value of an
entity's reporting units to the carrying value of those reporting units. This test requires various judgments and estimates. The
Company estimates the fair value of the reporting unit using a market approach in combination with a discounted operating cash
flow approach. Impairment of goodwill is measured as the excess of the carrying amount of goodwill over the fair values of recognized
and unrecognized assets and liabilities of the reporting unit. An adjustment to goodwill will be recorded for any goodwill that
is determined to be impaired. During the Company’s annual assessment of goodwill in 2014, the Company assessed that the negative
trends in patent litigation that have recently reduced the success of patent owners in protecting their patents in the federal
court system had caused an impairment of the Company’s goodwill assigned to its DSS Technology Management division and accordingly,
the Company recorded a $3,000,000 goodwill impairment charge to the goodwill assigned to its DSS Technology Management division.
Contingent
Legal Expenses - Contingent legal fees are expensed in the consolidated
statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from
potential infringers, no contingent legal fees are paid; however, the Company may be liable for certain out of pocket legal costs
incurred pursuant to the underlying legal services agreement that will be paid out from the proceeds from settlements or licenses
that arise pursuant to an enforcement action, which will be expensed as legal fees in the period in which the payment of such fees
is probable. Any unamortized patent acquisition costs will be expensed in the period in which a conclusion is reached in an enforcement
action that does not yield future royalties potential.
Earnings Per
Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual weighted
average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional
shares that would have been outstanding if dilutive potential shares had been issued. In a loss period, the calculation for basic
and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.
As of June 30, 2015
and 2014, there were 11,448,047 and 16,239,947 respectively, of common stock share equivalents potentially issuable under convertible
debt agreements, employment agreements, options, warrants, overallotment options, and restricted stock agreements, that could potentially
dilute basic earnings per share in the future. These shares are excluded from the calculation of diluted earnings per share in
periods in which the Company had a net loss because their inclusion would be anti-dilutive to the Company’s losses in the
respective periods.
Concentration
of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured
limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial
institutions.
During the six
months ended June 30, 2015 and 2014, one customer accounted for 22% and 30%, respectively, of the Company’s
consolidated revenue and accounted for 14% and 20%, respectively, of the Company’s accounts receivable balance as of
June 30, 2015 and December 31, 2014. The risk with respect to accounts receivables is mitigated by credit evaluations the
Company performs on its customers, the short duration of its payment terms for the significant majority of its customer
contracts and by the diversification of its customer base.
Reclassifications
- Certain prior year amounts have been reclassified to conform to the current year presentation.
Continuing
Operations - The Company has incurred significant net losses in previous years
and through the six months of 2015. The Company’s ability to fund its current and future commitments out of its available
cash and cash generated from its operations depends on a number of factors. Some of these factors include the Company’s ability
to (i) increase sales of the Company’s digital products; (ii) decrease legal and professional expenses for the Company’s
intellectual property monetization business; and (iii) continue to generate operating profits from the Company’s packaging
and plastic printing operations. As of June 30, 2015, the Company had approximately
$1,015,000 in unrestricted cash and $306,000 in restricted cash and up to $800,000 available under a revolving credit line
at its packaging subsidiary, which may not be sufficient to cover the Company’s future working capital requirements if these
and other factors are not met. If the Company cannot generate sufficient cash from its operations, the Company may need to raise
additional funds in the future in order to fund its working capital needs and pursue its growth strategy, although there can be
no assurances, management believes that sources for these additional funds will be available through either current or future investors.
New Accounting
Pronouncements Not Yet Adopted – In May 2014, the FASB issued new accounting guidance on revenue from contracts with
customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer
of promised goods or services to customers. The updated guidance will replace most existing revenue recognition guidance in U.S.
GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has
not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its financial
statements and related disclosures.
In August 2014, the
FASB issued Accounting Standards Update (“ASU“) No. 2014-15, "Presentation of Financial Statements - Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." The guidance requires
an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related
footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016,
and for annual and interim periods thereafter. Early application is permitted. The Company does not believe the adoption of this
ASU will have a significant impact on its financial statements.
In April 2015, the FASB issued Accounting
Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs ("ASU 2015-03"). The amendments in ASU 2015-03 require that debt issuance costs related to a
recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015.
The Company does not believe the adoption of this ASU will have a significant impact on its financial statements.
In July 2015,
the FASB issued Accounting Standards Update No. 2015-11, “Simplifying the Measurement
of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to measure
inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged
for inventory measured using last-in, first-out (“LIFO”) or
the retail inventory method. It is effective for annual reporting periods beginning after
December 15, 2016. The amendments should be applied prospectively with earlier application
permitted as of the beginning of an interim or annual reporting period. The Company is currently in the process of evaluating the
impact of adoption of ASU 2015-11 on its consolidated balance sheets.
Inventory consisted of the following:
| |
June 30, 2015 | | |
December 31,
2014 | |
| |
| | |
| |
Finished Goods | |
$ | 749,922 | | |
$ | 572,695 | |
Work in process | |
| 168,596 | | |
| 123,611 | |
Raw Materials | |
| 201,899 | | |
| 172,956 | |
| |
| | | |
| | |
| |
$ | 1,120,417 | | |
$ | 869,262 | |
In January and February
2014, DSS Technology Management made investments of $100,000 and $400,000, respectively, to purchase an aggregate of 594,530 shares
of common stock of Express Mobile, Inc. (“Express Mobile”), which represented approximately 6% of the outstanding common
stock of Express Mobile at the time of investment. Express Mobile is a developer of custom mobile applications and websites. The
investments were recorded using the cost method and had a balance of $500,000 as of June 30, 2015 ($500,000 – December 31,
2014).
Intangible assets are comprised
of the following:
| |
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
Useful Life | |
Gross Carrying Amount | | |
Accumulated Amortizaton | | |
Net Carrying Amount | | |
Gross Carrying Amount | | |
Accumulated Amortizaton | | |
Net Carrying Amount | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| |
Acquired intangibles- customer lists and non-compete agreements | |
5 -10 years | |
$ | 1,997,300 | | |
$ | 1,592,207 | | |
$ | 405,093 | | |
$ | 1,997,300 | | |
$ | 1,532,123 | | |
$ | 465,177 | |
Acquired intangibles-patents and patent rights | |
Varied | (1) |
| 3,650,000 | | |
| 1,207,435 | | |
| 2,442,565 | | |
| 3,650,000 | | |
| 852,343 | | |
| 2,797,657 | |
Patent application costs | |
Varied | (2) |
| 1,062,070 | | |
| 464,688 | | |
| 597,382 | | |
| 1,058,833 | | |
| 413,268 | | |
| 645,565 | |
| |
| |
$ | 6,709,370 | | |
$ | 3,264,330 | | |
$ | 3,445,040 | | |
$ | 6,706,133 | | |
$ | 2,797,734 | | |
$ | 3,908,399 | |
(1) Acquired patents and patent
rights are amortized over their expected useful life which is generally the remaining legal life of the patent. As of June 30,
2015, the weighted average remaining useful life of these assets in service was approximately 4.9 years.
(2) Patent application costs
are amortized over their expected useful life which is generally the remaining legal life of the patent. As of June 30, 2015, the
weighted average remaining useful life of these assets in service was approximately 9.5 years.
Intangible asset amortization expense for
the six months ended June 30, 2015 amounted to $466,596 ($2,312,737 - June 30, 2014).
On January 5, 2015,
the United States District Court for the Northern District of California issued a decision granting summary judgment to defendant
Facebook, Inc. in connection with a lawsuit filed on October 3, 2012 by Plaintiff Bascom Research, LLC (a subsidiary of the Company)
alleging patent infringement. As a result of the Court’s decision, the Company evaluated the valuation of the patents that
were the basis of the case for impairment as of December 31, 2014. The Company determined that since the patents had been invalidated
the probability of future cash flows derived from the patents that would support the value of the assets had decreased so the assets
were impaired. As a result, the Company recorded an impairment charge for the underlying patent assets of the net book value of
the patents as of December 31, 2014 of approximately $22,285,000.
On March 3, 2015,
a Markman hearing was held in the Eastern District of Texas in connection with the pending DSS Technology Management v.Taiwan
Semiconductor Manufacturing Company, Limited, et. al (“TSMC”) case. Based on the District Court’s claim construction
order issued on April 9, 2015, the Company’s subsidiary, DSS Technology Management and TSMC entered in to a Joint Stipulation
and Proposed Final Judgment of Non-Infringement dated May 4, 2015, subject to DSS Technology Management’s right to appeal
the court’s claim construction decision to the Federal Circuit, thus preserving the status quo in the event an appeal results
in remand for further proceedings in the District Court. During its review for the quarter ended March 31, 2015, the Company determined
that this court action was a triggering event requiring that goodwill and certain of the Company’s intangible assets be
tested for impairment. Furthermore, during the quarters ended March 31, 2015 and June 30, 2015, the Company’s market capitalization
significantly declined and was considered an impairment indicator of goodwill in accordance with ASC 350-20. As such, the Company
performed impairment tests for goodwill and certain of its intangible assets as described below for the quarters ended March 31,
2015 and June 30, 2015, respectively.
In performing the impairment
analysis related to the Company’s subsidiary DSS Technology Management’s intangible assets, the Company determined
that the patent portfolio containing the patents being litigated in DSS Technology Management’s suits against TSMC, Samsung,
and Intel, among others, had a net carrying value of approximately $1.4 million as of March 31, 2015. In the second step of the
impairment test, the Company utilized its projections of future undiscounted cash flows based on the Company’s existing use
of the patents. As a result, it was determined that the Company’s projections of future undiscounted cash flows were greater
than the carrying value of the asset group. Accordingly, the Company did not perform the second step of the impairment test and
deemed no impairment had occurred.
As a result of
the aforementioned triggering events, during the quarters ended March 31, 2015 and June 30, 2015, the Company performed the
first step of the goodwill impairment test on the goodwill allocated to DSS Technology Management in order to identify
potential impairment by comparing the fair value of the reporting unit with its carrying amount, including goodwill. The
carrying amount of the Company’s goodwill as of March 31, 2015 and June 30, 2015 was approximately $12 million of
which approximately $9.6 million is allocated to the Company’s subsidiary DSS Technology Management as a reportable
unit. For the Company’s DSS Technology Management reporting unit, a significant amount of future value is based on the
value of patents and patent rights, the Company uses a valuation methodology that assess the potential value of the
claims against parties the Company believes have infringed on the patents and therefore, the Company has the rights to
receive royalties for those infringers. The Company assessed the impact of the decision in the TSMC case referenced above on
the expected future value of those assets. Based on the Company’s analysis, the Company determined that the fair value
of the reporting unit exceeded the carrying value of the reporting unit, and therefore, no impairment of goodwill
had occurred during each of the periods tested.
| 5. | Short-Term and Long-Term Debt |
Revolving Credit
Lines - The Company’s subsidiary Premier Packaging Corporation (“Premier Packaging”)
has a revolving credit line with Citizens Bank of up to $800,000 (as amended on April 28, 2015) that bears interest at 1 Month
LIBOR plus 3.75% (3.93% as of June 30, 2015) and matures on May 31, 2016 (as amended on April 28, 2015) . As of June 30, 2015,
the revolving line had a balance of $0 ($0 as of December 31, 2014).
Long-Term Debt
- On December 30, 2011, the Company issued a $575,000 convertible note that was due on December 29,
2013, and carries an interest rate of 10% per annum. Interest is payable quarterly, in arrears. The convertible note was convertible
at any time during the term at lender’s option into a total of 260,180 shares of the Company’s common stock at a conversion
price of $2.21 per share. On February 23, 2015, the Company entered into Convertible Promissory Note Amendment No. 2 to extend
the maturity date to December 30, 2016, eliminate the conversion feature, and to institute principal payments in the amount of
$15,000 per month plus interest through the extended maturity date, and a balloon payment of $230,000 due on the extended maturity
date. As of June 30, 2015, the balance of the note was $500,000 ($604,000 at December 31, 2014).
On May 24, 2013, the
Company entered into a promissory note in the principal sum of $850,000 to purchase three printing presses that were previously
leased by the Company’s wholly-owned subsidiary, Secuprint Inc., and carries an interest rate of 9% per annum. Interest is
payable quarterly, in arrears. On February 23, 2015, the Company entered into Promissory Note Amendment No. 2 to extend the maturity
date to May 31, 2016 and to institute principal payments in the amount of $15,000 per month plus interest through the extended
maturity date, and a balloon payment of $610,000 due on the extended maturity date. As of June 30, 2015, the balance of the term
loan was $775,000 ($850,000 at December 31, 2014).
Term Loan Debt
- On October 8, 2010, Premier Packaging amended its credit facility agreement with Citizens Bank to add a standby
term loan note pursuant to which Citizens Bank was to provide Premier Packaging with up to $450,000 towards the funding of eligible
equipment purchases for up to one year. In October 2011, the Company had borrowed $42,594 under the facility which amount was converted
into a term note payable in 60 monthly installments of $887 plus interest at 1 Month LIBOR plus 3% (3.18% at June 30, 2015). As
of June 30, 2015, the balance under this term note was $14,197 ($19,522 at December 31, 2014).
On July 19, 2013, Premier
Packaging entered into an equipment loan with People’s Capital and Leasing Corp. (“Peoples Capital”) for a printing
press. The loan was for $1,303,900, repayable over a 60-month period which commenced when the equipment was placed in service
in January 2014. The loan bears interest at 4.84% and is payable in equal monthly installments of $24,511. As of June 30, 2015,
the loan had a balance of $945,130 ($1,067,586 at December 31, 2014).
On April 28, 2015,
Premier Packaging entered into a term note with Citizens for $525,000, repayable over a 60-month period. The loan bears interest
at 3.61% and is payable in equal monthly installments of $9,591. Premier Packaging used the proceeds of the term note to acquire
a HP Indigo 7800 Digital press. As of June 30, 2015, the loan had a balance of $509,009.
Promissory Notes
- On August 30, 2011, Premier Packaging purchased the packaging plant
it occupies in Victor, New York, for $1,500,000, which was partially financed with a $1,200,000 promissory note obtained from Citizens
Bank (“Promissory Note”). The Promissory Note calls for monthly payments of principal and interest in the amount of
$7,658, with interest calculated as 1 Month LIBOR plus 3.15% (3.33% at June 30, 2015). Concurrently with the transaction, the Company
entered into an interest rate swap agreement to lock into a 5.87% effective interest rate for the life of the loan. The Promissory
Note matures in August 2021 at which time a balloon payment of the remaining principal balance will be due. As of June 30, 2015,
the Promissory Note had a balance of $1,050,203 ($1,078,220 at December 31, 2014).
On December 6, 2013,
Premier Packaging entered into a Construction to Permanent Loan with Citizens Bank for up to $450,000 that was converted into a
promissory note upon the completion and acceptance of building improvements to the Company’s packaging plant in Victor, New
York. In May 2014, the Company converted the loan into a $450,000 note payable in monthly installments over a 5 year period of
$2,500 plus interest calculated at a variable rate of 1 Month Libor plus 3.15% (3.33% at June 30, 2015), which payments commenced
on July 1, 2014. The note matures in July 2019 at which time a balloon payment of the remaining principal balance of $300,000 is
due. As of June 30, 2015, the note had a balance of $420,247 ($435,000 at December 31, 2014).
Under the Citizens
Bank credit facilities, the Company’s subsidiary, Premier Packaging, is subject to various covenants including fixed charge
coverage ratio, tangible net worth and current ratio covenants. For the quarters ended March 31, 2015 and June 30, 2015, Premier
Packaging was in compliance with the covenants. The Citizens Bank obligations are secured by all of the assets of Premier Packaging
and are also secured through cross guarantees by the Company and its other wholly-owned subsidiaries, Plastic Printing Professionals
and Secuprint.
Promissory Notes
and other long-term liabilities - On February 13, 2014, the Company’s subsidiary, DSS Technology Management,
entered into an agreement with certain investors pursuant to which the Company contracted to receive a series of advances up to
$4,500,000 from the investors in exchange for promissory notes, fixed return interests and contingent interests collateralized
by certain of the Company’s intellectual property (the “Agreement”). The notes bear interest at 1.95% and are
subject to various covenants and will also be subject to a Make Whole Amount calculation (as defined in the Agreement), which would
result in an effective annual interest rate of approximately 4.23% for the term thereof, assuming no prepayments. At the Company’s
option, it may pay accrued interest when due on the Notes, or elect to capitalize the accrued interest, adding it to the principal
thereof. The maturity date of all the Notes is the date four years after issuance (February 13, 2018) of the Initial Advance Note.
As of June 30, 2015, an aggregate of $4,133,000 ($4,089,000 as of December 31, 2014) was outstanding which includes $92,000 of
accrued interest. In addition, $459,000 ($459,000 as of December 31, 2014) was outstanding under the fixed return equity interest
and contingent equity interests which is included in other long-term liabilities on the balance sheet. See Note 7 - Commitments
and Contingencies.
On February 23, 2015,
the Company amended two of its debt obligations that, among other things, extended the maturity dates of the notes, instituted
principal payments for the notes, and eliminated a conversion feature on one of the notes. In conjunction with these agreements,
the Company issued an aggregate of 100,000 shares of its common stock with a grant date fair value of $41,000.
Restricted Shares
– In January 2015, the Company issued an aggregate of 30,000 shares of restricted common stock to certain members
of the Company’s board in exchange for agreements by the board members to reduce their cash compensation for the fiscal year
of 2015. The restricted shares will vest on August 15, 2015 and had an aggregate grant date fair value of approximately $11,000.
Stock Options
- In January 2015, the Company issued an aggregate of 53,550 options to purchase shares of the Company’s common stock with
an exercise price of $0.60 per share to certain members of the Company’s board in exchange for agreements by the board members
to reduce their cash compensation for the fiscal year of 2015. The options shares will vest on August 15, 2015 and had an aggregate
grant date fair value of approximately $6,000. The aggregate fair value of these options was determined by utilizing the Black-Scholes-Merton
option pricing model with a volatility of 72.6%, a risk free rate of return of 1.66% and zero dividend and forfeiture estimates.
Stock-Based Payments
and Compensation - The Company records stock-based payment expense related to options and warrants based on the grant date
fair value in accordance with FASB ASC 718. Stock-based compensation includes expense charges for all stock-based awards to employees,
directors and consultants. Such awards include option grants, warrant grants, and restricted stock awards. During the six months
ended June 30, 2015, the Company had stock compensation expense of approximately $643,000 or $0.01 basic and diluted earnings per
share ($841,000; $0.02 basic earnings per share for the corresponding six months ended June 30, 2014).
As of June 30, 2015,
there was approximately $685,000 of total unrecognized compensation costs related to options, warrants and restricted stock granted
under the Company’s stock option plans that will be recognized over the next 12 months. This amount excludes $536,000 of
potential stock based compensation for stock options that vest upon the occurrence of certain events which the Company does not
believe are likely.
| 7. | Commitments and Contingencies |
On October 24, 2011
the Company initiated a lawsuit against Coupons.com Incorporated (“Coupons.com”). The suit was filed in the United
States District Court, Western District of New York, located in Rochester, New York. Coupons.com is a Delaware corporation having
its principal place of business located in Mountain View, California. In the Coupons.com suit, the Company alleged breach of contract,
misappropriation of trade secrets, unfair competition and unjust enrichment, and sought in excess of $10 million in money damages
from Coupons.com for those claims. On October 28, 2014, the District Court granted Coupons.com’s motion for summary judgment,
dismissing the case. On November 25, 2014, the Company appealed that decision to the United States Court of Appeals for the Second
Circuit. On March 5, 2015, the parties entered into a Stipulation whereby the Company withdrew the appeal without prejudice so
that the parties could complete settlement negotiations. On March 31, 2015, a confidential settlement was reached by the parties,
ending the case.
On November 26, 2013,
DSS Technology Management filed suit against Apple, Inc. (“Apple”) in the United States District Court for the Eastern
District of Texas, for patent infringement (the “Apple Litigation”). The Apple Litigation relates to certain patents
owned by DSS Technology Management in the Bluetooth technology space. DSS Technology Management is seeking a judgment for infringement,
injunctive relief, and compensatory damages from Apple. On October 28, 2014, the case was stayed by the District Court pending
a determination of Apple’s motion to transfer the case to the Northern District of California. On November 7, 2014, Apple’s
motion to transfer the case to the Northern District of California was granted. On December 30, 2014, Apple filed two petitions
for Inter Partes Review (“IPRs”) of the patents at issue in the case with the PTAB. DSS Technology Management filed
its responses to the petitions on March 30, 2015. On May 1, 2015, the District Court issued an order granting Apple’s motion
to stay the case until the IPRs are decided. On June 25, 2015, the PTAB instituted the IPR of Apple’s claims.
On March 10, 2014,
DSS Technology Management filed suit in the United States District Court for the Eastern District of Texas against Taiwan Semiconductor
Manufacturing Company, TSMC North America, TSMC Development, Inc. (referred to collectively as “TSMC”), Samsung Electronics
Co., Ltd., Samsung Electronics America, Inc., Samsung Telecommunications America L.L.C., Samsung Semiconductor, Inc., Samsung Austin
Semiconductor LLC (referred to collectively as “Samsung”), and NEC Corporation of America (referred to as “NEC”),
for patent infringement involving certain of its semiconductor patents. DSS Technology Management is seeking a judgment for infringement,
injunctive relief, and money damages from each of the named defendants. In June 2014, TSMC filed a petition for Inter Partes Review
of the patents at issue with the PTAB. DSSTM filed its preliminary response to the petition in October 2014. Samsung also filed
an IPR relating to the same patents in September 2014. DSSTM filed its preliminary response to that petition in December, 2014.
On December 31, 2014, the PTAB instituted review of several of the patent claims at issue in the case. Samsung filed a motion with
PTAB to join TSMC’s IPR proceeding. The request was granted by the PTAB. On March 3, 2015, a Markman hearing was held in
the Eastern District of Texas. Based on the District Court’s claim construction order issued on April 9, 2015, DSS Technology
Management and TSMC entered in to a Joint Stipulation and Proposed Final Judgment of Non-Infringement dated May 4, 2015, subject
to DSS Technology Management’s right to appeal the court’s claim construction decision to the Federal Circuit, thus
preserving the status quo in the event an appeal results in remand for further proceedings in the District Court. On April 28,
2015, DSS Technology Management reached a confidential settlement with NEC. A PTAB hearing was scheduled for August 12, 2015 in
connection with the pending TSMC/Samsung IPR proceeding.
On May 30, 2014, DSS
Technology Management filed suit against Lenovo (United States), Inc. (“Lenovo”) in the United States District Court
for the Eastern District of Texas, for patent infringement. The complaint alleged infringement by Lenovo of one of DSS Technology
Management’s patents that relates to systems and methods of using low power wireless peripheral devices. DSS Technology Management
is seeking judgment for infringement and money damages from Lenovo in connection with the case. On April 27, 2015, Lenovo moved
for summary judgment in the District Court on the grounds that the patent at issue is invalid for indefiniteness. On June 17, 2015, the parties entered in to a confidential non-suit agreement which ended the
litigation with Lenovo.
On February 16, 2015,
DSS Technology Management filed suit in the United States District Court, Eastern District of Texas, against defendants Intel Corporation,
Dell, Inc., GameStop Corp., Conn’s Inc., Conn Appliances, Inc., NEC Corporation of America, Wal-Mart Stores, Inc., Wal-Mart
Stores Texas, LLC, and AT&T, Inc. The complaint alleges patent infringement and seeks judgment for infringement of two of DSSTM’s
patents, injunctive relief and money damages. The case is currently in the initial pleadings stage. On April 28, 2015, a confidential
settlement was reached with NEC. On June 29, 2015, Intel filed its Answer to the complaint and also filed a motion to have the
case transferred to the Northern District of California, which motion is currently pending as of the date of this report.
On April 28, 2015,
the Company was served with a shareholder derivative lawsuit that was filed in the Supreme Court of the State of New York, County
of Kings: Benjamin Lapin, Derivatively on Behalf of Himself and All Others Similarly Situated, Plaintiff v. Robert Fagenson, Jeffrey
Ronaldi, Peter Hardigan, Robert Bzdick, Jonathon Perrelli, Warren Hurwitz, Ira Greenstein, David Klein and Philip Jones, Defendants,
and Document Security Systems, Inc., Nominal Defendant. The complaint alleges, among other things, breach of fiduciary duty, gross
mismanagement, abuse of control, and waste of corporate assets since October 2, 2012, and alleges that demand on the Board of Directors
to take action would be futile. The complaint seeks unspecified damages, attorneys’ fees, and other costs and expenses. The
Company believes that all of the claims in this lawsuit are without merit and intends to vigorously defend against these claims,
but is unable to predict the outcome or reasonably estimate a range of possible loss. On June 29, 2015, the Company filed a motion
to dismiss the suit, which motion is currently pending as of the date of this report.
On July 16, 2015, DSS
Technology Management filed three separate lawsuits in the United States District Court for the Eastern District of Texas alleging
infringement of one of its semiconductor patents. The defendants are SK Hynix et al., Samsung Electronics et al., and
Qualcomm Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief
and money damages. These cases are currently in the initial pleadings stage.
In addition to the
foregoing, we are subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally
adjudicated. The Company accrues for potential litigation losses when a loss is probable and estimable.
Contingent
Litigation Payments – The
Company retains the services of professional service providers, including law firms that specialize in intellectual property licensing,
enforcement and patent law. These service providers are often retained on an hourly, monthly, project, contingent or a blended
fee basis. In contingency fee arrangements, a portion of the legal fee is based on predetermined milestones or the Company’s
actual collection of funds. The Company accrues contingent fees when it is probable that the milestones will be achieved and the
fees can be reasonably estimated. As of June 30, 2015, the Company has not accrued any contingent legal fees pursuant to these
arrangements.
Contingent
Payments – The
Company is party to certain agreements with funding partners who have rights to portions of intellectual property monetization
proceeds that the Company receives. As of June 30, 2015, there are no contingent payments due.
Related Party
Consulting Payments – During 2015 the Company paid consulting fees of approximately $35,000 to
Patrick White, its former CEO, under a consulting agreement that expired on February 28, 2015.
| 8. | Supplemental Cash Flow Information |
Supplemental cash flow information for the
six months ended June 30, 2015 and 2014 is approximately as follows:
| |
2015 | | |
2014 | |
| |
| | |
| |
Cash paid for interest | |
$ | 125,000 | | |
$ | 151,000 | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Gain (Loss) from change in fair value of interest rate swap derivatives | |
$ | 3,000 | | |
$ | (25,000 | ) |
Accrued liabilities with related parties settled with equity | |
$ | - | | |
$ | 134,000 | |
Financing of equipment purchases | |
$ | 525,000 | | |
$ | - | |
Financing of building improvements | |
$ | - | | |
$ | 200,000 | |
Change in non-controlling interest | |
$ | - | | |
$ | 200,000 | |
The
Company’s businesses are organized, managed and internally reported as four operating segments. Two of these operating
segments, Packaging and Printing, and Plastics are engaged in the printing and production of paper, cardboard and plastic documents
with a wide range of features, including the Company’s patented technologies and trade secrets designed for the protection
of documents against unauthorized duplication and altering. The two other operating segments, ExtraDev,
Inc., dba DSS Digital Group, and DSS Technology Management, Inc., are engaged in various aspects of developing, acquiring, selling
and licensing technology assets and are grouped into one reportable segment called Technology.
Approximate information
concerning the Company’s operations by reportable segment for the three and six months ended June 30, 2015 and 2014 is as
follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently,
would report the results contained herein:
Three Months Ended June 30, 2015 | |
Packaging and Printing | | |
Plastics | | |
Technology | | |
Corporate | | |
Total | |
Revenues from external customers | |
$ | 2,710,000 | | |
| 974,000 | | |
| 512,000 | | |
| - | | |
$ | 4,196,000 | |
Depreciation and amortization | |
| 144,000 | | |
| 28,000 | | |
| 217,000 | | |
| 2,000 | | |
| 391,000 | |
Stock based compensation | |
| 18,000 | | |
| 10,000 | | |
| 34,000 | | |
| 256,000 | | |
| 318,000 | |
Net income (loss) | |
| 94,000 | | |
| 11,000 | | |
| (372,000 | ) | |
| (776,000 | ) | |
| (1,043,000 | ) |
Six Months Ended June 30, 2015 | |
Packaging and Printing | | |
Plastics | | |
Technology | | |
Corporate | | |
Total | |
Revenues from external customers | |
$ | 4,792,000 | | |
| 1,912,000 | | |
| 922,000 | | |
| - | | |
$ | 7,626,000 | |
Depreciation and amortization | |
| 272,000 | | |
| 61,000 | | |
| 433,000 | | |
| 4,000 | | |
| 770,000 | |
Stock based compensation | |
| 35,000 | | |
| 20,000 | | |
| 67,000 | | |
| 521,000 | | |
| 643,000 | |
Net income (loss) | |
| 135,000 | | |
| 98,000 | | |
| (1,427,000 | ) | |
| (1,496,000 | ) | |
| (2,690,000 | ) |
Identifiable assets | |
| 9,461,000 | | |
| 2,017,000 | | |
| 12,911,000 | | |
| 1,562,000 | | |
| 25,951,000 | |
Three Months Ended June 30, 2014 | |
Packaging and Printing | | |
Plastics | | |
Technology | | |
Corporate | | |
Total | |
Revenues from external customers | |
$ | 3,503,000 | | |
| 899,000 | | |
| 481,000 | | |
| - | | |
$ | 4,883,000 | |
Depreciation and amortization | |
| 106,000 | | |
| 44,000 | | |
| 1,127,000 | | |
| 11,000 | | |
| 1,288,000 | |
Stock based compensation | |
| 18,000 | | |
| 10,000 | | |
| 24,000 | | |
| 241,000 | | |
| 293,000 | |
Net income (loss) | |
| 263,000 | | |
| (13,000 | ) | |
| (1,557,000 | ) | |
| (1,037,000 | ) | |
| (2,344,000 | ) |
Six Months Ended June 30, 2014 | |
Packaging and Printing | | |
Plastics | | |
Technology | | |
Corporate | | |
Total | |
Revenues from external customers | |
$ | 5,746,000 | | |
| 1,820,000 | | |
| 945,000 | | |
| - | | |
$ | 8,511,000 | |
Depreciation and amortization | |
| 256,000 | | |
| 87,000 | | |
| 2,245,000 | | |
| 14,000 | | |
| 2,602,000 | |
Stock based compensation | |
| 92,000 | | |
| 52,000 | | |
| 117,000 | | |
| 579,000 | | |
| 840,000 | |
Net income (loss) | |
| 199,000 | | |
| (22,000 | ) | |
| (3,236,000 | ) | |
| (2,340,000 | ) | |
| (5,399,000 | ) |
Identifiable assets | |
| 9,143,000 | | |
| 2,059,000 | | |
| 53,786,000 | | |
| 1,321,000 | | |
| 66,309,000 | |
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain
statements contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995 (the “1995 Reform Act”). Document Security Systems, Inc. desires to avail itself of certain “safe
harbor” provisions of the 1995 Reform Act and is therefore including this special note to enable us to do so. Except for
the historical information contained herein, this report contains forward-looking statements (identified by the words “estimate”,
“project”, “anticipate”, “plan”, “expect”, “intend”, “believe”,
“hope”, “strategy” and similar expressions), which are based on our current expectations and speak only
as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors, as previously set
forth in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2014, and supplemented in the
Risk Factors sections of our previously filed Form 10-Q for the first quarter of 2015 and this report, that could cause actual
results to differ materially from the results anticipated in the forward-looking statements.
Overview
Document Security Systems,
Inc. (referred to in this report as “Document Security Systems”, “DSS”, “we”, “us”,
“our” or “Company”) was formed in New York in 1984 and, in 2002, chose to strategically focus on becoming
a developer and marketer of secure technologies. We specialize in fraud and counterfeit protection for all forms of printed documents
and digital information. The Company holds numerous patents for optical deterrent technologies that provide protection of printed
information from unauthorized scanning and copying. We operate two production facilities, consisting of a combined security printing
and packaging facility and a plastic card facility where we produce secure and non-secure documents for our customers. We license
our anti-counterfeiting technologies to printers and brand-owners. In addition, we have a digital division which provides cloud
computing services for its customers, including disaster recovery, back-up and data security services. In 2013, the Company expanded
its business focus by merging with DSS Technology Management, Inc., formerly known as Lexington Technology Group, Inc., which acquires
intellectual property assets and interests in companies owning intellectual property assets for the purpose of monetizing these
assets through a variety of value-enhancing initiatives, including, but not limited to, investments in the development and commercialization
of patented technologies, licensing, strategic partnerships and litigation.
Prior to 2006, our
primary revenue source in our document security division was derived from the licensing of our technology. In 2006, we began a
series of acquisitions designed to expand our ability to produce products for end-user customers. In 2006, we acquired Plastic
Printing Professionals, Inc. (“P3”), a privately held plastic cards manufacturer located in the San Francisco, California
area. P3 is also referred to herein as the “DSS Plastics Group”. In 2008, we acquired substantially all of the assets
of DPI of Rochester, LLC, a privately held commercial printer located in Rochester, New York, referred to herein as “Secuprint”
or “DSS Printing Group”. In 2010, we acquired Premier Packaging Corporation, a privately held packaging company located
in the Rochester, New York area. Premier Packaging Corporation is also referred to herein as “Premier Packaging” or
the “DSS Packaging Group.” In May 2011, we acquired all of the capital stock of ExtraDev, Inc. (“ExtraDev”),
a privately held information technology and cloud computing company located in the Rochester, New York area. ExtraDev is also referred
to herein as the “DSS Digital Group”.
On July 1, 2013, we
merged with DSS Technology Management, Inc. (formerly known as Lexington Technology Group, Inc.), a private intellectual property
monetization company. DSS Technology Management, Inc. is also referred to herein as “DSS Technology Management” or
“DSSTM”. DSS Technology Management is focused on extracting the economic benefits of intellectual property assets through
acquiring or internally developing patents or other intellectual property assets (or interests therein) and then monetizing such
assets through a variety of value enhancing initiatives.
In January 2014, we moved our printing operation
to the same location as our packaging operation in Victor, New York in an effort to make our printing and packaging operations
more efficient.
We do business in four operating segments
as follows:
DSS Packaging
and Printing Group - Produces custom paperboard packaging serving clients in the pharmaceutical, beverage, photo
packaging, toy, specialty foods and direct marketing industries, among others. The group also provides secure and commercial printing
services for end-user customers along with technical support for our technology licensees. The division produces a wide array of
printed materials such as security paper, vital records, prescription paper, birth certificates, receipts, manuals, identification
materials, entertainment tickets, secure coupons, parts tracking forms, brochures, direct mailing pieces, catalogs, business cards,
etc. The division also provides resources and production equipment resources for our ongoing research and development of security
printing and related technologies.
DSS Plastics
Group - Manufactures laminated and surface printed cards which can include magnetic stripes, bar codes, holograms,
signature panels, invisible ink, micro fine printing, guilloche patterns, biometric, radio frequency identification (RFID) and
watermarks for printed plastic documents such as ID cards, event badges, and driver’s licenses.
DSS Digital Group - Provides
data center centric solutions to businesses and governments delivered via the “cloud”. This division developed an iPhone
based application that integrates some of our traditional optical deterrent technologies into proprietary digital data security
based solutions for brand protection and product diversion prevention.
DSS Technology
Management - Acquires or internally develops patented technology or intellectual property assets (or interests
therein), with the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited
to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships and commercial
litigation. Since 2013, DSS Technology Management has been involved in several patent litigation lawsuits, and as of the date of
this filing, has active litigation against several companies, as summarized below.
On January 5, 2015,
the United States District Court for the Northern District of California issued a decision granting summary judgment to defendants
Facebook and LinkedIn, effectively ending the case at the trial court level. On January 22, 2015, Bascom Research, LLC, a
subsidiary of DSS Technology Management, Inc. (“DSS Technology Management”), and Facebook, entered into a Stipulation
filed with the District Court whereby Bascom Research agreed not to appeal the District Court’s judgment, and Facebook agreed
to request the dismissal of its pending CBM with PTAB. On February 19, 2015, Facebook and Bascom Research filed a joint motion
with the Patent Trial and Appeal Board (“PTAB”) to terminate the Covered Business Method (“CBM”) proceeding.
The CBM proceeding was terminated on February 24, 2015.
On November 26, 2013,
DSS Technology Management filed suit against Apple, Inc. (“Apple”) in the United States District Court for the Eastern
District of Texas, for patent infringement. The complaint alleged infringement by Apple of two of DSS Technology Management’s’s
patents that relate to systems and methods of using low power wireless peripheral devices. DSS Technology Management is seeking
a judgment for infringement and money damages from Apple in connection with the case. On October 28, 2014, the case was stayed
by the District Court pending a determination of Apple’s motion to transfer the case to the Northern District of California,
which was filed on March 3, 2014. On November 7, 2014, Apple’s motion to transfer the case was granted. On December 30, 2014,
Apple filed two petitions for inter partes review (“IPRs”) of the patents at issue with the PTAB. DSS Technology Management’s
filed its responses to the petitions on March 30, 2015. On May 1, 2015, the District Court issued an order granting Apple’s
motion to the stay the case until the IPRs are decided. On June 25, 2015, the PTAB instituted the IPR of Apple’s
claims.
On March 10, 2014,
DSS Technology Management filed suit in the United States District Court for the Eastern District of Texas against Taiwan Semiconductor
Manufacturing Company, TSMC North America, TSMC Development, Inc. (referred to collectively as “TSMC”), Samsung Electronics
Co., Ltd., Samsung Electronics America, Inc., Samsung Telecommunications America L.L.C., Samsung Semiconductor, Inc., Samsung Austin
Semiconductor LLC (referred to collectively as “Samsung”), and NEC Corporation of America (referred to as “NEC”),
for patent infringement involving one of its semiconductor patents. In this case, DSS Technology Management is seeking a judgment
for infringement, injunctive relief, and money damages from each of the named defendants. On June 24, 2014, TSMC filed a petition
for Inter Partes Review with the PTAB, and DSS Technology Management filed its preliminary response to that petition on October
17, 2014. Samsung filed an IPR relating to the same patents on September 12, 2014, and filed a corrected IPR on October 3, 2014.
DSS Technology Management filed its preliminary response to the Samsung IPR in December, 2014. On December 31, 2014, the PTAB instituted
review of several of the patent claims at issue in the case. Samsung filed a motion with PTAB to join TSMC’s IPR proceeding.
The request was granted by the PTAB. A PTAB hearing is currently scheduled for August 12, 2015 in connection with the pending TSMC/Samsung
IPR proceeding.
On March 3, 2015, a
Markman hearing was held in the Eastern District of Texas. Based on the District Court’s claim construction order issued
on April 9, 2015, DSS Technology Management and TSMC entered in to a Joint Stipulation and Proposed Final Judgement of Non-Infringement
dated May 4, 2015, subject to DSS Technology Management’s right to appeal the court’s claim construction decision to
the Federal Circuit, thus preserving the status quo in the event an appeal results in remand for further proceedings in the District
Court. On April 28, 2015, DSS Technology Management reached a confidential settlement with NEC.
On May 30, 2014, DSS
Technology Management filed suit against Lenovo (United States), Inc. (“Lenovo”) in the United States District Court
for the Eastern District of Texas, for patent infringement. The complaint alleges infringement by Lenovo of one of DSS Technology
Management’s patents that relates to systems and methods of using low power wireless peripheral devices. DSS Technology Management
is seeking judgment for infringement and money damages from Lenovo in connection with the case. On April 27, 2015, Lenovo moved
for summary judgment in the District Court on the grounds that the patent at issue is invalid for indefiniteness. A decision on
the motion is currently pending. On June 17, 2015, the parties entered in to a confidential non-suit agreement which ended the
litigation with Lenovo.
On February 16, 2015,
DSS Technology Management filed suit in the United States District Court, Eastern District of Texas, against defendants Intel Corporation,
Dell, Inc., GameStop Corp., Conn’s Inc., Conn Appliances, Inc., NEC Corporation of America, Wal-Mart Stores, Inc., Wal-Mart
Stores Texas, LLC, and AT&T, Inc. The complaint alleges patent infringement and seeks a judgment for infringement of two of
DSSTM’s patents, injunctive relief and money damages. The case is currently in the initial pleadings stage. On April 28,
2015, a confidential settlement was reached with NEC. On June 29, 2015, Intel filed its Answer to the complaint and also filed
a motion to have the case transferred to the Northern District of California, which motion is currently pending as of the date
of this report.
On July 16, 2015, DSS
Technology Management filed three separate lawsuits in the United States District Court for the Eastern District of Texas alleging
infringement of one of its semiconductor patents. The defendants are SK Hynix et al., Samsung Electronics et al., and
Qualcomm Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief
and Money damages. These cases are currently in the initial pleadings stage.
Results
of Operations for the Three and Six Months Ended June 30, 2015 Compared to the Three and Six Months Ended June 30, 2014
This discussion should
be read in conjunction with the financial statements and footnotes contained in this quarterly report and in our Annual Report
on Form 10-K for the year ended December 31, 2014.
Revenue
| |
Three Months
Ended June 30, 2015 | | |
Three Months
Ended June 30, 2014 | | |
% change | | |
Six Months
Ended June 30, 2015 | | |
Six Months
Ended June 30, 2014 | | |
% change | |
Revenue | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Printed products | |
$ | 3,683,000 | | |
$ | 4,407,000 | | |
| -16 | % | |
$ | 6,703,000 | | |
$ | 7,571,000 | | |
| -11 | % |
Technology sales, services and licensing | |
| 513,000 | | |
| 476,000 | | |
| 8 | % | |
| 922,000 | | |
| 940,000 | | |
| -2 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total revenue | |
$ | 4,196,000 | | |
$ | 4,883,000 | | |
| -14 | % | |
$ | 7,625,000 | | |
$ | 8,511,000 | | |
| -10 | % |
For the three months
ended June 30, 2015, total revenue was approximately $4.2 million, representing a decrease of 14% from the corresponding three
months ended June 30, 2014. Revenues from the sale of printed products decreased 16% during the three months ended June 30, 2015,
as compared to the same period in 2014, which reflected a decrease in revenues from packaging and commercial printing sales offset
by an increase in plastic card sales. Technology sales, services and licensing revenue increased 8% which reflected an increase
in licensing revenues due to an increase in one-time license agreements signed during the quarter offset in 2015 by a 29% decrease
in revenues from the sale of the Company’s digital products during the three months ended June 30, 2015, as compared to the
same period in 2014.
For the six months
ended June 30, 2015, total revenue was approximately $7.6 million, representing a decrease of 10% from the corresponding six months
ended June 30, 2014. During the same period, revenues from the sale of printed products decreased 11% as compared to the same period
in 2014, which reflected a decrease in revenues from packaging and commercial printing sales offset by an increase in security
printing and plastic card sales. Technology sales, services and licensing revenue decreased 2% which reflected an increase in licensing
revenues due to an increase in one-time license agreements signed during the second quarter offset by a 19% decrease in revenues
from the sale of the Company’s digital products during the six months ended June 30, 2015, as compared to the same period
in 2014.
Costs and expenses
| |
Three Months
Ended June 30,
2015 | | |
Three Months
Ended June 30,
2014 | | |
% change | | |
Six Months
Ended June 30,
2015 | | |
Six Months
Ended June 30,
2014 | | |
% change | |
Costs and expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of goods sold, exclusive of depreciation and amortization | |
$ | 2,663,000 | | |
$ | 3,197,000 | | |
| -17 | % | |
$ | 4,650,000 | | |
$ | 5,395,000 | | |
| -14 | % |
Sales, general and administrative compensation | |
| 1,007,000 | | |
| 1,154,000 | | |
| -13 | % | |
| 2,013,000 | | |
| 2,446,000 | | |
| -18 | % |
Depreciation and amortization | |
| 391,000 | | |
| 1,288,000 | | |
| -70 | % | |
| 770,000 | | |
| 2,602,000 | | |
| -70 | % |
Professional fees | |
| 307,000 | | |
| 502,000 | | |
| -39 | % | |
| 1,026,000 | | |
| 1,042,000 | | |
| -2 | % |
Stock based compensation | |
| 318,000 | | |
| 294,000 | | |
| 8 | % | |
| 643,000 | | |
| 841,000 | | |
| -24 | % |
Sales and marketing | |
| 90,000 | | |
| 128,000 | | |
| -30 | % | |
| 193,000 | | |
| 301,000 | | |
| -36 | % |
Rent and utilities | |
| 165,000 | | |
| 181,000 | | |
| -9 | % | |
| 324,000 | | |
| 366,000 | | |
| -11 | % |
Other operating expenses | |
| 233,000 | | |
| 242,000 | | |
| -4 | % | |
| 413,000 | | |
| 466,000 | | |
| -11 | % |
Research and development | |
| 117,000 | | |
| 112,000 | | |
| 4 | % | |
| 233,000 | | |
| 226,000 | | |
| 3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total costs and expenses | |
$ | 5,291,000 | | |
$ | 7,098,000 | | |
| -25 | % | |
$ | 10,265,000 | | |
$ | 13,685,000 | | |
| -25 | % |
Costs of goods sold,
exclusive of depreciation and amortization includes all direct costs of printed products revenues, including materials,
direct labor, transportation and manufacturing facility costs. In addition, this category includes all direct costs associated
with technology sales, services and licensing including hardware and software that are resold, third-party fees, and fees paid
to inventors or others as a result of technology licenses or settlements, if any. Costs of goods sold decreased 17% during the
three months ended June 30, 2015 as compared to the same period in 2014. The decrease exceeded the correlated decrease in revenue
experienced by the Company during the period primarily due to the increase in higher margin license revenue that offset decreases
in lower margin revenue during the quarter. Costs of goods sold decreased 14% during the six months ended June 30, 2015 as compared
to the same period in 2014. The decrease exceeded the correlated decrease in revenue experienced by the Company during the period
primarily due to the increase in higher margin license revenue that offset decreases in lower margin revenue during the first six
months of 2015 as compared to the same period in 2014.
Sales, general and
administrative compensation costs, excluding stock-based compensation, decreased 13% and 18% during the three and six months
ended June 30, 2015, respectively, as compared to the same periods in 2014, primarily due to a reduction of employee headcount,
a reduction in bonus compensation and a reduction in executive management compensation.
Depreciation and
amortization includes the depreciation of machinery and equipment used for production, depreciation of office equipment and
building and leasehold improvements, amortization of software, and amortization of acquired intangible assets such as customer
lists, trademarks, non-compete agreements and patents, and internally developed patent assets. Depreciation and amortization decreases
during the three and six months ended June 30, 2015 as compared to the same periods in 2014, were due to the significant decrease
in the carrying value of the Company’s patent assets as a result of impairments recognized by the Company in the fourth quarter
of 2014.
Professional fees
decreased 39% for the three months ended June 30, 2015 as compared to the same period in 2014. The second quarter 2015 decrease
was primarily due to the decreases in accounting, consulting and investor relations costs for the quarter. For the six months ended
June 30, 2015, professional fees decreased 2%, as compared to the same time period in 2014, as a result of decreases in accounting,
consulting and investor relations costs which were partially offset by increases in legal costs, of which a significant portion
was incurred in the first three months of 2015 in conjunction with the Company’s intellectual property monetization business.
Stock-based
compensation includes expense charges for all stock-based awards to employees, directors and consultants. Such awards
include option grants, warrant grants, and restricted stock awards. Stock-based compensation costs for the three months ended
June 30, 2015 increased 8% and decreased 24% during the six months ended June 30, 2015 as compared to the same periods in
2014, which reflect changes in the number and value of equity compensation being granted by the Company since 2014.
Sales and marketing
costs, which includes internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and
trade show participation expenses, decreased 30% and 36% during the three and six months ended June 30, 2015, respectively, as
compared to the same periods in 2014, primarily due to decreases in travel and marketing study costs.
Rent and utilities
decreased 9% and 11% during the three and six months ended June 30, 2015, respectively, as compared to the same periods in
2014, due to decreases in rented space costs utilized by the Company’s Technology Management division along with reductions
in utilities costs incurred by the Company’s printed products division.
Other
operating expenses consist primarily of equipment maintenance and repairs, office supplies, IT support, bad debt expense
and insurance costs. Other operating expenses decreased 4% and 11% for the three
and six months ended June 30, 2015, respectively, as compared to the same periods in 2014 which reflected a general decrease
in office, delivery, equipment repair and software costs in 2015.
Research and development
costs consist primarily of compensation costs for research personnel, third-party research costs, and consulting costs. Research
and development costs were virtually flat during the three and six month periods of 2015 as compared to same periods in 2014 as
the Company made no changes to the number or compensation of research personnel involved in the research and development of the
Company’s AuthentiGuard product line.
Other Income and Expense
| |
Three Months Ended June 30, 2015 | | |
Three Months Ended June 30, 2014 | | |
% change | | |
Six Months Ended June 30, 2015 | | |
Six Months Ended June 30, 2014 | | |
%
change | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Other expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
$ | (90,000 | ) | |
$ | (89,000 | ) | |
| 1 | % | |
$ | (169,000 | ) | |
$ | (164,000 | ) | |
| 3 | % |
Gains on sales of investment and equipment | |
| 146,000 | | |
| - | | |
| 100 | % | |
| 146,000 | | |
| - | | |
| 100 | % |
Net loss on debt modification and extinguishment | |
| - | | |
| (35,000 | ) | |
| -100 | % | |
| (19,000 | ) | |
| (52,000 | ) | |
| -63 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other expense | |
$ | 56,000 | | |
$ | (124,000 | ) | |
| -145 | % | |
$ | (42,000 | ) | |
$ | (216,000 | ) | |
| -81 | % |
Gains on sales of investments
and equipment consists of approximately $46,000 received by the Company’s subsidiary Premier Packaging during the three months
ended June 30, 2015 for the sale of a printing press that had a zero book value, and $100,000 received by the Company’s subsidiary
DSS Technology Management as a distribution from its investment in Virtual Agility Technology Investment LLC that the Company had
previously written down to zero.
Net Loss and Net
Loss per Share
| |
Three Months Ended June 30, 2015 | | |
Three Months Ended June 30, 2014 | | |
% change | | |
Six Months Ended June 30, 2015 | | |
Six Months Ended June 30, 2014 | | |
%
change | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Net loss | |
$ | (1,043,000 | ) | |
$ | (2,344,000 | ) | |
| -56 | % | |
$ | (2,690,000 | ) | |
$ | (5,399,000 | ) | |
| -50 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loss per share: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.02 | ) | |
$ | (0.06 | ) | |
| -67 | % | |
$ | (0.06 | ) | |
$ | (0.13 | ) | |
| -54 | % |
Shares used in computing loss per share: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 46,302,404 | | |
| 42,040,907 | | |
| 10 | % | |
| 46,271,078 | | |
| 41,982,770 | | |
| 10 | % |
For the three months
ended June 30, 2015, net loss was $1.0 million, a 56% decrease from a net loss of $2.3 million in the three months ended June 30,
2014. The decrease was primarily the result of a $935,000 reduction in amortization of intangibles expense in 2015, along with
a reduction in nearly all other cost categories during 2015 as compared to the same period in 2014.
For the six months
ended June 30, 2015, net loss was $2.7 million, a 50% decrease from a net loss of $5.4 million in the six months ended June 30,
2014. The decrease was primarily the result of a $1.8 million reduction in amortization of intangibles expense in 2015, along with
a reduction in nearly all other cost categories during the first six months of 2015 as compared to the same period in 2014.
LIQUIDITY AND CAPITAL
RESOURCES
We have historically
met our liquidity and capital requirements primarily through the private placement of our equity securities and debt financings.
As of June 30, 2015, we had cash of approximately $1.0 million and restricted cash of approximately $306,000. In addition, we have
$800,000 available to our packaging division under a revolving credit line.
Operating Cash Flow
– During the first six months of 2015, we used approximately $928,000 of cash for operations, representing a 16% decrease
from a use of cash for operations during the first six months of 2014. The reduction in operating cash use reflects the reduction
in the Company’s net loss during 2015 that was due to the reduction in cash-based operating expenses such as compensation,
professional fees, sales and marketing and occupancy costs.
Investing
Cash Flow - During the first six months of 2015, we used approximately $57,000 for
capital improvements, which resulted in a significant reduction of investing cash outflows as compared to the first six months
of 2014. In addition, the Company did not purchase any investment or intangible assets during 2015 other than minimal costs associated
with the filing of internally developed patents pending.
Financing Cash Flows
- During the first six months of 2015, we made aggregate principal payments for long-term debt of approximately $387,000, which
reflects a significant reduction in financing cash flow activity from the same period in 2014.
Future
Capital Needs -As of June 30, 2015, the Company had approximately $1.0 million in unrestricted cash and $306,000
in restricted cash and up to $800,000 available under a revolving credit line at its packaging subsidiary, which may not be sufficient
to cover the Company’s future working capital requirements. The Company believes that its current cash resources and credit
line resources provide it with sufficient resources to fund its operations and meet its obligations for at least the
next twelve months, provided that the Company achieves or substantially achieves the key factors of its business plan over the
next twelve months, including but not limited to (i) increasing sales of the Company’s digital products; (ii) decreasing
legal and professional expenses for the Company’s intellectual property monetization business; and (iii) continuing to generate
operating profits from the Company’s packaging and plastic printing operations.
Furthermore, the Company believes that it will be able to raise additional equity and/or debt funding if necessary, to fund working
capital requirements not met by its current cash and credit resources. The Company has been able to obtain equity and/or debt based
financing in the past, including most recently, in December 2014 when the Company raised gross proceeds of approximately $1.7 million
from the sale of common stock. However, there is no assurance the Company will be able to raise such funds if necessary.
Off-Balance Sheet Arrangements
We do not have any
off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements,
revenues or expenses.
Critical Accounting Policies and Estimates
As of June 30, 2015,
our critical accounting policies and estimates have not changed materially from those set forth in our Annual Report on Form 10-K
for the year ended December 31, 2014.
ITEM 4 - CONTROLS AND PROCEDURES
Under the
supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and procedures as of June 30, 2015, as such term is defined under
Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.
Based on this evaluation, our principal executive officer and principal financial officer have concluded that, based on the
material weaknesses discussed below, our disclosure controls and procedures were not effective to ensure that information
required to be disclosed by us in reports filed or submitted under the Securities Exchange Act were recorded, processed,
summarized, and reported within time periods specified in the Securities and Exchange Commission’s rules and forms and
that our disclosure controls are not effectively designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our
principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
Management identified
the following material weakness in its internal control over financial reporting in its annual assessment of internal controls
over financial reporting that management performed for the year ended December 31, 2014. This material weakness still remains as
of June 30, 2015.
|
|
The Company’s controls associated with identifying and accounting for complex and non-routine transactions in accordance with GAAP were ineffective. Specifically, during the course of the annual audit, adjustments were made to correct the recorded amounts for impairment of goodwill that could have resulted in a material misstatement of our financial statements. |
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
Plan for Remediation of Material Weaknesses
In response to the
identified material weaknesses, management, with oversight from the Company’s audit committee, plans to continue to monitor
and review our control environment and to evaluate whether cost effective solutions are available to remedy the identified material
weaknesses by expanding the resources available to the financial reporting process.
Changes in Internal Control over Financial Reporting
In the ordinary course
of business, we may routinely modify, upgrade or enhance our internal controls and procedures for financial reporting. In June
2015, the Company’s corporate staff accountant voluntarily terminated her employment. The Company is in the process of evaluating
the options to replace or transfer the position, and the impact that the change has on the Company’s internal control over
financial reporting. Otherwise, there have not been any changes in our internal controls over financial reporting as defined
in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act during the second quarter of 2015 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting,
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On October 24, 2011
the Company initiated a lawsuit against Coupons.com Incorporated (“Coupons.com”). The suit was filed in the United
States District Court, Western District of New York, located in Rochester, New York. Coupons.com is a Delaware corporation having
its principal place of business located in Mountain View, California. In the Coupons.com suit, the Company alleged breach of contract,
misappropriation of trade secrets, unfair competition and unjust enrichment, and sought in excess of $10 million in money damages
from Coupons.com for those claims. On October 28, 2014, the District Court granted Coupons.com’s motion for summary judgment,
dismissing the case. On November 25, 2014, the Company appealed that decision to the United States Court of Appeals for the Second
Circuit. On March 5, 2015, the parties entered into a Stipulation whereby the Company withdrew the appeal without prejudice so
that the parties could complete settlement negotiations. On March 31, 2015, a confidential settlement was reached by the parties,
ending the case.
On April 28, 2015,
DSS Technology Management reached a confidential settlement with NEC Corporation of America (“NEC”) that resulted in
the termination of litigation against NEC in connection with DSS Technology Management’s pending litigation filed in the
Eastern District of Texas against TSMC, Samsung and NEC, on March 10, 2014, and its pending litigation filed in the Eastern District
of Texas against Intel Corporation, Dell, Inc., GameStop Corp., Conn’s, Inc., Conn Appliances, Inc., NEC, Wal-Mart Stores,
Inc., Wal-Mart Stores Texas, LLC and AT&T, Inc., on February 16, 2015.
On April 28, 2015,
the Company was served with a shareholder derivative lawsuit that was filed in the Supreme Court of the State of New York, County
of Kings: Benjamin Lapin, Derivatively on Behalf of Himself and All Others Similarly Situated, Plaintiff v. Robert Fagenson, Jeffrey
Ronaldi, Peter Hardigan, Robert Bzdick, Jonathon Perrelli, Warren Hurwitz, Ira Greenstein, David Klein and Philip Jones, Defendants,
and Document Security Systems, Inc., Nominal Defendant. The complaint alleges, among other things, breach of fiduciary duty, gross
mismanagement, abuse of control, and waste of corporate assets since October 2, 2012, and alleges that demand on the Board of Directors
to take action would be futile. The complaint seeks unspecified damages, attorneys’ fees, and other costs and expenses. The
Company believes that all of the claims in this lawsuit are without merit and intends to vigorously defend against these claims,
but is unable to predict the outcome or reasonably estimate a range of possible loss. On June 29, 2015, the Company filed a motion
to dismiss the suit, which motion is currently pending as of the date of this report.
On May 1, 2015, in
connection with DSS Technology Management’s pending litigation against Apple, Inc. (“Apple”) originally filed
on November 26, 2013, the District Court for the Northern District of California issued an order granting Apple’s motion
to stay the case until the pending IPR proceedings are decided by the Patent Trial and Appeal Board (PTAB). On June 25, 2015,
the PTAB instituted the IPR of Apple’s claims..
On May 4, 2015, based
on the District Court’s claim construction order issued on April 9, 2015 in connection with DSS Technology Management’s
pending litigation filed on March 10, 2014 in the Eastern District of Texas against defendants TSMC, Samsung and NEC, DSS Technology
Management and TSMC entered in to a Joint Stipulation and Proposed Final Judgment of Non-Infringement, subject to DSS Technology
Management’s right to appeal the court’s claim construction decision to the Federal Circuit, thus preserving the status
quo in the event an appeal results in remand for further proceedings in the District Court. A PTAB hearing is currently scheduled
for August 12, 2015 in connection with the TSMC/Samsung IPR proceeding.
On June 17, 2015, DSS
Technology Management and Lenovo (United States) Inc. (“Lenovo”) entered into a confidential non-suit agreement which
ended DSS Technology Management’s patent infringement lawsuit against Lenovo, which was originally filed on May 30, 2014
in the United States District Court for the Eastern District of Texas.
On July 16, 2015, DSS
Technology Management filed three separate lawsuits in the United States District Court for the Eastern District of Texas alleging
infringement of one of its semiconductor patents. The defendants are SK Hynix et al., Samsung Electronics et al., and
Qualcomm Incorporated. Each respective complaint alleges patent infringement and seeks judgment for infringement, injunctive relief
and money damages. These cases are currently in the initial pleadings stage.
ITEM 1A - RISK FACTORS
Except as set forth below and in our
first quarter 10-Q filing, there have been no material changes to the discussion of risk factors included in our most recent
Annual Report on Form 10-K.
Due to our low cash balance and negative
cash flow, unless we raise additional capital we may have to further reduce our costs by curtailing future operations to continue
as a business, and substantial doubt may be raised about our ability to continue as a going concern.
We have incurred significant
net losses in previous years, including for the year ended December 31, 2014 and through the first six months of 2015. As of June
30, 2015, the Company had approximately $1,015,000 in unrestricted cash and $306,000 in restricted cash and up to $800,000
available under a revolving credit line at its packaging subsidiary, Our ability to fund our capital requirements out of our available
cash and cash generated from our operations in the future will depend on many factors, but largely on our ability to (i) increase
sales of the Company’s digital products; (ii) decrease legal and professional expenses for the Company’s intellectual
property monetization business; and (iii) continue to generate operating profits from the Company’s packaging and plastic
printing operations. The Company has been able to obtain equity and/or debt based
financing in the past, including most recently, in December 2014 when the Company raised gross proceeds of approximately $1.7 million
from the sale of common stock. However, we may not be able to find financing in the capital markets or from lenders on acceptable
terms or at all in the future. If we are not successful in generating needed funds from operations or in equity or debt capital
raising transactions, we may need to reduce our costs which measures could include selling or consolidating certain operations
or assets, and delaying, canceling or scaling back product development and marketing programs. These measures could materially
and adversely affect our ability to operate profitably. In addition, if we are not successful in generating needed funds from operations
or from capital raising transactions, substantial doubt may be raised about our status as a going concern.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 – MINE SAFETY DISCLOSURES
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
Exhibit Number |
|
Exhibit Description |
|
|
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification
of Chief Executive Officer.* |
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.* |
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.* |
32.2 |
|
Certification of Chief Financial Officer as required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.* |
101.INS |
XBRL Instance Document* |
101.SCH |
XBRL Taxonomy Extension Schema Document* |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document* |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document* |
*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
DOCUMENT SECURITY SYSTEMS, INC. |
|
|
|
|
|
August 13, 2015 |
By: |
/s/ Jeffrey Ronaldi |
|
|
|
Jeffrey Ronaldi |
|
|
|
Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
August 13, 2015 |
By: |
/s/ Philip Jones |
|
|
|
Philip Jones |
|
|
|
Chief Financial Officer (Principal Financial Officer) |
|
Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
I, Jeffrey Ronaldi, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of Document Security Systems, Inc. for the quarter ended June 30, 2015;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)),
for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the registrant’s audit committee of the board of directors (or persons performing the equivalent functions):
a) All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: August 13, 2015 |
|
|
|
/s/Jeffrey Ronaldi |
|
Jeffrey Ronaldi |
|
Chief Executive Officer (Principal Executive Officer) |
|
Exhibit 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
OF CHIEF FINANCIAL OFFICER
I, Philip Jones, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of Document Security Systems, Inc. for the quarter ended June 30, 2015;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)),
for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the registrant’s audit committee of the board of directors (or persons performing the equivalent functions):
a) All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: August 13, 2015 |
|
|
|
/s/ Philip Jones |
|
Philip Jones, |
|
Chief Financial Officer (Principal Financial Officer) |
|
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of Document Security Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2015 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey Ronaldi, as Chief
Executive Officer of the Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company at the dates and for the periods indicated. |
Date: August 13, 2015 |
|
|
|
/s/Jeffrey Ronaldi |
|
Jeffrey Ronaldi |
|
Chief Executive Officer (Principal Executive Officer) |
|
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of Document Security Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2015 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip Jones, as Chief Financial
Officer of the Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company at the dates and for the periods indicated. |
Date: August 13, 2015 |
|
|
|
/s/Philip Jones |
|
Philip Jones |
|
Chief Financial Officer (Principal Financial Officer) |
|
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